Budget Buster ~ Taxes!

[disykat]

As others have said, she needs to figure their tax liablility with and without her income. Only then can she figure out if it is worth it for her to work.

It's not like they pay $0 if she doesn't work, so she obviously came out ahead. She has to do the math to figure out how much and then base her decisions on that!

 

[goodeats]

She didn't really pay 100% of her income to Fed Tax, but she probably pays a pretty high percentage compared to her DH's income. That was part of the reason I became a temporary SAHM. My income pushed us to phase out a lot of deductions and we ended losing our $25K passive activity loss. This made a HUGE difference in our total tax bill. When you compared the same year with me working and me not working ended up being like $30K difference in total tax paid (state and fed). When you factor in daycare and social security/med taxes I would have been bringing home less than half of my income. Add in 15K to 401K every year (yes I know this is still MY money) and I was bringing home a very little amount every paycheck. For us it was worth it for me to take a few years off with little ones. (For those that are concerned in my ability to jump back in the work force I am doing contracting work for my old job so my resume is not getting 'stale'.)

I think the marginal tax brackets affect a lot of middle class families and 'force' a lot of women out of the workforce.

 

[daughtersrus]

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).

This confuses me. I did my DD's taxes a week ago. Her income was much less than $16,000 (full time student) and she had federal taxes withheld. She will end up getting it all back but they were still withheld from her paychecks during the year.


Same for my other DD. She has 4 W2 forms. She worked as a long term sub for two different school districts, part time with our park district and started a permanent teaching position in Aug. With each of these jobs, she made less than $16,000 individually (total was more) and each of these withheld taxes. The 3 school districts did not withhold SS because she won't be able to collect it but they did take out all of the rest (fed, medicare, state as well as the one for teachers but I can't remember what it's called.) . The park district took it out in all 4 areas.

She is getting a partial refund but has to wait until next week for her return to be processed with the IRS changes.

 

[brerrabbit]

Again withholding rules are based on averages and even though you may get back every penney you pay in at the end of the year they start deducting from day one. The IRS has no way of knowing every situation of every worker in the country. IE your daughter would only work part time at a lower rate and not make it to some certain income level. Also be careful when doing your daughter's taxes who is a full time student. Remember that if you claim her as a dependent then when she files she loses certain deductions. This could result in her getting less money back.

 

[daughtersrus]

Again withholding rules are based on averages and even though you may get back every penney you pay in at the end of the year they start deducting from day one. The IRS has no way of knowing every situation of every worker in the country. IE your daughter would only work part time at a lower rate and not make it to some certain income level. Also be careful when doing your daughter's taxes who is a full time student. Remember that if you claim her as a dependent then when she files she loses certain deductions. This could result in her getting less money back.

Thanks for the info.

I used Taxact. When doing her taxes, it always asks if someone else can claim you.

Although my older DD still lives at home, she turned 24 in Dec so we no longer claim her.

 

[mrspaha]

Don't forget too that the withholding tables that employers use to figure the amount to withhold for federal and state income taxes are based on the premise that the employee will work the entire year at that rate of pay, and does not and cannot factor in any other unknown information, such as 2nd jobs, tax credits the employee can take on their returns, etc.

That is why if you do have unusual circumstances, it's good to do your own projection (or consult a CPA) for tax planning purposes. On your W-4, you can request that an additional fixed dollar amount be taken out of each paycheck if a refund at the end of the year is your goal.

 

[ccgirl]

While I understand people get excited to get that big tax refund.... That is money that people could have used to work for them instead of overpaying the gov't and having them hold it interest free. Your sister is actually paying almost exactly what they should. You said they owed $800, that means that they underpaid by $800. So, what they need to do is have their withholdings increased by $15.00 a week. You can have your employer take out extra money. Also, you said they would have had a $2500 refund had she not worked but she made $16,000. That means that they are still ahead by $13,000. That is a lot of money to give up rather than just paying $800 at the end of the year. We have owed in the past as well. We have 2 children and we both claim married 0. I try to get my refund as close to $0 as possible and invest the extra money every month or pay down bills rather than have the gov't hold it for me interest free until the end of the year.

