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Exemption question (salary & military pension)
Old 03-01-2014, 06:23 AM   #1
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Exemption question (salary & military pension)

Hey everyone! I have a tax question...I know that not everyone on here is a tax professional but thought someone might have had the same scenario as me.

After doing my taxes, it looks like I'm going to have to pay for the first time in 20+ years. Normally I would get back around $1000 or so but this year I'll have to pay $845. I spent 22 years in the Air Force so my taxable income was always "low" by comparison to my overall income (tax free housing/food allowances) and I always received a refund.

Anyway, I started a new federal job in January 2013 and now have two sources of income. For both my pension and salary, I claimed "1". The pension is only taxed federally while my salary is taxed both at the federal and state level (don't know if that makes a difference).

I used the IRS.gov withholding calculator for each source of income and BOTH of them, the IRS says, would result in an overpayment of $500+. If this is the case, then why do I need to pay? I don't understand! I also maxed out my TSP ($17,500), which kept my total taxable income below the 15% threshold.

So I guess now I should start thinking about knocking one of those exemptions down to "0"? It doesn't make sense to me but I'd rather break even or have to pay a little bit instead of $800+ every year.

Any thoughts?
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Old 03-01-2014, 07:03 AM   #2
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Go to DFAS (the accounting activity for your military retirement) and adjust your withholding on your retired pay. No forms to fill out and you can adjust state (if applicable) there too. +1 on not getting large refunds of overpayments.
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Old 03-01-2014, 07:17 AM   #3
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It sounds to me as if you are running into the fact that two roughly equal sources of income incur more than twice the amount of tax of each one separately. That's because of the progressive nature of the tax laws. The tax rate starts out at 0%, then goes to 10%, 15%, 25% and even higher as your income increases. If you had only one income, much of it would be taxed in the 0% or 10% category. When you add the second source of income, you have already exhausted the 0% and 10% brackets, so the second income will probably all fall into the 15% or higher tax brackets, thus more than doubling the taxes you owe.
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Old 03-01-2014, 07:22 AM   #4
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The young wife and I not only must claim zero exemptions, but also withhold an extra $100 from each paycheck in order to avoid having large tax bills in April. It may be the same amount in the end, but it hurts less when you never see it in your bank account.
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Old 03-02-2014, 07:26 AM   #5
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Quote:
Originally Posted by karluk View Post
It sounds to me as if you are running into the fact that two roughly equal sources of income incur more than twice the amount of tax of each one separately. That's because of the progressive nature of the tax laws. The tax rate starts out at 0%, then goes to 10%, 15%, 25% and even higher as your income increases. If you had only one income, much of it would be taxed in the 0% or 10% category. When you add the second source of income, you have already exhausted the 0% and 10% brackets, so the second income will probably all fall into the 15% or higher tax brackets, thus more than doubling the taxes you owe.
Yes, after doing some more digging, I think you hit the nail on the head. The exemption(s) have no idea that you're getting income from two different sources...it just accounts for the one source it's attached to. Will probably knock my pension exemption down to "0" per OAG's suggestion. Thanks!
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Old 03-02-2014, 07:49 AM   #6
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I'm retired Air Force as well and recently retired as a defense contractor a second time. I agree with all the posts. The only way I found to be near accurate with my withholding was to do a preliminary guesstimate with tax preparation software such as Turbo Tax or H&R Block. I then adjusted my withholdings with DFAS. Now, I'm back in the 0 to 15 percent bracket.
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