Budget Buster ~ Taxes!

[RMAMom]

My sister was a housewife and she and her DH got about $5000 back at tax time last year.

In 2010 her DH got a raise and she went to work last February and she just did her taxes and they owe a little more than $800. Here is the worst part, they paid $16000 (combined) in taxes and she earned $16000 in income.

I asked about her W-4 and she said they both claim married 0. So what are the options, she should go back to being a house wife or is there something they can do, invest in etc to pay less taxes?

Thoughts?

 

[jedijohn]

Donate some of their $100,000+ income to me.

 

[Jeff_G]

They are looking at it the wrong way, ie she made 16k and we paid 16k in taxes. This is not the correct way to look at it, his income would have taxes without her income. Without knowing the number, let’s say his normal taxes would be 14k, and hers was 2k, she then made 12k after taxes. Well that is 12k more than before. Sure her income might have bumped them into a higher tax bracket or even pushed their AGI over the limit for certain credits but they need to figure out the real costs of her income, ie daycare, clothing, vehicle wear and tear. Even then it might make sense to take a small hit to work, as she continues in her career she will get pay raises. Think about where she will want to be career wise after the kids are out of daycare off at school all day. On the other hand if she want to stay at home and raise the kids I’d say go for that as well.

I’m in the same boat last several years I received a refund, this year I have to pay in, same deal my wife went to work and we both claimed 0, so this year we know we need to claim 0 and have additional amounts withheld. You don’t want to have an underpayment penalty next year, so make sure you withhold at least 100% of what your tax from last year was.

 

[mrspaha]

You really have to look at your taxable income and total taxes paid. It seems like so many people just look at their "refunds" and compare refund to refund, as opposed to comparing taxable income and total tax liability from year to year. Since their income is much higher in 2010, they're probably in a higher tax bracket; thus paying more taxes.

Since they are making more money, perhaps they should consider investing in IRA's or 401K's, which would reduce their taxable income.

Ideally, they should go to a CPA to get some tax planning advice. There are so many variables that go into income tax returns that really a professional tax preparer that can see their actual incomes, deductions, credits etc would be best able to advise them.

 

[RMAMom]

They are looking at it the wrong way, ie she made 16k and we paid 16k in taxes. This is not the correct way to look at it, his income would have taxes without her income. Without knowing the number, let’s say his normal taxes would be 14k, and hers was 2k, she then made 12k after taxes. Well that is 12k more than before. Sure her income might have bumped them into a higher tax bracket or even pushed their AGI over the limit for certain credits but they need to figure out the real costs of her income, ie daycare, clothing, vehicle wear and tear. Even then it might make sense to take a small hit to work, as she continues in her career she will get pay raises. Think about where she will want to be career wise after the kids are out of daycare off at school all day. On the other hand if she want to stay at home and raise the kids I’d say go for that as well.

I’m in the same boat last several years I received a refund, this year I have to pay in, same deal my wife went to work and we both claimed 0, so this year we know we need to claim 0 and have additional amounts withheld. You don’t want to have an underpayment penalty next year, so make sure you withhold at least 100% of what your tax from last year was.

Well her youngest child is 17 so no childcare and her job is a $15.00 and hour administrative position for someone who will probably retire in another couple of years so there is no ladder to climb and honestly I am no sure she will work after her boss retires

You really have to look at your taxable income and total taxes paid. It seems like so many people just look at their "refunds" and compare refund to refund, as opposed to comparing taxable income and total tax liability from year to year. Since their income is much higher in 2010, they're probably in a higher tax bracket; thus paying more taxes.

Since they are making more money, perhaps they should consider investing in IRA's or 401K's, which would reduce their taxable income.

Ideally, they should go to a CPA to get some tax planning advice. There are so many variables that go into income tax returns that really a professional tax preparer that can see their actual incomes, deductions, credits etc would be best able to advise them.

Thanks, they probably will call a CPA, I was just curious to see if there was something they could do. I know nothing about any of this. Maybe they are stuck and will always pay so much in taxes.

The kicker was after she did the taxes and found out she owed she did them again without her income and had a $2500.00 refund. I know you say they shouldn't just look at the refund but she was a housewife for over 20 years, her DH took a pay cut and they were in bad shape for about a year before she found her job. 2 months after she went to work her DH got the raise and they decided that she would keep her job but there were a lot of adjustments to change their whole way of life. I think now she is feeling like it was for nothing and I have no idea what to say to her.

 

[LaurenLC]

Donate some of their $100,000+ income to me.

