Why do we owe taxes??

[Huff]

Anyone know the basis for federal withholding amounts? The past 3 years we've owed quite a bit on federal taxes. We have no kids and claim 0 deductions at our work for maximum withholding's. We file married/jointly but do not have enough to itemize (low mortgage with low interest). Why would we owe when we both have max withheld? That means the withholding is below the amount of expected taxes for our income. Any ideas?

 

[jsmith]

Well with the information you have given its a bit difficult but here are a couple of possible scenarios
-each employer withholds based on the tax rate for the earners income bracket. If you are both at the top of the bracket-i.e with a couple of thousand dollars of pushing into the next bracket, your combined incomes probably push you up two-thus the amount of taxes withheld will be too low-especially if you have a large number of pre tax withholdings.
- One or both of you gets a signifgant amount of income that does not have with holding-i.e interest or dividend income, alimony ect.
we fit into scenario one-and even with itemized deductions we usually just break even. However we pay for health insurance with after tax dollars impacting the amount of with holding we have.

 

[jessc79]

Anyone know the basis for federal withholding amounts? The past 3 years we've owed quite a bit on federal taxes. We have no kids and claim 0 deductions at our work for maximum withholding's. We file married/jointly but do not have enough to itemize (low mortgage with low interest). Why would we owe when we both have max withheld? That means the withholding is below the amount of expected taxes for our income. Any ideas?

That doesn't sound right. Do you have a CPA doing your taxes? I would recommend it in this case.

 

[ForMyBoys]

This happens to us even though we do itemize. The primary driver is the fact that I make more than my hubby. Essentially my income pushes us up into a higher bracket and not enough is withheld from my dh's paychecks.

 

[Huff]

In our case my wifes income is about 25% less than my own so not a huge difference. Do companies base withholdings on marital status or assume single? If not that could be a problem. I may ask my companies CFO for comment or find a CPA. One thing to note is that last summer my wife changed jobs with a substantial increase in her income but we owed quite a bit last year as well. We'll get a small refund on state.

 

[ForMyBoys]

They withhold based on how you fill out your W-4. Withholding amounts are set by law based upon the amount you earn and what you request on the W-4. If you selected married on your W-4 it will withhold at a married rate. Which assumes only one spouse works so it withholds less, not more. In your situation you should ensure your W-4's say single.

Also if you do both make the same you are, as a PP mentions, reaching high tax brackets quicker, known as the marriage tax penalty. I copied this from a website:

Marriage Tax Penalty
While most married couples filing jointly reap tax benefits, some fall victim to the marriage tax penalty and end up paying more income tax than they would have if they’d stayed single. This often happens to couples who make around the same yearly income. As income levels rise, tax brackets for those filing jointly are not twice the amount for singles. For example, according to Fidelity, if you are single and both you and your partner make $83,000 a year, each of you falls into the 28 percent tax bracket. But if you’re married, the 28 percent tax bracket starts much lower than your combined income, at around $137,000. In this case, if you and your partner marry and file jointly, you’ll fall into a higher tax bracket and will be subjected to higher taxes. If one partner makes significantly more than the other, it is likely that marrying and filing jointly will result in tax benefits rather than penalties.

 

[clh2]

Another thing to consider - do either you or your wife get paid overtime? While it is great to get OT pay - that can really mess with your taxes too.

The last time I filled out a w-4 (12 years ago) in addition to the formulas provided by the IRS - we have an additional amount taken out of each of my paychecks too.

 

[Huff]

Thanks ForMyBoys, sounds like whats happening. While we both have 0 deductions claimed on W4 I'm sure we both selected married. I'll see what the effect is if we select single. We get back on state. Ideally I'd lke to owe on federal close to what we get back on state, or both be close to 0 refund/owe.

 

[disneychrista]

You can have your employer deducted a flat amount in addition to to the % based on income. Say you owe $1200, you & your husband, can have an additional $25 deducted from your check (assumes semi-monthly payments) to not have to write the check each April. $25*4*12=$1200.

 

[Shelly F - Ohio]

I once worked for a company who to this day I have no idea how they figured tax withheld.

I switched jobs and moved just 3 block from the old company. My pay rate was the same but my taxes withheld were less at the new company. And i worked the same amt of hours. I had the same deducts as the old company. I questioned HR and they verify and said it was right. They used quickbooks for our payroll. I think some thing was wrong with the software they used

Another girl who was now making more than her old job was complaining because she was not getting as much back in taxes.

