Join Early Retirement Today
Reply
 
Thread Tools Display Modes
Tax "Tip" for Newlyweds
Old 10-03-2007, 11:49 AM   #1
Dryer sheet wannabe
 
Join Date: May 2007
Posts: 18
Tax "Tip" for Newlyweds

Don't know if you can call it a tip, but just wanted to pass along some information to any newlyweds that just caught me by surprise.

Both my wife and I work relatively well-paying jobs in the corporate world. We were married last November and excitedly updated our W4 withholdings for 2007 to the "Married" status with 1 withholding allowance - this seemed to be the logical choice because it accurately reflected our filing status.

Throughout the year I noticed my federal tax withholdings seemed a little low, however this is just my second year working post-college and I chalked it up to the significant increase in my 401K contributions. I am always very on-top of my finances, but just let this one slide until this past weekend when my wife and I projected our income tax liability for this year to determine if our withholdings were on pace using the IRS.gov withholding calculator. To our surprise we are on pace to OWE ~$4,000 at tax time (about 25% of our total tax liability). Now this "surprise" isn't horrible because we are both very frugal and save a significant amount of our money, but it is definitely disappointing. We are planning on bumping up our withholdings for the remainder of the year to lower our outstanding tax liability come April.

After some brief research I found that the "married" status for withholdings came about when it was typical that just 1 spouse was working and your paycheck withholdings are calculated accordingly. Needless to say, withholding under the "married" status if both partners work will result in a drastic underpayment of taxes. Moral of the story is if both spouses work each should keep with the "single" status for withholding purposes - newlyweds keep this in mind . All in all I am not too distraught because who wants to give the government an interest free loan anyway? Just not a surprise I want others to encounter.
RE-Fin-54321 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 10-03-2007, 12:15 PM   #2
Thinks s/he gets paid by the post
retire@40's Avatar
 
Join Date: Feb 2004
Posts: 2,670
The tax tables are over generalized to keep things simple.

Sometimes that does cause over/under estimations such as in your case.

There was some talk about this type of apparent disparity on an unrelated matter in this thread... http://www.early-retirement.org/foru...tml#post556956
__________________
No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
retire@40 is offline   Reply With Quote
Old 10-03-2007, 12:59 PM   #3
Thinks s/he gets paid by the post
jIMOh's Avatar
 
Join Date: Apr 2007
Location: west bloomfield MI
Posts: 2,223
it depends on relative incomes of the spouses.

if one spouse makes considerably more than the other, the taxes withheld from higher earning spouse will have a higher impact. If both spouses make about same amount, in 15% bracket, the combined income might be in 25% bracket, and be assured that uncle sam will collect his share April 15. I suspect you fell into the latter category?

In my situation (married, in Ohio) we get 4 figures back from federal most years, then turn around and write Ohio a check for about half of what federal gives us back. Both of us earn deep into 15% bracket if we filed as single. We withhold extra taxes from my wife's paycheck. She makes around 20k less than me, but is closing in fast... and I also put much more into 401k than she does, so take home is closer than 20k difference.
__________________
Light travels faster than sound. That is why some people appear bright until you hear them speak. One person's stupidity is another person's job security.
jIMOh is offline   Reply With Quote
Old 10-03-2007, 01:41 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 7,866
From http://www.irs.gov/pub/irs-pdf/fw4.pdf:

"Two earners/Multiple jobs. If you have a working spouse or more than one job, figure the total number of allowances you are entitled to claim on all jobs using worksheets from only one Form W-4. Your withholding usually will be most accurate when all allowances are claimed on the Form W-4 for the highest paying job and zero allowances are claimed on the others."

and

"If you have more than one job or are married and you and your spouse both work and the combined earnings from all jobs exceed $40,000 ($25,000 if married) see the Two-Earners/Multiple Jobs Worksheet on page 2 to avoid having too little tax withheld."

So it always is a good idea to read the instructions if you're entering into a new tax situation. By the way, TDCumm16, you may want to make sure you won't get hit with an underpayment penalty. If you don't adjust or don't adjust enough, you could owe one.