 

[SunnieRN]

Taxes burn!! I have a home loan, I purchased my house 3 years ago. Interest rat 6.25%. I have thought SERIOUSLY about refi to a lower interest rate, but on my income, far below 100K, I paid almost 11K in taxes and am only getting 2K back with my mortgage interest deducted. If I refi to a lower interest rate, I will be paying additional taxes. Hmm, wonder if I refi and up my pre tax retirement up the same amount, if it would even out?

 

[RMAMom]

Thanks everyone, you have given her a lot to think about. I'm going to forward this to her so she can read it. She is planning to consult a CPA to better understand their options and I think this will give her a little to think about before she goes.

 

[bellarella]

Taxes burn!! I have a home loan, I purchased my house 3 years ago. Interest rat 6.25%. I have thought SERIOUSLY about refi to a lower interest rate, but on my income, far below 100K, I paid almost 11K in taxes and am only getting 2K back with my mortgage interest deducted. If I refi to a lower interest rate, I will be paying additional taxes. Hmm, wonder if I refi and up my pre tax retirement up the same amount, if it would even out?

Yes -- it would. All a mortgage deduction does is lower your taxable income. Assuming you are single, you are in the 25% marginal tax bracket it looks like. For every dollar you pay in mortgage interest, you save $.25 on your taxes. That won't change if you lower your interest rate. If you save $100 a month by refinancing, your federal tax liability will go up by $025. You still are better off by $75. If you are allowed to invest that $100 in a 401(k), then your tax liability will be the same, but it will be in your retirement account rather than your mortgage lender's account.

 

[SunnieRN]

Yes -- it would. All a mortgage deduction does is lower your taxable income. Assuming you are single, you are in the 25% marginal tax bracket it looks like. For every dollar you pay in mortgage interest, you save $.25 on your taxes. That won't change if you lower your interest rate. If you save $100 a month by refinancing, your federal tax liability will go up by $25. You still are better off by $75. If you are allowed to invest that $100 in a 401(k), then your tax liability will be the same, but it will be in your retirement account rather than your mortgage lender's account.

Thank you!! That's exactly what I needed to know!

 

[Jeff_G]

Taxes burn!! I have a home loan, I purchased my house 3 years ago. Interest rat 6.25%. I have thought SERIOUSLY about refi to a lower interest rate, but on my income, far below 100K, I paid almost 11K in taxes and am only getting 2K back with my mortgage interest deducted. If I refi to a lower interest rate, I will be paying additional taxes. Hmm, wonder if I refi and up my pre tax retirement up the same amount, if it would even out?

Let’s say you are in the 25% tax bracket, and your mortgage was $100,000, your yearly interest after 3 years is $5983.16. That deduction saves you $1,495.79 on taxes. You are paying a bank $5,983.16 to save on paying the IRS $1,495.79.

Now let’s say you refinance down 1.5 point to 4.75 your interest will be $4,326.45 saving you $1,656.71 and you still deduct 1081.61. This is a tax savings loss of $414.18 so even factoring that in you save over $1,200 by refinancing.


If you want the same tax deduction, refinance and donate the yearly difference to a charity, you will get the same tax breaks (assuming you are even itemizing in the first place) and you will be doing some good!

 

[LadyBeBop]

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.)

Nope. You're right. And that's a biggie right there.

Having a 17 year old is a pain. Too old for the child tax credit, and too young for the education credits.

Not that I'm dealing with it anymore. My youngest is 22.

 

[kiddo76]

This confuses me. I did my DD's taxes a week ago. Her income was much less than $16,000 (full time student) and she had federal taxes withheld. She will end up getting it all back but they were still withheld from her paychecks during the year.