I'm sure that you were trying to be funny, but this kind of attitude REALLY irks me! My husband and I just had our taxes done on Saturday and we owe... A LOT! In 2010 we both claimed 0 on our W2, had an additional $75- $100 taken out of each check, contributed at least 15% to our 401Ks, had a baby and I lost my job in August.... I'm not exactly sure what more Uncle Sam wants from us! Don't get me wrong, we do okay, but we are far from rich! Every time I read a post about someone asking about owing on taxes someone else posts about how it must be sooooooo nice to be soooooo rich and it's NOT ALWAYS the case!

 

[carj]

I may be wrong but I think that the child tax credit doesn't apply to 17 year olds. That would have reduced their refund by $1000. (I may be wrong.)

We owe this year too. We owed last year so we increased the amount withheld. Still, we owe.

I know that it must stink to owe when you are used to a refund.

 

[carj]

I'm sure that you were trying to be funny, but this kind of attitude REALLY irks me! My husband and I just had our taxes done on Saturday and we owe... A LOT! In 2010 we both claimed 0 on our W2, had an additional $75- $100 taken out of each check, contributed at least 15% to our 401Ks, had a baby and I lost my job in August.... I'm not exactly sure what more Uncle Sam wants from us! Don't get me wrong, we do okay, but we are far from rich! Every time I read a post about someone asking about owing on taxes someone else posts about how it must be sooooooo nice to be soooooo rich and it's NOT ALWAYS the case!

 

[tlmdisney]

It sounds like your sister netted r $12,700 then. I guess she needs to decide if that is enough to work or not. It seem that she is thinking that if she did not work they would not have held out any of the $16,000 in taxes plus gave them $2,500 more. That is not how it works her husband taxes would still have been 12,700 after $2,500 refund.

 

[Jeff_G]

Another thing to consider is Social Security… Being a SAHM you don’t earn any SS credits, now assuming SS will still be around and the retirement withdrawal age doesn’t goto 150 years old, she might consider putting in her required “time” now to earn the minimum SS credits so that someday she might get something back from SS…

But then again I’m not going to rely on SS for anything… I agree with the comment of putting more money into 401ks that is a good way to offset taxable income…

And agree with people getting caught up in owing vs. refund, a refunds mean you gave the government use of your money all year interest free. You lost the ability to use it for your own good. Owing meant you got to use your money for a few months where you would not have otherwise… Ideally you want to be as close to zero as possible. Owing or refund this all equalizes out to your actual tax liability when you file. You pay the same tax with a refund vs. owing additional at filing… It would be nice if Uncle Sam gave us all interest on our refunds, you know they tack on interest and penalties if you underpay…

 

[kydisneyfans]

Make sure each of them max out the $5,000 IRA contribution, that reduces income by $10,000, lowering their taxes, and potentially bringing them back into a lower tax bracket.

 

[bellarella]

The kicker was after she did the taxes and found out she owed she did them again without her income and had a $2500.00 refund. I know you say they shouldn't just look at the refund but she was a housewife for over 20 years, her DH took a pay cut and they were in bad shape for about a year before she found her job. 2 months after she went to work her DH got the raise and they decided that she would keep her job but there were a lot of adjustments to change their whole way of life. I think now she is feeling like it was for nothing and I have no idea what to say to her.

This is totally the wrong way to think about it. The difference in tax (assuming she ran the calculations correctly) was $3,300. This means her working brought in $12,700 after taxes. That's over $1,000 per month net gain.

The reason this happened was because taxes were withheld from her check as if her $16,000 were the only income for a married couple. That's a very low tax bracket. In reality, her income was more like last dollars added on to her husband's income, which should have been taxed at their marginal rate.

To avoid this in the future, they need to figure out what their income will be combined and then figure out (roughly) what their tax liability is and then adjust their withholding to make sure enough gets pulled out of each check. They can either spread it between both of theirs, or take it out of one.

As others have mentioned, contributing to tax-excempt or tax-deffered accounts can help lower their tax liability.

 

[wvjules]

I'm confused...with her income they owe $16,000 but without it they get a refund of $2500? That's over $18,000 difference. Doesn't seem right to me.

 

[bellarella]

I'm confused...with her income they owe $16,000 but without it they get a refund of $2500? That's over $18,000 difference. Doesn't seem right to me.

No, with her income their total tax liability was $16,000 -- coincidently the same amount that she brought in.

With her income they owed $800 in addition to what they had already paid. Without her income they would have gotten $2500 back.

Doing the rough math, they had $15,200 withheld from their checks combined. So, if they would have gotten a $2500 refund without her income, they would have owed $12,700 vs. the $16,000 they owed with her income; a tax difference of $3,300. That is 20% -- so most likely their total income falls somewhere on the 15% and 25% tax bracket line.

