Why I’m glad my new employer withheld way too much tax

2014 taxesThis is kind of a long story, but be patient and you will be rewarded with (what appears to be) a happy tax ending for me. 🙂

OK, to begin with: most Americans are familiar with having three sets of income taxes withheld from their paychecks: federal, state, and local (either city or county.) In general, this has only meant two sets of tax forms because two of the three states I’ve lived in include the local tax on the state forms.

However, Indiana (where I now live) knocked me for a loop when I ran my numbers through the e-file software I used. I carefully entered my entire W2 plus the freelance income I made while I lived in IN plus the date I moved, and it spit out a refund of over $300. I was surprised, because I was expecting my moving-expenses deduction to more or less cancel out the freelance income, leading to a small refund if at all.

When I looked closely at the actual IN-40 the e-file software had filled out, I saw what had happened: for some reason it had entered a $0 for my county tax owed, even though my employer had withheld roughly the same amount from my paycheck as this theoretical refund was.

What was going on? I had no idea, but obviously I didn’t want to file incorrectly and have to refund my refund later (or worse get audited!), so I went to the actual Indiana Department of Revenue site to look at the forms for part-year residents. It turns out that there is a separate form for calculating county tax due; you fill it out and then transfer the amount owed to the state form. OK, whatever. I still didn’t know why the software was spitting out $0 and I was annoyed because it was looking like I might have to hand-file (God forbid) in order to get it right. Plus I was already missing my $300+ refund. Anyway, I opened up the county tax form for part-year residents to see what I might be dealing with, and it gave me two options: “If you lived in Indiana on Jan 1, 2014” and “If you lived in another state but worked in Indiana on Jan 1, 2014.”

Neither of these applied to me, since I both lived and worked in another state at the beginning of January. Now I was really annoyed, because where was the right form for me? I figured I’d better call and ask. Luckily it’s still early enough in the year that I only had to wait for about 5 minutes to talk to an actual human being. Unluckily, after I walked him through my problem, he had no more idea than me what I needed to do. Eventually, after looking at the same forms I’d been looking at, we had a brief dialogue.

Him: You know, I think you did it right — it really is $0.

Me: But surely you want some county tax from me?!

Him: I don’t know why, but I don’t think we do. I’ll make a note on your record that you called and we talked about this, though.

Me: Great, thanks. Can I get your name again just in case?

So, we hung up, and I almost just went ahead and filed. But I was still nervous about it. So I googled some more stuff (I’d tried google earlier but with different sets of terms) and lo and behold, it turns out that when you move to Indiana, even on January 2, you don’t owe any county tax for the entire year. If you move within Indiana, but to a different county, even on January 2, you pay county tax to your January 1 county for the entire year. Why? I have no idea. It makes basically zero sense to me. However, that’s apparently the law.

I discovered this by finding instructions for payroll software in Indiana, meant for employers. Maybe it’s also laid out explicitly somewhere in the instructions for the IN-40; my next step would probably have been to comb carefully through those. But a quick look didn’t turn that information up. Anyway, this payroll software instruction was meant for employers so that they would get this right…but my HR department apparently didn’t get the memo. Or maybe they did it on purpose? Because the end result here is that I’m actually quite happy. I’m getting a nice and wholly unexpected refund, AND I didn’t get a sudden shock with my first 2015 paycheck, when (if they’d only just started withholding the county tax) I would have been really surprised to suddenly find about $30 less per month than I was used to budgeting with.

So, there’s my story. How weird is that? Note to anyone moving to Indiana: try to do it in January to maximize your holiday from county tax!

*I had suspected I’d have a substantial federal refund, largely because my first employer withheld “too much” money given that I changed jobs to one with a lower salary mid-year.

23 thoughts on “Why I’m glad my new employer withheld way too much tax

  1. What a weird quirk in the law… But I’m glad it worked in your favor! I used to work on commission, and commission is taxed like “luxury income” (like winning the lottery)… 42%! It sucks knowing you earned so much in commission but really you’re only getting about half of that. The good thing though is that I always get a very good refund back. But starting in 2015, I’m no longer commissioned so I have to consider that in 2016 I won’t get so much back! :-/

    1. thesingledollar says:

      Wow, I didn’t know that about commission either! Tax law is so convoluted.

