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Married Filing Jointly w/ 2 incomes - how to avoid owing

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janinegirly

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Hoping more knowledgeable people can help me with this one. Our tax return was not in our favor as much as we had hoped and turned out to be due to not enough witheld taxes on my paycheck. This really upset me since I only take one allowance (my daughter) and certainly am not taking home some huge amount.
Upon further investigation it seems to have gone awry once I claimed married status on my paycheck--I did receive a little more in each paycheck-but figured this was how it should be since I am married! After doing some reading I am learning that I should have had additional witheld and claimed zero allowances. Now that''s not such a great realzation since it will feel like a paycut--but can anyone maybe explain this to me? Is having two wage earners really the tax burden it seems? We don''t make huge salaries but I suppose fair ones. It just seems like I should''ve just kept claiming single status--which runs against logic, but for tax purposes who knows.
 

cara

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Welcome to the marriage penalty. OK, I''m not any kind of expert but this is what I understand: Basically, the tax code was setup in a different era when it was assumed there was a breadwinner and non-breadwinner spouse. If two people earn roughly equal amounts of money, they will collectively owe more money when they get married than they would owe if they remained single and filed separately. (And filing married filing separately will not solve this problem - its a legal issue with the tax code that penalizes married people with roughly comparable incomes.)

Then the withholdings formulas basically have to guess what is going on with your tax rate, but based only on one person''t income since your withholding is not usually affected by what your spouse earns. Clearly they got it wrong for you this year.

The easiest way to fix the withholding problem is exactly what you suggest and reject: somehow have more money withheld from your paycheck. Either by changing your deductions to 0 or there is usually a space where you can specify an additional arbitrary amount to withhold. Yes this will feel like a pay cut because you are taking home less money throughout the year in order to cover your tax burden without owing money at the end. Note that whether or not you change the withholdings will not affect whether or not you owe the tax - and you may even owe a penalty if you don''t have enough withheld in some circumstances.

To really solve the problem, we need to lobby to get rid of the marriage penalty but I''m not holding my breathe.
 

megumic

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Actually, you benefit more by filing jointly married than by filing separately (usually). The tax code wants to benefit married people - it''s kind of ridiculous if you ask me b/c taxes shouldn''t care if we''re married or not, but your standard deduction can be larger. Did you itemize? Maybe do the math with a standard deduction and see if there is a difference.

I will also say this, withholding 1 or 2 as opposed to 0 gives you more cash throughout the year, but could hit you at tax time. Personally for FI and I, we both withhold 1. We''d rather have the cash now and put it in an interest bearing account, as opposed to in the feds account. Plus, a dollar today is always worth more than a dollar tomorrow, so it''s better in my pocket now than later.


For those who don''t quite know...here''s a little more tax info. (I didn''t know any of this until I took federal income tax law!)

The way the tax code works is this. On the first $16,700 you and your H earn, you are taxed 10%. Then, on the next $16,701 to $67,900 that you earn, you''re taxed 15%. Based on my example, what you earn between $67,901 and $85k is taxed at 25%. So when people say they are taxed at the 25% tax rate, it doesn''t mean their whole income is taxed 25%. It really means that the last dollar they earn is taxed at this higher rate.

This grid is for couples married filing jointly in 2009.
10% on $16,700
15% on $16,701-67,900
25% on $67,901-137,050
And so on up to 35%.

If you file single, these rates are cut right in half.
 

janinegirly

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Thanks Cara and Megumic. I do know most of what you mention but still surprised. I only took one deduction for my daughter on Fed, the rest was zero. Based on this I will need to start claiming single (or put in figure to be additionally deducted) but it''s a big amount, almost 400 a month which is significant. And I''m not even sure that is enough.

Has anyone else run into this?`
 

cara

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Meg, I think you mean ''married filing separately'' rather than filing single. If you are married, you are not allowed to file single, and the marriage penalty is relative to if two people stayed single. Once married, you are correct that most couples will do better filing married filing jointly than married filing separately. For example, the upper limit of the 28% tax bracket is $171k for single and only $208k for married filing jointly. (and $104k for married filing separatley.)

Janine, I have run into this but our situation is complicated as most of my husband''s income has no withholding so we have to pay estimated taxes. And I am not looking forward to doing our taxes as I think we estimated really wrong this year!
 

janinegirly

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Oh and just to clarify when I say claiming "single" I mean on my W-4. I read somewhere that in some cases the person with higher income has classification as married and the other checks single plus whatever dependents. Just was wondering if anyone could vouch for this being the best way to estimate in their experience.

This marriage penalty thing is unbelievable.I was lucky enough to receive a bonus this year, but was literally taxed 45% before I saw $1! Not liking tax man right now.
 

MustangGal

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DH and I have the same issue. We''re both claiming Married 0 just to get the correct amounts taken out, even though we''re "eligible" for more than that. And in 2009 they lowered what was being withheld so it made things even worse.
 

janinegirly

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Date: 2/25/2010 10:56:32 AM
Author: MustangGal
DH and I have the same issue. We''re both claiming Married 0 just to get the correct amounts taken out, even though we''re ''eligible'' for more than that. And in 2009 they lowered what was being withheld so it made things even worse.
Seems in my case even married 0 isn''t enough, by a long shot. So frustrating. No wonder no one can save.
 

Hudson_Hawk

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So where does the head of household witholding come into play?
 

