Calculating total federal income tax due for 2012

We’re far enough along in the year that I’m reasonably confident in my total income for the year, so I’ve calculated how much federal income tax I should pay overall for the year.

Excel Calculations

To follow along, open up a new Excel spreadsheet.

In cell A1, enter the sum of your federal taxable earnings for the year. This isn’t your total gross earnings because you could have pre-tax deductions. My paychecks each month actually show what my federal taxable wages are.

In cell A2, enter your standard deduction (or the sum of your itemized deductions, if you plan on using those when filing instead). Personally, I prefer to do this calculation as it relates to the amount of federal income tax deducted from my paycheck using both the standard deduction and the sum of my itemized deductions to have a better margin of error. For 2012, this is [1]:

  • $5,950 for singles and married individuals filing separately
  • $11,900 for married couples filing a joint return
  • $8,700 for heads of household

In cell A3, enter the number of personal and dependent exemptions you can use. If you’re single, this is only 1.

In cell A4, enter:

=A3*3800

where $3,800 is the value of each personal and dependent exemption [1].

In cell A5, enter the sum of your interest and ordinary dividends.

In cell A6, enter:

=A1+A5-A2-A4

This is an approximation of your total taxable income. Disclaimer: I'm excluding more complex cases that don't apply to me. You should do your own figuring if you have further income that I haven't covered here.

In cell A7, enter:

=MIN(8700,A6)*0.1+IF(A6>8700,(MIN(35550,A6)-8700)*0.15,0)+IF(A6>35550,(MIN(85650,A6)-35550)*0.25,0)+IF(A6>85650,(MIN(178650,A6)-85650)*0.28,0)

This formula will calculate your total tax due if the amount in cell A6 was less than $178,650.

My situation

I ran this calculation with both the standard deduction and an estimated sum of my itemized deductions. I estimate the sum of my itemized deductions to be higher than the standard deduction, so I should owe a bit less tax (< $1,000 less) if I itemize.

I will have paid more federal income tax than the amount in A7 assuming the standard deduction with my November paycheck, which means that, mathematically, I don't need to pay any income tax on my December paycheck to cover all of my tax owing for the year.

I did a similar calculation last year and didn't really believe that I didn't need to pay as much income tax with my December paycheck as my employer had been taking off each month. I ended up with the refund that I expected. But this year I've calculated that I even if I skip paying federal income taxes with December's paycheck, I will still overpay by about $400, assuming that I take the standard deduction, which makes my margin of error in skipping paying federal income taxes with December's paycheck about $1,000.

A resource that has helped me quite a bit in estimating my federal income taxes due is the IRS Withholding Calculator. Running the calculator this past Sunday, it seemed to think that I had already received my November paycheck, so I had to include the taxes I expect to be withheld from November's paycheck in the field labelled "Enter the total Federal income tax withheld to date in 2012 (including amounts withheld from bonuses or which you expect to have withheld for bonuses):". You can double check where it thinks you are in the pay year by looking at the amount under "Projected withholding for rest of year:" on the concluding page. If that is equal to "Total tax withheld from last check:" and you're paid monthly, then it thinks you've already seen your November paycheck.

This year, I'm going to trust the math. I'm going to take the IRS Withholding Calculator's suggestion of setting my W-4 allowances to 23 in early December so that my employer doesn't withhold any federal income tax from my last paycheck of the year. That means that I'll have a huge paycheck in December, since I'm also done with paying Social Security taxes and my 401(k) contribution will be less than other months.

Next year? I'm going to set my W-4 allowances to 2 instead of the 1 that I had been using this year and I'm going to adjust my RSU vests to have only 28% withheld instead of the 35% I had set it to to offset only 25% being withheld from them earlier in the year. I'll continue to take a look at these calculations several times a year. I'll need to evaluate whether I want to have less federal income tax withheld from each of my paychecks to take into account my itemized deductions now that I own a place, but for the first part of the year, I'm going to assume just the standard deduction on my paychecks. I would, after all, rather have too much withheld than end up paying penalties because I didn't pay enough federal income tax throughout the year.

[1] http://www.irs.gov/uac/In-2012,-Many-Tax-Benefits-Increase-Due-to-Inflation-Adjustments

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  1. #1 by Early Financial Freedom on November 7, 2012 - 11:08 am

    “In cell A6, enter:

    =A1+A6-A2-A4″

    Did you mean A5 not A6?

    • #2 by Leigh on November 7, 2012 - 11:14 am

      Oops, yes. I’ll fix that. I added the interest and dividends in after I’d done most of the math and forgot about that :) Thanks!

  2. #3 by Joe on November 7, 2012 - 12:15 pm

    I never got the itemized vs standard deduction thing.

    When I want to estimate Canadian taxes for planning purposes I use this really quick calculator http://lsminsurance.ca/calculators/canada/income-tax

    I just need to deduct my pension/RRSP contributions from the gross, get the taxes, deduct it from the original gross, and voila, gross income net taxes.

    • #4 by Leigh on November 15, 2012 - 10:56 pm

      We can itemize so many things, mostly mortgage interest, property taxes, and charitable donations. I don’t really agree with it, but I’ll use it so long as it’s there and throw the extra money I get against my mortgage.

      Canadian taxes sound so much easier to estimate.

  3. #5 by Harry Campbell (@PFPro1) on November 7, 2012 - 11:03 pm

    Sounds like you’ve got a good idea of where you’re at tax-wise. I usually do a rough calculation of where I’m at and how much I’ve paid in taxes. I keep my withholding at 4 for fed/state and I usually break about even. Seems like 1 or 2 would be very low for someone like you who maxes out 401k and can itemize due to owning a house.

    • #6 by Leigh on November 8, 2012 - 12:28 am

      I re-do this calculation after each quarterly bonus and after raises. I fidget the W-4 allowances for my regular paychecks, as well as the flat interest rate being taken off of my bonuses. You’re right – 1 was definitely too low this year. I’ll start at 2 next year probably and see how that goes. I’m not actually estimating to itemize that much this year, as I only made payments on the condo for 5/12 of the year and only paid half of the year’s property taxes.

      Sounds like you keep on top of where you are with your taxes too! :)

      • #7 by Harry @ PF Pro on November 8, 2012 - 12:32 pm

        Ah I forgot you only paid interest and prop. tax for 5.5 months. Yea you’ll definitely be able to up those withholdings next year :)

  1. 2012 Income Tax Return Status: Refund Pending | Leigh's Financial Journey
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