2Cor521
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 10-03-2007, 01:46 PM   #5
Dryer sheet wannabe
 
Join Date: May 2007
Posts: 18
We make about the same income in the same tax bracket. Combined we are just pushed from the middle to upper end of that bracket.

I guess I could probably get myself in trouble providing such a general tip, and as with everything it all depends on the specifics of your situations. I guess the real take-away would be to understand how changing your withholding status on your W4 will affect your expected tax refund/liability at the end of the year. Without any analysis I made what seemed to be a logical choice with my W4 change, but upon further review it didn't turn out to well...
RE-Fin-54321 is offline   Reply With Quote
Old 10-03-2007, 01:49 PM   #6
Dryer sheet wannabe
 
Join Date: May 2007
Posts: 18
Quote:
Originally Posted by SecondCor521 View Post
So it always is a good idea to read the instructions if you're entering into a new tax situation. By the way, TDCumm16, you may want to make sure you won't get hit with an underpayment penalty. If you don't adjust or don't adjust enough, you could owe one.
2Cor521
Lessoned learned SecondCor .

We are ensuring that our withholding adjustments for the rest of the year are significant enough to avoid a penalty. Thanks for the heads up.
RE-Fin-54321 is offline   Reply With Quote
Old 10-03-2007, 02:46 PM   #7
Gone but not forgotten
Khan's Avatar
 
Join Date: Aug 2006
Posts: 6,924
Send a message via AIM to Khan
Quote:
Originally Posted by jIMOh View Post
it depends on relative incomes of the spouses.

if one spouse makes considerably more than the other, the taxes withheld from higher earning spouse will have a higher impact. If both spouses make about same amount, in 15% bracket, the combined income might be in 25% bracket, and be assured that uncle sam will collect his share April 15. I suspect you fell into the latter category?

In my situation (married, in Ohio) we get 4 figures back from federal most years, then turn around and write Ohio a check for about half of what federal gives us back. Both of us earn deep into 15% bracket if we filed as single. We withhold extra taxes from my wife's paycheck. She makes around 20k less than me, but is closing in fast... and I also put much more into 401k than she does, so take home is closer than 20k difference.
In Ohio, if you are both employed, sometimes the total State and Federal tax is less if you file separately instead of joint.
__________________
"Knowin' no one nowhere's gonna miss us when we're gone..."
Khan is offline   Reply With Quote
Old 10-03-2007, 03:08 PM   #8
Recycles dryer sheets
 
Join Date: Jun 2005
Posts: 233
Isn't it actually a bad thing to receive a tax refund, because that means that you've essentially been loaning the government your money interest free for a year?

And if that's true, then isn't it better to do a minimal withholding, and then just write that nasty check to the tax man at the end of the tax year (assuming that you won't get slapped with some kind of underpayment penalty)?
SLC Tortfeasor is offline   Reply With Quote
Old 10-03-2007, 04:57 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 7,866
Quote:
Originally Posted by TDCumm16 View Post
Lessoned learned SecondCor .

We are ensuring that our withholding adjustments for the rest of the year are significant enough to avoid a penalty. Thanks for the heads up.
Sorry, I was grumpy earlier today about something else and it came through in my post (well, it did to me anyway). Glad you'll work to avoid the penalty, though.

Quote:
Originally Posted by SLC Tortfeasor View Post
Isn't it actually a bad thing to receive a tax refund, because that means that you've essentially been loaning the government your money interest free for a year?

And if that's true, then isn't it better to do a minimal withholding, and then just write that nasty check to the tax man at the end of the tax year (assuming that you won't get slapped with some kind of underpayment penalty)?
I would agree with you SLC. But "better" is a subjective term. Some people really don't like writing (big) checks to the government, some fear coming up short, some like the forced savings aspect.

2Cor521
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 10-03-2007, 10:02 PM   #10
Full time employment: Posting here.
 
Join Date: Dec 2006
Posts: 509
Quote:
Originally Posted by SLC Tortfeasor View Post
Isn't it actually a bad thing to receive a tax refund, because that means that you've essentially been loaning the government your money interest free for a year?
If you're answering the question, "What will maximize my assets assuming I make optimal financial decisions?" then you are certainly correct.

