A Huge Tax Bill!!!

Q. I utilize the withholding calculator on the IRS website to ensure my W-4 amounts are correct. This has gotten me very close to the amounts figured on my 1040 for the past 5-6 years since I’d begun utilizing the calculator.  I do a final check with the calculator after the last pay date in the year (in this case, on 12/28) to get a rough idea of what to expect come tax time. On my final 12/28 check, as on the bi-monthly checks, it showed that I would be getting a refund of just under $2K. Since the withholding calculator accounts for mortgage interest but not real estate taxes, I assumed the refund would be even greater. However, when I fired up my 2009 copy of HR Block’s tax software, I was shocked and horrified to see that it calculated an amount owed of almost $6000! Sure that it must be incorrect, I downloaded Intuit’s Turbo Tax, and that showed I owed even more. I went back to my printout from the 12/28 visit to the IRS withholding calculator utility, and the values entered were within $200 of the actuals. What factors could the withholding calculator not be accounting for that could cause such a vast difference in liabilities? I ran my expected 2010 numbers through so I could fill out my 2010 W-4 correctly, and was presented with an equally low liability and high number of withholding allowances, which I am now concerned are incorrect. My situation is pretty vanilla: Married filing jointly, only one income, one child dependent. Claiming mortgage interest credit, and the associated taxes paid to taxing authorities and nothing else.

A. The answer to your question is truly impossible to solve using a forum like this because I can’t possibly know everything about your financial and tax situation.  What I can tell you is the the IRS withholding calculator and the official IRS W-4 form are designed to recommend withholding settings that will slightly overpay your liability if completed properly.  Judging by your statement that it has always been relatively close until this year, there must be something affecting either your tax prep software, or your values from the withholding calculator.

There are two possible causes for your dilemma.

1- The Making Work Pay Credit gave an $800 credit to those who utilize the married withholding tables.  The problem is that if both spouses work, they would both get the credit on their withholding.  Certain individuals are actually not eligible for the credit and the withholding tables don’t account for this either.  This could cause huge under withholding problems such as you described.

2- Which leads to the second solution. The Making Work Pay Credit problem was a hot topic of discussion all year in tax preparation and CPA circles.  It created a serious problem for two-income families.  Had you been utilizing the services of a tax professional over the years, you would have been notified of this potential problem and been able to appropriately adjust withholding for one or both spouses.  Turbo Tax and the Block product are designed to simplify the tax preparation process.  They cannot use the judgment that a tax preparer can.   While they are both great products, everyone has to admit that we have very complex tax laws in this country.  There simply is no substitute for the advice and assistance of a professional tax preparer or CPA.

I would recommend making an appointment as soon as possible.  $6000 is worth the extra effort to get this right.