Why do I owe tax and am being penalized for underpayment?

[confusedmeghan]

TT says:

You owe $4,853 because the total tax on your 2023 return is $42,828 and your tax payments were $38,003. You also owe a $28 penalty for not withholding enough tax during the year. Your filing status is Single and your income came from wages of $203,715, capital gains of $6,523, dividends of $5,819, IRA distributions of $1, and interest of $1,012. You claimed the standard deduction of $13,850 which helped reduce your taxable income. Since your tax payments and standard deduction of $13,850 did not fully offset your total tax of $42,828, you owe the difference of $4,853.

Ok, so I see I have capital gains/dividends/interest that totals $13,354. But $4853 would be a 36% tax on that, so what else am I missing? Was I not taxed enough by my employer for my salary? If so how do I prevent that if the information I've given them is already accurate?

[PaulaM]

Underpayment penalties are calculated anytime that you do not have enough taxes withheld per each quarter. Wages for most people makes up the majority of the quarterly amounts, but you must include other types of income such as what you have included above.

You can avoid an underpayment penalty for next tax year by completing the estimated tax section and paying quarterly, or complete a new W-4 form withholding more taxes, then give to your employer. 

See How does TurboTax calculate my estimated tax payments? for how estimated taxes are calculated and what you as a highly compensated employee should look out for. 

[confusedmeghan]

Thanks, I understand what underpayment is, I just don't know what/how I underpaid. I can see that I owe taxes for some capital gains/dividends/interest earnings, but that doesn't account for the total I'm being asked to pay. Does this mean not enough money was withheld from my normal paycheck?

You say I should complete a new w4 form withholding more taxes, but how would I know how much and why would I need to withhold more? Shouldn't my paycheck just be taxed at the correct rate? The capital gains/dividends/interest earnings totaled $13,354, but that didn't change my tax bracket or anything. So why would my paycheck not be taxed correctly?

I normally get a refund every year, so I'm confused by why I owe so much. I knew I would have to pay something for the stocks, but this amount doesn't add up.

[SusanY1]

Tax withholding tables were updated this year and in the process some taxpayers had adjustments that went unnoticed throughout the year, but became quite obvious when it was time to file their tax returns.

This seems to be more pronounced in two-income households, or with single taxpayers whose income is over $150,000.  We can't know for sure, but it sounds like this may have been the case for you as the extra capital gains income doesn't seem to explain a significant jump.

The best way to sort of drill down to where the issue may be is to compare your 2022 return with 2023 line by line to see where the differences lie. Pay close attention to the payments section and the withholding on line 25a.  

If your withholding decreased from 2022 but your income didn't, then you definitely want to complete a new form W-4.  Our withholding calculator may help.  I suggest running through the calculator now to give an updated W4 to your employer and then marking your calendar to check again around mid-June or so with a recent paystub to check that you're on track.  

Because the W-4 will adjust for any perceived under-withholding year-to-date you should repeat the process again in January to avoid having too much tax withheld.