However, for many people they don't make "optimal" financial decisions... they may spend the money instead of invest it. Therefore, depending on a person's emotional attachment to money will determine what is actually "best" for them.

There really is no feeling like "The government just gave ME $4,000" at the end of the year. I really enjoy the past tax refunds I've gotten.

And every damn time I try to adjust my withholdings so that I will end up owing them instead of them owing me. Tax time is bittersweet because I get cash back and keep trying to figure out how to withhold less and less.

This year I took the max amount of withholding my company will allow since I just had a kid, single income household, mortgage with itemized deductions and 401k contributions, etc... I *hope* I have to pay next year, but I'm doubtful again.
Peaceful_Warrior is offline   Reply With Quote
Old 10-04-2007, 06:14 AM   #11
Recycles dryer sheets
 
Join Date: Jan 2006
Posts: 331
Quote:
Originally Posted by TDCumm16 View Post
Don't know if you can call it a tip, but just wanted to pass along some information to any newlyweds that just caught me by surprise.
I actually am not going to change my withholdings when I get married to reflect the situation. In fact, I'm probably going to go for additional withholdings. I know that it's "bad" to have a refund since it means I loaned the government money, but it is good for me.

I figure our first year of marriage we'll really be working out the kinks in our financial life, and our savings will not be spectacular. Mainly because she will have to stop working when we get married. So, my income will then be covering both of us, and I'm not a super budgeter.

So I won't really "lose" the interest on my 1 or 2k refund so much as gain an extra chunk of money every year.
NinjaPigeon is offline   Reply With Quote
Old 10-04-2007, 08:11 AM   #12
Full time employment: Posting here.
bow-tie's Avatar
 
Join Date: Mar 2004
Posts: 688
I had the same thing happen with my wife and I. I was pissed when it happened, but this lesson has certainly stuck with me since - - stay vigilant, because no one else will do it for you.
__________________
Diggin' my way to financial freedom, one buck-at-a-time
bow-tie is offline   Reply With Quote
Old 10-04-2007, 08:36 AM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,483
Quote:
Originally Posted by Peaceful_Warrior View Post
If you're answering the question, "What will maximize my assets assuming I make optimal financial decisions?" then you are certainly correct.

However, for many people they don't make "optimal" financial decisions... they may spend the money instead of invest it. Therefore, depending on a person's emotional attachment to money will determine what is actually "best" for them.

There really is no feeling like "The government just gave ME $4,000" at the end of the year. I really enjoy the past tax refunds I've gotten.

And every damn time I try to adjust my withholdings so that I will end up owing them instead of them owing me. Tax time is bittersweet because I get cash back and keep trying to figure out how to withhold less and less.

This year I took the max amount of withholding my company will allow since I just had a kid, single income household, mortgage with itemized deductions and 401k contributions, etc... I *hope* I have to pay next year, but I'm doubtful again.
Well, ,most folks I know who get a big refund blow it on some big ticket item, then again none of those folks are on this forum........
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Old 10-04-2007, 11:01 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 7,866
Quote:
Originally Posted by Peaceful_Warrior View Post
This year I took the max amount of withholding my company will allow
Warrior,

As far as I know (I'm sure someone will correct me if I am wrong) your company may not restrict you on the number of allowances you choose to claim. Note that if you claim more than 10, they are required to inform the IRS. However, if it is appropriate for your tax situation, then I don't think you'll have a problem. For several years I was claiming 14 allowances and still getting refunds. Never had a problem with it.

2Cor521
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 10-04-2007, 11:07 AM   #15
Full time employment: Posting here.
 
Join Date: Dec 2006
Posts: 509
Quote:
Originally Posted by SecondCor521 View Post
Warrior,

As far as I know (I'm sure someone will correct me if I am wrong) your company may not restrict you on the number of allowances you choose to claim. Note that if you claim more than 10, they are required to inform the IRS. However, if it is appropriate for your tax situation, then I don't think you'll have a problem. For several years I was claiming 14 allowances and still getting refunds. Never had a problem with it.
That's good to know. The online system wouldn't let me take more than 10, but if I get a refund again for this year then I'm going to ask them how they can increase that number for me.
Peaceful_Warrior is offline   Reply With Quote
Old 10-04-2007, 12:25 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 7,866
PW,

You may just have to fill out the paper version and get it to your HR department. Again, I think the law is on your side if you chose to push it.