Same for my other DD. She has 4 W2 forms. She worked as a long term sub for two different school districts, part time with our park district and started a permanent teaching position in Aug. With each of these jobs, she made less than $16,000 individually (total was more) and each of these withheld taxes. The 3 school districts did not withhold SS because she won't be able to collect it but they did take out all of the rest (fed, medicare, state as well as the one for teachers but I can't remember what it's called.) . The park district took it out in all 4 areas.

She is getting a partial refund but has to wait until next week for her return to be processed with the IRS changes.

That's because I gave the figures for filing married. Assuming they are single and claim 0, no taxes would be withheld on the first $6,050 they made, then 10% between $6050 and $10425, etc through the withholding tables. Keep in mind, these are the annual figures and assumes you worked all 52 weeks and the same amount each week. The amount actually withheld would depend on the employers payroll period (weekly, biweekly, etc) and the amount they earned in any given week.

I think schools need to teach high school students the basics of income tax withholding and filing. Far too may people have no idea how income tax withholding actually works. Or the difference between tax credits and tax deductions. I can't tell you the number of people I have had discussion with who refuse to get paid more than x hours in OT because the "don't want to go in to a higher tax bracket and pay more taxes".

 

[*Seanaci*]

Wow. Lots of info in this thread.

I like the idea of aiming for a net of 0 (refund/owning) when tax time comes around.

 

[ccgirl]

Wow. Lots of info in this thread.

I like the idea of aiming for a net of 0 (refund/owning) when tax time comes around.

This is what I do. A tax refund is just that, a refund of money you overpaid the gov't. If we went to a store and they charged us $100 for something that was going to cost $75 we would go to customer service right away to get our money back. We wouldn't wait a year to get our money back; right?

 

[mrspaha]

This is what I do. A tax refund is just that, a refund of money you overpaid the gov't. If we went to a store and they charged us $100 for something that was going to cost $75 we would go to customer service right away to get our money back. We wouldn't wait a year to get our money back; right?

Great way of putting it! I realize some people look at tax refunds as a forced way of savings, and then use their refund as a sort of bonus to take a vacation or something. But, then I see so many more people get very impatient and very upset that they don't get their refund right away.

 

[prncess674]

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!

So you are both claiming 00 on your W-4 plus both paying an additional $75 per paycheck that must mean you have over $100K in investment/dividend income on top of your $100K salary. Consider $75 * 2 paychecks per month * 2 people * 12 months that is an additional $3,600 per month in addition to your regular 00 tax bill is hard to believe. claiming 00 means you qualify for no dedcution and every single deduction you qualify for is phased out which means you income in $300K+. An additional $3,600 in tax liability would mean you are in the 35% plus tax bracket and are earning 100K+ in investment income PER YEAR! You may not think that your healthy salary plus 100K income is healthy income but a lot of people would beg to differ. I also question why you have zero deductions?

 

[LaurenLC]

So you are both claiming 00 on your W-4 plus both paying an additional $75 per paycheck that must mean you have over $100K in investment/dividend income on top of your $100K salary. Consider $75 * 2 paychecks per month * 2 people * 12 months that is an additional $3,600 per month in addition to your regular 00 tax bill is hard to believe. claiming 00 means you qualify for no dedcution and every single deduction you qualify for is phased out which means you income in $300K+. An additional $3,600 in tax liability would mean you are in the 35% plus tax bracket and are earning 100K+ in investment income PER YEAR! You may not think that your healthy salary plus 100K income is healthy income but a lot of people would beg to differ. I also question why you have zero deductions?

Why in the world would you care how many deductions we claim?

 

[prncess674]

Why in the world would you care how many deductions we claim?

You are stating that you qualify for $0 deductions including the dependent deduction for your daughter. As a US tax citizen you owe taxes on all income, including passive income from investments which by your stated calculation is over $100K in INCOME PER YEAR. If you are earning $100K in income then you must have $10 Million in investments. Sorry, but $10M in investment isn't middle class. I am sorry that you somehow believe that your invesmtent income should be tax exempt. If you don't like the US tax law, maybe move to a more tax friendly jurisdiction like a questionable country where you would pay for personal protection since you don't pay for public police, fire, etc..