2025 Taxes are killing me

[bscerbo1]

Hi!

With quarterly bonuses i'm earning about $190K/year. File as single with no dependents.  In the past I used to claim "4" for lower taxes out of each paycheck and still received a moderate refund.  I'm unsure of what to do this year on my W2. I have about 10% going into a 401K. 

Thanks for any advice you have to lower the amount of taxes taken from the check every pay period. 

[Bsch4477]

If you are eligible to contribute more to your 401 K that would lower your tax liability. 

[Terri Lynn]

The W-4 system changed significantly in 2020, so the "4" allowances you used to claim no longer exist in the same way. The goal of the new W-4 is to make withholding more accurate without relying on a subjective number of allowances.

Understanding the New W-4 (Post-2019):

• No more "allowances": The new W-4 focuses on your filing status, dependents (if any), other income, deductions, and credits. The IRS's aim is for taxpayers to have their withholding as close as possible to their actual tax liability, minimizing large refunds or amounts due at tax time.

Strategies to Lower Withholding with Your Income and 401(k):

1. Filing Status:

• Since you file as "Single with no dependents," this is straightforward. Check the "Single or Married filing separately" box in Step 1.

2. Account for Your 401(k) Contributions (Step 4(b) - Deductions):

• Your 401(k) contributions are pre-tax, meaning they reduce your taxable income. This is a significant factor in your tax planning.
• Estimate your annual 401(k) contribution: If you earn $190,000 and contribute 10%, that's $19,000 annually. For 2025, the 401(k) contribution limit is $23,500. If you can, consider increasing your contributions to maximize this tax-advantaged savings, especially with your income level.
• Use the Deductions Worksheet (Page 3 of Form W-4): This is where you'll account for your 401(k) contributions.
• Standard Deduction: For a single filer in 2025, the standard deduction is likely around $14,600 (this value updates annually, so confirm the exact 2025 amount when you complete the form).
• Enter your 401(k) contributions: In the deductions worksheet, you'll enter the amount of your estimated pre-tax 401(k) contributions for the year.
• Total Itemized/Other Deductions: Compare your standard deduction to your itemized deductions (which for most people, particularly those not itemizing, primarily consist of pre-tax retirement contributions). If your itemized deductions (mainly your 401k) exceed the standard deduction, you can add the difference to the "deductions" line in Step 4(b) of your W-4.
• Example: If 2025 standard deduction is $14,600 and you contribute $19,000 to your 401(k), you have $4,400 in additional deductions ($19,000 - $14,600). You'd enter $4,400 in Step 4(b). This tells your employer to withhold less because a portion of your income is already tax-free.

3. Address Quarterly Bonuses (Step 4(a) - Other Income (Optional)):

• Bonuses are taxed as supplemental wages and can be subject to a flat 22% federal withholding rate, or they might be combined with your regular wages and taxed using the aggregate method (based on your W-4).
• The challenge: When your employer applies the withholding rules to your bonus pay, it might assume that paycheck represents your regular income level throughout the year, leading to over-withholding on the bonus.
• Strategies for bonuses:
• Do nothing on the W-4 for bonuses: Your employer will likely withhold a significant amount from your bonus checks. This often leads to a larger refund, which you've experienced. If you prefer a larger refund, this might be okay.
• Adjust Step 4(a) - "Other Income (Optional)": This step is usually for un-withheld income (like freelance work). However, some people might reduce their standard withholding slightly in anticipation of over-withholding from bonuses, essentially "pre-empting" the extra tax taken. This is more advanced and requires careful monitoring.
• Most recommended: Use the IRS Tax Withholding Estimator (see below). This tool is designed to handle fluctuating income like bonuses.

4. Additional Withholding (Step 4(c) - Optional):

• This section allows you to have additional tax withheld. This is the opposite of what you want right now, but it's useful if you ever find yourself under-withheld.

The Most Important Tool: IRS Tax Withholding Estimator

Given your income level, quarterly bonuses, and 401(k) contributions, a tax withholding estimator will be needed. I recommend using the IRS Tax Withholding Estimator.

• How it works: You'll input details about your income, filing status, dependents, pay frequency, existing withholding, and most importantly, your 401(k) contributions and expected bonus amounts.
• It provides a recommendation: The estimator will calculate your projected tax liability and recommend exactly how to fill out your W-4 (including any amounts for Step 4(a) or 4(b)) to get your withholding as close as possible to your actual tax.
• Re-run it periodically: Since you have quarterly bonuses, it's a good idea to use the estimator at least once a year, and potentially after a large bonus, to ensure your withholding remains accurate.

Summary for Lowering Taxes Per Paycheck:

1. Use the IRS Tax Withholding Estimator: This is the most accurate way to tailor your W-4 to your specific financial situation, including your bonuses and 401(k).
2. Maximize 401(k) Contributions: Continue contributing 10% or more. This is a primary driver of tax savings on your paycheck. For 2025, the limit is $23,500.
3. Complete the W-4 Deductions Worksheet: Ensure you accurately reflect your 401(k) contributions in Step 4(b) of the W-4.
4. Review your pay stubs: After submitting your new W-4, monitor your pay stubs to see the impact on your net pay and ensure the withholding is where you expect it to be.

By following these steps and utilizing the IRS estimator, you should be able to optimize your withholding to take less out of each paycheck while avoiding a large tax bill at the end of the year.

Helpful Links:

• IRS Withholding Estimator 
• W4 and your Take Home Pay 
• How bonuses are taxed 

Please feel free to reach backout with any additional questions or concerns you might have!

Thank you for joining us today and have an amazing rest of your day!

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[marctu]

Lets start with the  income tax rates here.  The marginal income tax rates are found here:  2024-2025 Tax Brackets and Tax Rates.

Being single in 2025, the standard deduction is $15,000 for tax year 2025.   That would mean that your taxable income is $175,000 with income of $190,000.  So using the tax brackets, the taxable income above $103,551 is taxed in the 24% tax bracket.   

Since you have a bonus as part of this pay, you need to understand that there are two ways that the income taxes can be withheld on a bonus:

• The percentage method. Is withheld at 22% for federal income taxes.  Above $1 million it is done at 37%.
• The aggregate method. Employers that issue bonus payments along with regular wages in one paycheck can withhold taxes on the entire payment as though it’s a single paycheck in a regular payroll period. 

Ultimately you do pay a good amount in taxes.  Since I am assuming "killing" refers to the overall taxes and not the actual amount owed in your scenario, since at this income level the income taxes for Federal are about $30,500 and the FICA tax is another $13,200 or so.  This does not include any state tax either.  

If it refers to the amount actually owed when filing, you will need to investigate what method your employer uses, and then make adjustments accordingly to account for the bonus component of your pay.   With $19,000 being deferred into a a 401(k), assuming it is pre-tax, which I did, you could raise the level depending upon your age as well.

The limits are as follows:

In 2025, the maximum 401(k) contribution is $23,500 for those under 50. If you are 50 or older, you can contribute an additional $7,500, for a total of $31,000. Individuals aged 60-63 can contribute an additional $11,250, bringing the total to $34,750

Thank you for the question @bscerbo1 

All the best,

Marc T.

TurboTax Live Tax Expert

28 Years of Experience Helping Clients