2Cor521
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 10-04-2007, 01:44 PM   #17
Full time employment: Posting here.
 
Join Date: Dec 2006
Posts: 509
Got it. Then I'll see how things look around Feb/March timeframe and take it from there.

I'd look at it now, but there's been way too many life events complicating my situation that it may be more headache than its worth to look at until after it's all done.

For the first time, I'm going to have somebody prepare my taxes for me. I have a decent idea of all the various deductions / complications, so I should be able to eye anything that doesn't make sense and also ask the right questions - but between a baby, moving to a state with no income tax (so now I have to deduct sales tax instead), renting out our old property, buying a new one, changing a hobby into a part-time business, investing in some dividend-paying post-tax LLCs, and changing my 401k investments mid-year to give me a little more liquid post-tax cash cushioning for all these life events - it's a miracle I haven't lost my mind already!
Peaceful_Warrior is offline   Reply With Quote
Old 10-07-2007, 07:10 PM   #18
Thinks s/he gets paid by the post
 
Join Date: May 2006
Location: Orlando
Posts: 2,638
Peaceful - Do your taxes yourself this year even if you end up paying someone else to do them also. TaxAct is a great program that is very inexpensive. Know about what your tax return should look like when the accountant hands it to you all prepared. You might even surprise yourself and decide you have done a good job and file your own work and save yourself several hundred dollars.
Buckeye is offline   Reply With Quote
Old 10-07-2007, 11:28 PM   #19
Full time employment: Posting here.
 
Join Date: Dec 2006
Posts: 509
Quote:
Originally Posted by Buckeye View Post
Peaceful - Do your taxes yourself this year even if you end up paying someone else to do them also. TaxAct is a great program that is very inexpensive. Know about what your tax return should look like when the accountant hands it to you all prepared. You might even surprise yourself and decide you have done a good job and file your own work and save yourself several hundred dollars.
I've used TaxAct for about 5 years now and been *very* pleased with it. I just wasn't sure how well it would handle the following in conjunction:
- Taking a loss on a Rental property at middle of year (along with various expenses, including depreciation)
- Moving to a new state mid-year such that I would deduct State Income Tax in CA, and deduct State Sales Tax in WA.
- Having a baby (I know it handles this one easily)
- Having a hobby turn into a business (which is currently taking a loss due to lots of investment in design and advertising)

I also have lots of individual sources of income - some issue K-9s (which worked fine in TaxAct in the past), there's Vanguard sale of shares (I haven't had to report that in year's prior), as well as Prosper.com which didn't even issue me any sort of official document (just had to look up how much interest I earned and count that as income).

I'm not opposed to using TaxAct again - I love the software and plan to use it for all future years when I don't have all this whacked out tax stuff going on... but I just figured since this year was complex with a lot of mid-year stuff going on, it might be easier to just pay somebody.

Do you think TaxAct can handle all that stuff reasonably easily? I know I've seen the topics in there, I just haven't taken the time to really dig into them and see if I have confidence in it handling all of the above situations.
Peaceful_Warrior is offline   Reply With Quote
Old 10-22-2007, 08:41 PM   #20
Dryer sheet aficionado
 
Join Date: Oct 2007
Posts: 25
I got married in July and we were going to change our W-4 in January. Best to get started on the right foot from the beginning of the year.
RhodyGreg14 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Tax Policy Promotes "Early" Retirement REWahoo FIRE and Money 19 07-21-2017 02:10 PM
Scott Burns on the "Fair Tax" samclem Other topics 36 10-23-2006 11:26 AM
Scott Burns on the "Fair Tax" hogwild FIRE and Money 2 10-19-2006 10:23 AM
M*'s Sue Stevens: "How Two New Tax Laws Will Affect Your Bottom Line" Nords FIRE and Money 5 09-28-2006 12:44 PM
Another " FLAT TAX " thread Lakewood90712 FIRE and Money 3 03-22-2006 07:40 AM

» Quick Links

 
All times are GMT -6. The time now is 05:43 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.