Case Study: Tax Planning for Families with High W2 Incomes

Executive Summary

Families with high W-2 incomes face any number of financial challenges. Chief among them is properly managing their tax obligations. Each year, high income earning families have to not only find ways to minimize their taxable income but more importantly, pay the correct amount in taxes based on their taxable income. A common challenge is ensuring employers withhold enough federal income taxes that will cover the total tax liability owed by the family for the year.

This case study analyzes the tax withholdings and final tax liability for a TaxAssurances client.

Background

A NYC accountant and their marketer spouse jointly earned over $850k in W-2 wages in 2022
They both contributed to their respective 401k plans through their employers
They have family health insurance through one spouse’s employer
They have two children that participated in after-school and summer activities
They both did not contribute to their employer provided dependent care FSA plans
They purchased a primary residence in Westchester County NY in July 2022 and took on a $1.4M mortgage
They have a second NYS home with a $140k mortgage
They contribute weekly to their religious organization
Their primary home is not located in Yonkers or NYC so they do not have to worry about local income taxes
They had income they received from a limited partnership
They had a cryptocurrency investment account with capital gains and losses and it needed to be reported to the IRS
They had a traditional investment account with interest, dividends, capital gains/losses that needed to be reported
They had traditional saving accounts that paid interest that needed to be reported
They received interest income from escrowed home property tax payments
They filed a federal extension requesting more time to file their federal tax return on April 15, 2022 and also paid estimated taxes of over $50k with that extension

Results

At the end of the federal tax preparation process, they owed almost $3k.
The couple received a NYS tax refund of over $21k because the top marginal state tax rate was 6.85% and the effective tax rate for NYS was 6.9% and their respective employers paid more than what was necessary.
Based on their overall circumstances, it was more advantageous for them to file their federal and state income tax returns jointly instead of separately.
The total amount of their Itemized deductions made it more beneficial to take those deductions than it did to take the standard deduction
The couple incurred an additional Medicare tax because their combined household income was over $250k for the year and the additional tax amount was reflected on “IRS form 8959 – Additional Medicare Tax.”
The couple had an additional Medicare tax withholding because the accountant’s employer overpaid in Medicare tax and the additional withholding amount was also reflected on “IRS form 8959 – Additional Medicare Tax.”
The couple also incurred a net investment income tax because their combined family income was over $250k and they had interest and dividend income.
The couple was able to harvest losses in their investment account that helped lower their taxable income. They took the maximum $3k loss for the year.
The couple made over $400k so they could not take the child tax credit.
The couple was able to take advantage of the child and dependent care credit because they paid for the after-school care of their children

Challenges & Solutions

The couple had an initial federal tax payment shortfall of over $58k. This occurred because the employer for the accountant took out federal tax withholdings at a marginal federal tax rate of 22%. The employer for the spouse took out federal tax withholdings at a marginal federal tax rate of 17.7% The marginal federal tax rate for their total combined income in 2022 was 37% and the effective federal tax rate (after considering eligible deductions from total gross income) was 29.7%

Again, at the end of the federal tax preparation process, they owed almost $3k.

Solution #1

The estimated payment of over $50k made with the federal extension helped to tremendously make up for the shortfall in the federal tax withholdings done by their respective employers.

Solution #2

The couple could have made adjustments to their respective W-4 forms to have more federal taxes withheld from their respective normal base as well as their commission/bonus-based pay. Going forward, they still can.

Solution #3

The couple can keep enough saved in a traditional savings account or in other investments that can provide them with the needed money to pay the entire tax bill off or even a part of it.

Solution #4

The couple could establish a payment plan to pay the remaining outstanding tax liability. Hopefully, it provides them with enough liquidity to pay not only last year’s tax liability and this year’s expected tax liability but provides enough liquidity for daily living expenses.

Conclusion

This case study about this accountant and their marketer spouse illustrates the complexities of tax planning and liability for high-income earners.

While their substantial income put them in a high tax bracket, strategic financial planning through retirement contributions, itemizing deductions, and making estimated tax payments helped reduce their overall tax burden along with their tax withholdings through work.

However, challenges remained due to insufficient tax withholdings by their employers that under paid their necessary taxes given their total household income.

Solutions included increasing withholdings, maintaining liquid savings, and making tax payments over time.

Overall, proactive tax planning and wealth management are essential for high-net-worth and income individuals in optimizing their tax circumstances. This case study shows the importance of working with expert financial and tax advisors to develop comprehensive strategies that minimize taxes owed while maximizing savings and investments. With proper advice and preparation, even complex tax scenarios can be managed for high-income families.

Kolonji Murray

Founder/Tax Professional

TaxAssurances LLC

8 Sickles Avenue

New Rochelle, NY 10801

914-278-9241

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