 

[CT Yankee]

You may be able to prepare your taxes as married filing separately. If you are using an accountant or using some kind of tax preparation software, try running that scenario and see if it saves you any money. It has worked for us a couple of times.

 

[nunzia]

This happens to us yearly ..claim zero..have quite a bit extra taken out and still owed. I had a part time job that didn't withold any, so that's why we had more taken out at other jobs and still owed..and we are pretty low earners..about the national average. This year we actually caved and have a CPA doing the taxes..had some inheritance stuff and it all got very confusing so we will see.

 

[clutter]

If anyone is curious about how much is going to be withheld, do a search on the IRS website for Circular E. If you get an index, you want the tax tables. Find your payroll withholding type (i.e. single/married, weekly, bi-weekly, semi-monthly pay period) and your taxable wages for your pay. It only goes up to a certain salary, but it might help folks.

OP, there used to be a place on the W-4 that you could check your status as married, but withhold at higher single rates.

 

[Jasonkat]

I am a CPA and my wife is an IRS auditor, so I think I have a good answer for you

The W4 is used to determine the amount your company withholds based on your salary - pretax deductions (health ins, 401k contributions, etc). The idea is to fill out your W4 as you will be claiming on your taxes: if you will file single fill out your W4 as single, if you will file as married fill out the W4 as married, if you will claim 2 spouses and no kids each should claim 1 exemption on the W4.

The problem that many people run into is that the W4's formula is based on the olden days: days when the Man made significantly more than the Woman. So the W4 formula for married people who make the same amount of money results in massive underwithholding.

So what should someone do in this situation? If both spouses work and each spouse makes "real money" (more than $25,000) the withholding schedule won't work right on its own. To be safe you can do two things:

1) Have the lower earning spouse claim Single and 0 allowances and the higher earning spouse claim Married and 0 allowances. This should get you fairly close

2) Use Google to get the tax rate schedule and just do the math. If you can project your income and deductions you can get your taxable income. Then you can use your projected taxable income to compute your tax liability from the tax rate schedule. Then you look at your pay stubs and see how much you have withheld so far this year, how much is being withheld each check, how many checks you have left and you just do the math to see how much you will have withheld at year end (amount withheld already + (amount withheld each check X # of checks remaining) = total amount withheld this year). If you are underwithholding you can adjust your W4 and you can even have your company withhold more money. If your company won't withhold more money you can make estimated tax payments to the IRS on a quarterly basis.

The tax rate schedule is the thing that looks like this:

Married Filing Jointly or Qualifying Widow(er) Filing Status

10% on taxable income from $0 to $17,850, plus
15% on taxable income over $17,850 to $72,500, plus
25% on taxable income over $72,500 to $146,400, plus
28% on taxable income over $146,400 to $223,050, plus
33% on taxable income over $223,050 to $398,350, plus
35% on taxable income over $398,350 to $450,000, plus
39.6% on taxable income over $450,000.

 

[dcfromva]

Anytime you have more than one income source, it is a real good idea to run your numbers through the IRS Tax withholding calculator. Here is a link:

IRS Tax withholding calculator

 

[secretpantssam]

My Husband and I file separately because we'd owe way more together than we do separately.

 

[tvguy]

For years DW and I had a specific percentage withheld for Federal taxes, instead of using the withholding tables. That usually nailed it within about $100. IRS banned that, so now we either owe $1,000 or they owe us $1,000. So to address OP's question, I have no earthly idea how the withholding tables are put together. They make no sense.

 

[HeyIt'sMe]

OP thanks for posting this question and thanks to all for the responses.

My DH & I have always claimed Married w/0 exemptions on our W-4s. For many years we always got a refund....then things started working out where we pretty much broke even, which was great.....now for the last few years, including 2012, we have owed Federal but still get a refund from State (the credit for our 529 contributions really help!). I did our taxes today and we need to pay an additional net of $2,400.

DH has gotten significant promotions and raises the last few years which has moved us up to the higher tax brackets. I think we'll change our W-4s to have extra $ withheld for Federal taxes on our paychecks.

 

[bearzabout]

In the past, we paid more because of the alternative minimum tax. If we made over a certain dollar amount, we paid more than the tax table said we owed. And this was before our country went bankrupt.

 

[emilymad]

This happens to us. We both changed to single 0 in the middle of the year. We will see how the taxes come out.

For those who file married filing seperately how do you handle your deductions? Split everything in half?