Tax "Tip" for Newlyweds

[RE-Fin-54321]

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.

 

[retire@40]

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/for...an-half-married-couples-30059.html#post556956

 

[jIMOh]

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.

 

[SecondCor521]

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

 

[RE-Fin-54321]

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]

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.

 

[Khan]

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.

 

[SLC Tortfeasor]

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)?

 

[SecondCor521]

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.

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

 

[Peaceful_Warrior]

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.

 

[NinjaPigeon]

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.

 

[bow-tie]

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.

 

[FinanceDude]

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........

 

[SecondCor521]

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

 

[Peaceful_Warrior]

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.

 

[SecondCor521]

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

 

[Peaceful_Warrior]

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!

 

[Buckeye]

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.

 

[Peaceful_Warrior]

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.

 

[RhodyGreg14]

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.

 

[USK Coastie]

In my 45 years of w^^k always claimed single and 0. Had to write two checks to the IRS in that time for taxes. YEA YEA I know left money with the govmt instead of getting interest on it in my account but no surprises at tax time

 

[success108]

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)?

Generally, if the tax you owe is greater than $1,000 there is a penalty, and it's a pain to calculate. See Publication 505.
Publication 505 (2/2007), Tax Withholding and Estimated Tax