Backpay and taxes

[terces]

Finally got some money due from us from the govt. (military backpay) I know its taxable and I was kind of surprised that they didn't hold any of it back. Its around 10K so I'm kind of concerned how its gonna affect our taxes this coming year. Can I get a penalty if I owe too much taxes because of this payment? Should I up my withholding for these last few months? Is there a way to estimate what the taxes might be on this money?

[MonkeyMama]

If you pay in 100% of the taxes that you owed last year, there will be no penalty. For example, your total tax liability was $5k last year. You've already withheld $5k this year. Then you are fine. (If you are in a high tax bracket, the rule is 110%). It's called the "safe harbor" rule, to avoid penalties for windfalls like that.

I would set aside the tax portion and hold onto it until April 15th. I'd just estimate 25% + state rate. Unless you know for sure you are in the 15% tax bracket. (Or in a higher bracket).

[terces]

Crap. I just looked at our withholding compared to last year taxes and we are way off. I know our pay and life has gone through some big changes the last couple years....

What's my best options to get it up to what our taxes were last year? Have the last few checks pull out some big sums... or mail a check to the IRS.

[creditcardfree]

I'm surprised they didn't withhold for that sum.

I would change your withholding...for the rest of the year to increase the amount that is withheld. Go to paycheckcity to get estimates, but remember to only enter in the taxable pay...no BAH, BAS or TSP contributions.

[MonkeyMama]

I'd just send 25% to the IRS, to make it simple. You have until January 15th to send in an Estimate (irs.gov - Form 1040ES, 4th quarter estimate).

Do you prepare your own tax return? You'd have to show that the money was received in the 4th quarter, to avoid penalties, as well. Just FYI. On the penalty calculation form you can input your income by quarter.

For withholding, you could just ask another $2500 to be withheld through the end of the year. (x amount per paycheck). I think an estimate would be easier. Either is fine.

Don't forget the state. If the income is taxable in Texas.

P.S. Are you sure it is taxable? My only other thought. Military is beyond me - so many different types of taxable and non-taxable income, etc.

[creditcardfree]

P.S. Are you sure it is taxable? My only other thought. Military is beyond me - so many different types of taxable and non-taxable income, etc.

Good point. If part of the back pay is housing...than remember that it is not taxable. Or were you in a combat zone earning that pay? That would also would not be taxable!

You might also check with Finance...maybe they made an error that could be corrected.

[terces]

No it should be taxable. DH is retired. It's CRDP retro pay.
No state tax in Texas.

Compared to last year, I estimated that we are $1000 short in withholding of what we paid in taxes last year so I'm going to have that withdrawn from that last few checks this year. We usually are in the 15% tax bracket.

I'll get this all straightened out. I do my own tax returns. I'm just so use to getting all our withholding back its weird to actually pay tax. So nice when half of dh's pay was non-taxable. Since he retired he has 3 pays coming in....2 taxable, one not.