If Box 5 contains income not subject to federal tax, why did payable federal income taxes spike when unvested retirement benefits (not 401K) were included with wages?

[jimhohman3]

I turned 65 in 2018.  My company added the value of my unvested retirement benefits (stocks and long-term cash incentives, but not 401K) to Box 5 of my W2 form.  This figure was on top of my regular Medicare wages and tips.  The result was to spike our federal taxes due.  Is this a glitch with TurboTax Premier (which I'm using) or is this supposed to happen:  Are our federal income taxes on unvested retirement benefits supposed to be collected at this time?  

[dmertz · Accepted solution]

It's likely that the additional amount in box 5 increased the amount of additional Medicare tax on Form 8959 that you must pay.  Examine Form 8959 in forms mode.

[jimhohman3]

Thanks very much.  Yes, I agree we are subject to a higher Medicare tax which the employer has, in fact, withheld in full.  So, we're even on the Medicare tax that's payable.  But for some reason TurboTax thinks the higher number in Box 5 also means we have to pay a higher federal income tax even though the the benefits in question are payable for another year or two.  Does this sound like a glitch in the product?

[jimhohman3]

are not payable for another year or two.

[dmertz]

Are you saying that you seeing the amount entered in box 5 of TurboTax's W-2 form affecting Taxable Income on Form 1040 line 10?  If so, which of line above line 10 is changing?  If it's line 6, what line of Schedule 1 is changing?

Items appearing on Schedule 4 are other taxes (including the additional Medicare tax), not income taxes.  If you are married filing separately, your employer will not have withheld the entire amount of additional Medicare taxes necessary since an employer only withholds additional Medicare taxes on amounts in box 5 above $200,000 while an MFS filer is subject to additional Medicare taxes when box 5 is above $125,000.  Or it's possible that the employer simply failed to withhold the proper amount of additional Medicare taxes since the increase in box 5 came from something other than wages. If Form 5989 line 18 is non-zero, you must pay additional Medicare taxes with your tax return.