 

[daughtersrus]

All that we know if that combined, the DH and DW paid in $16,000 in federal taxes. How much did the DW pay in for SS? How much for State? How much for Local? When you take all of these out as well, she's probably making much less than $15/hour.

Since the refund with only the DH working would still have been 1/2 of what they previously were getting, something must have changed. Are they loosing the child credit? Did their college loan interest change? If they itemize, did their mortgage interest, charity, property taxes, work related expenses, health care expenses...change?

There are just too many unknown variables.

 

[pigletto]

I'm sure that you were trying to be funny, but this kind of attitude REALLY irks me! My husband and I just had our taxes done on Saturday and we owe... A LOT! In 2010 we both claimed 0 on our W2, had an additional $75- $100 taken out of each check, contributed at least 15% to our 401Ks, had a baby and I lost my job in August.... I'm not exactly sure what more Uncle Sam wants from us! Don't get me wrong, we do okay, but we are far from rich! Every time I read a post about someone asking about owing on taxes someone else posts about how it must be sooooooo nice to be soooooo rich and it's NOT ALWAYS the case!

 

[The Pluto People]

Depending on how old she is she may get more $ in Social Security (retirement) by claiming 1/2 of her husband's benefits rather than her own. So the Social Security ramifications of her working could be a moot point.

 

[dfchelbay]

Doesn't she have any write off? Mortgage interest, property taxes, vehicle taxes, oop medical (over the 7.5% threshold), charitable contributions, etc.

A better way to think of it is to look at the disposable income she had over the last year. To get all that spending money, she had to pay what was withheld from her paycheck, plus part of the $800 outstanding.

In the end, it always stinks to have to pay more taxes!

 

[brerrabbit]

Believe it or not when the Federal Government first started collecting income tax, there was no withholding involved. At the end of the year if you made $10,000 (actually a good salary for back then) and the tax rate was 10% then you just wrote a check for $1,000 and sent it to the IRS.

Look at the situation the same way today and you get a better picture of what you should do. Refunds mean nothing they are just a balancing of estimated payments during the year vs what you actually owe at the end of the year.

Lets say husband makes $100k in year one and pays $16,500 in withholding during the year, net pay looks like $83,500 but gets a refund of $2,500. Then net pay was actually $86,000 and he paid $14,000 in taxes, they just had to wait till February of the following year to get it.

In year two husband makes $100k and pays $16,500 in withholding and wife makes $16,000 and pays $2,500 in withholding.

So in year two net pay is $116k and withholding is $19,000 but after doing their taxes discover that they owe an additional $800.

They still are better off because they made net 96,200 in year two compared to $86,000 in year one. The refund or having to pay means nothing even though some would argue, "but they had to pay!"

Bottom line is if you always want a refund then set withholding to single with 0 deductions, and have them take $100 extra a check. Then you have less money during the year but get a big refund every year.

Also keep in mind that what you put on your W-4 just corresponds to what the average tax should be for people making about what you make. It does not account for children under 17 you get tax credits for, mortgage deductions, savings rate, IRA contributions, etc. You have to mindful of those things.

That is why usually in about June or July I take pay stubs and investment and mortgage documents and run a pro forma tax return to see where I stand. From there I can adjust withholding to try and end the year as close to my actual tax liability as possible. Come April I want to get no refund, and owe no more. Net 0 is my goal. Others see overpaying during the year as a forced savings plan and if that's what you want to do that's okay, but just understand what it takes to do that.

 

[kiddo76]

Also keep in mind that what you put on your W-4 just corresponds to what the average tax should be for people making about what you make. It does not account for children under 17 you get tax credits for, mortgage deductions, savings rate, IRA contributions, etc. You have to mindful of those things.

Also keep in mind that is doesn't take in account any additional income. The wife would have had hardly anything withheld from her income if she claimed married 0. At income of $16000, she wouldn't have had any taxes withheld on the first $13,750 of income and only 10% withheld from the income over that ($2250). If that $16000 had been added to her DH's income and withheld accordingly, the employer would have withheld 25%-27% of that $16000. So considering that, I don't think owing $800 is too bad, it could have been a lot worse.

What they need to do this year is have an additional amount taken out of their paycheck. A CPA or tax software can help them figure out what that amount should be.

And everyone, please remember that the amount withheld from you paycheck in no way affects your total tax liability at the end of the year. Think of withholding as an estimated payment of your yearly tax bill. If you get a refund, your estimated payments were too high, if you have to pay, your estimated payments were too low.