After completing my 37th tax season and taking some time to rest, relax, and refresh I am pleased to get back into the routine of writing a monthly article for ChartNotes. The topic for this article was developed during tax season as I met with clients over their income taxes and as I analyzed completed tax returns and offered clients insight into their tax as a percentage of income, their tax payments during the year as a percentage of income, and what resources to look to when making tax payments when filing their returns.

In other articles I have written over the past twelve months I have presented information about the various tax rates that may apply to individual taxpayers. To review that information, here is a summary of the common tax rates and some selected individual tax information:

  • Ordinary income tax rates – 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%
  • Alternative minimum tax (AMT) rates – 26% and 28%
  • Capital gains tax rates – 0%, 15%, and 20%
  • Qualifying dividend tax rates – 0%, 15%, and 20%
  • Net Investment Income Tax (NIIT) rate – 3.8%
  • Medicare Contribution Tax (MCT) rate – .9%
  • Adjusted Gross Income (AGI) thresholds:
    • NIIT and MCT:
       Married Filing Joint (MFJ) – $250,000
       Married Filing Separately (MFS) – $125,000
       Head of Household (HOH) – $200,000
       Single (S) – $200,000
  • AGI deduction phaseouts:
    • Itemized deductions and exemptions:
       MFJ – $300,000
       MFS – $150,000
       HOH – $275,000
       S – $250,000

Take a few moments to review your tax return for 2013. First, let’s determine your federal tax (Form 1040, line 61) as a percentage of your AGI (Form 1040, line 37). Divide line 61 by line 37. What is the result? Next, let’s determine your Oregon tax (Form 40, line 41) as a percentage of AGI (Form 1040, line 37). Divide Form 40, line 41 by Form 1040, line 37. What is the result? This is the HOW MUCH part of the article. I selected twelve 2013 individual tax returns from my client list and determined these tax percentages as follows:
Tax Chart_chartnotes article.png
How do your tax percentage numbers compare or fit into this mix?

Generally, taxpayers use two methods to pay taxes prior to filing their annual return:

• Withholding from income reported on Forms W-2(Wages) and 1099-R (Retirement Plan Benefit Payments)
• Estimated tax payments using Form 1040-ES paid quarterly on April 15, June 15, September 15, and January 15.

Let’s analyze HOW you pay your taxes. If there are amounts indicated on Form 1040, lines 7, 15b, and/or 16b, then you have income that is subject to income tax withholding. Refer to Form 1040, line 62 to learn the amount of Federal income tax withheld from wages reported on line 7 or retirement plan benefits reported on lines 15b and 16b.

Now calculate the amount of AGI not subject to withholding by taking the amount on line 37 and subtracting the amounts on lines 7, 15b, and 16b. This result is your other income, not subject to income tax withholding, and probably the reason you are required to pay estimated tax payments quarterly using form 1040-ES. Refer to Form 1040, line 63 to learn the amount of Federal income tax you paid in the form of estimated tax payments using Form 1040-ES.

Next, let’s determine if your tax payments from withholding and ES payments are aligned with the related income. Figure the withheld tax as a percentage of the income subject to withholding. The formula for this would be the amount on Form 1040, line 62 divided by the sum of the amounts on Form 1040, lines 7, 15b, and 16b.

Now figure the ES payments as a percentage of income not subject to withholding. The formula for this would be the amount on Form 1040, line 63 divided by the result of subtracting the amounts on Form 1040, lines 7, 15b, and 16b from the amount on Form 1040, line 37.

How do these two percentages compare to your overall Federal tax percentage that we calculated earlier? This exercise should give you some insight into the WHY of your 2013 underpayment or overpayment of tax on your individual tax return.

Following the same approach you can make similar calculations pertaining to your Oregon taxes.

These calculations should also help you look to the correct source of income (account or business activity) for the resource to make your tax payments. Does your withholding from wages or retirement plan benefits need to be adjusted? If so, consider completing a new withholding declaration using a Form W-4. Remember, the more allowances you claim, the less tax is withheld. Do your ES payments need to be modified? If so, consult your tax advisor to determine the adjustment. If you have sources of income that are not subject to withholding be sure to tap into that cash flow to make the quarterly estimated tax payments.

I hope this article has helped you to understand HOW MUCH tax you pay as a percentage of your income, HOW you pay your taxes (withholding and/or ES payments), and WHY your 2013 tax due or refund situation occurred based on the alignment or misalignment of your tax payments to your related income. If this article has prompted questions in your mind, please contact your tax advisor for some professional help and answers.