  2. Cindy says:

    OMG, we’re neighbors! Small world.
    I’ve never heard of that either, and I do Payroll in Indiana! Although I did know if you move after January 1st, you can’t change your county until the following year. I’ve never had someone move in from out of state, so I guess it hasn’t really mattered yet. But it doesn’t make any sense that they wouldn’t want to collect anything from people new to the state! You think they’d do a “January 1st, or when you first started living/working here” type thing.

    1. thesingledollar says:

      You would think that! Maybe they think it attracts new people to the state? But they don’t exactly advertise it, like I said, so it’s just weird. The funniest part of the phone call was when I was all “uh, are you sure you don’t want money from me?”

  3. Kristin says:

    Is this part of the state tax? Luckily the state I moved from and the state I moved to don’t have state income tax, so I am sure I am saving some money. Taxes give me such a headache I seriously can’t even handle it!

    1. thesingledollar says:

      No, it’s separate (though it’s usually handled somewhere on the state’s forms.) It’s a county-level income tax. It’s usually not that much; you’re probably making up for it in higher sales/property taxes. Things do get complicated, though!

  4. Christine says:

    There are so many tax quirks that my boyfriend will be hiring an accountant to do his taxes this year. I’ve been doing them myself with a tax software but I wonder if it might be beneficial for me to have someone else to do it. Maybe I’ll find I’m entitled to more money than I thought 🙂

    1. thesingledollar says:

      I might switch to an accountant in the next few years if my income rises. Right now I just hate the thought of paying someone else and I think they’re simple enough that I can handle it myself…but it would be nice to hand the task over 🙂

  5. Funny, work almost took me to Indiana for a college IT conference. Indianapolis, to be precise.

    I will be typing up a much less happy tax ending in the coming weeks. Perhaps you could send some of your good tax karma/vibes my way.

    1. thesingledollar says:

      Oh dear. Good luck with that!

  6. ARBM says:

    I know nothing about the taxes in the states, but that’s great news for you. I think this might be the first year I don’t get money back in tax season. 🙁 I just hope I don’t have to pay…

    1. thesingledollar says:

      ooooh, I hope you don’t have to pay also!

  7. I’m humbled by your persistence in finding the answers you needed. My head hurts just thinking of all the roadblocks you encountered along the way. I know your post isn’t about this, but it brings home to me the fact that so many of us bury our heads in the sand to avoid the various mazes of all that is confusing in managing finances. You are not giving into the temptation to stick your head in the sand. (Perhaps that option has never tempted you?) Well done! You have earned that $300!

    1. thesingledollar says:

      I have earned it, you’re right! Although it was a great hourly rate — sorting the whole thing out probably took an hour, maybe a bit more. I guess you’re right, I’m not much of a head in the sand person. Although I can ignore the hell out of stuff when I feel like it 🙂 In this case, though, I wanted to get the right answer and it was very worthwhile to me to get it right the first time and not have to file an amended return later, so I just plugged away until I got there.

  8. I live in Indiana too- north of Indianapolis. I pay a ton of taxes so any day I can pay less is a good day! =)

    1. thesingledollar says:

      I’m so happy with my $300 refund! 🙂

  9. I guess you learn something new every day, today I learned this. I guess you can take that extra money and make it work harder than the county would!

    1. thesingledollar says:

      right? It was news to me! I’m looking forward to seeing it in my IRA 🙂

  10. Take the small victories when you can, the government usually doesn’t give you those!

  11. Taxes can be so complicated…I’m a big fan of a flat consumption tax. Unfortunately it will likely never happen unless a lot of people change their mindset. Because of side income and employers not withholding enough, my wife and I got killed on taxes last year and owed nearly 5 figures – not fun! But this year we both voluntarily had more withheld as well as paid big quarterly taxes. I’m hoping for a refund this year!

    1. thesingledollar says:

      I’m not a fan of a consumption tax largely because they’re highly regressive, BUT I agree with you for sure that they’re overly complicated. Side income can really mess you up unless you’re prepared for it — it sounds like you definitely did the right thing this year so I hope you get a refund too!

  12. Vawt says:

    It is nice to see an example that turned out to be to your benefit. Tax laws are always confusing. When I moved from Kansas to California, it was a pain. Living in Kansas and working in Missouri always caused me to have to do 2 state forms, I don’t miss that (especially getting a Missouri refund, but owing Kansas every year).

    1. thesingledollar says:

      Yeah, anything involving two states (whether it’s a move or a live/work situation) is always complicated. I’m glad your life is simpler in California!

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