MustangGal

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Date: 2/25/2010 11:02:07 AM
Author: janinegirly

Date: 2/25/2010 10:56:32 AM
Author: MustangGal
DH and I have the same issue. We''re both claiming Married 0 just to get the correct amounts taken out, even though we''re ''eligible'' for more than that. And in 2009 they lowered what was being withheld so it made things even worse.
Seems in my case even married 0 isn''t enough, by a long shot. So frustrating. No wonder no one can save.
Before we had the baby we both claimed Single 0.
 

DivaDiamond007

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When I got married in 2005 I left my W-4 as single and so did my DH. Tell your employer to change your W-4 to married but withheld at the higher single rate and that will save you some money there. If it''s still not enough then you''ll also want to put extra amounts in on the W-4 to be taken out each paycheck. We also do not put DS on our W-4 but obviously claim him as a dependent on our tax returns. We have always gotten a smallish refund by doing it that way.
 

movie zombie

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it is not illegal to change back to single on your W4. an employer is supposed to withhold based on what you state on your W4. w/o that as back up, your employer is in legal deep water.

the only thing a W4 does is state what withholding rate you want for your salary. when i was married, i usually kept it as single with 0 deductions to make sure the amount was enough.

when i was single, i declared as many as 15 dependents [this is not illegal] as i had enough deductions with interest on my home to more than cover that. yes, i had to fill out an additional form to the W4 to do it but i''d rather have the $ in my pocket than sitting with the government w/o interest or control over it for a year. there used to be an online calulator through one of my employers [HP] to aid in figuring out just what amount an employee needed to be paying based on salary. i would work my taxes for the previous year using their numbers to verify that i in fact had paid enough in withholding to cover so i wouldn''t have to pay much [$100 or less] if anything on april 15. a lot of work but it was worth it.

if i was in your place, i''d definitely file another W4 with my employer for single with 0 deductions and i''d have hubby look at his as well. yes, monthly it might be less $ but it beats trying to come up with $$$ to pay taxes on april 15.

mz
 

janinegirly

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moviezombie- yes i know w-4 deductions are at employee''s discretion--I guess I was naive in thinking the tax code would be in line with reality (ie if I''m maried, I can select married without penalty...). I have just changed mine back to married at single status rate, etc. I may change deduction from 1 to 0.

but are you saying when you were single you said "single + 15 dependents" and then when married said "single with 0 dependents"--so basically being married did increase your tax burden pretty significantly.

I have a call into the tax guy, but of course no call back yet.
 

VRBeauty

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Date: 2/25/2010 1:28:12 PM
Author: janinegirly

but are you saying when you were single you said ''single + 15 dependents'' and then when married said ''single with 0 dependents''--so basically being married did increase your tax burden pretty significantly.
MZ referenced having enough deductions to cover that level of witholding. I did the same thing back when my mortgage and other deductions offset quite a bit of my income -- I used single + a lot of deductions to keep the amount witheld in line with my tax burden. Now that my house is paid off I''m back to single + 0 so I don''t have to come up with a lot of dough on April 15, and so I don''t get hit with a penalty for failing to withold enough.
 

Mara

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marriage penalty sure does suck.

the only way that we don't owe each year is thanks to owning property and taking the interest write off.

otherwise with our incomes and filing joint and married even if we both claimed 0 we'd still owe. you'd probably have to each claim 0 and take extra deductions, definitely not fun. it does feel like taking a pay cut to be married right???

oh and to echo MZ you can put whatever you want on your W4. it's when you file that legitimately matters to the government. i claim 4 on my W4 because we've worked it out with our tax guy that is what works for us, but obviously i dont have 4 kids.
 

Hudson_Hawk

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I feel like if so many are having this problem then they should adjust the tables so that 0 works for most couples. It should be an easy process, that''s why the withholding table exists. To have to calculate the extra deductions etc, is asinine!
 

lilyfoot

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I''m so confused, I thought it was beneficial tax-wise to get married .. what am I missing here?
 

cara

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It is only beneficial to get married (income-tax-wise, at least) for couples with highly disparate incomes. For most couples that earn on the same order as each other, there is a marriage penalty ie. they would pay less income tax by remaining unmarried. System was designed in a different era to offer a modest marriage benefit to the stereotypical married couple consisting of a breadwinner and a non-breadwinner. Politicians haven''t managed to fix or redesign it for the modern era where both spouses often materially contribute to family earnings.
 

janinegirly

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I guess the crux of it is on your income alone you might be in a lower tax bracket, but combined with your DH you could very well hit a higher bracket.

However I thought income was taxed by the bracket in stages (i.e. first 15K at lowest, etc). So I don''t get why there is such discrepancy either. All I know is when I did the w/holding calculator it says to file single, zero dependents AND an extra amount deducted. I can''t do the extra amount-I''ll have zero left over..that''s ridiculous! urgh.
 

lilyfoot

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Date: 2/25/2010 11:38:01 PM
Author: cara
It is only beneficial to get married (income-tax-wise, at least) for couples with highly disparate incomes. For most couples that earn on the same order as each other, there is a marriage penalty ie. they would pay less income tax by remaining unmarried. System was designed in a different era to offer a modest marriage benefit to the stereotypical married couple consisting of a breadwinner and a non-breadwinner. Politicians haven''t managed to fix or redesign it for the modern era where both spouses often materially contribute to family earnings.
So if me and my FI earn the same (maybe a difference of 1.5 or 2k a year), we''re screwed?
 

lucyandroger

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Date: 2/26/2010 3:04:40 PM
Author: lilyfoot

Date: 2/25/2010 11:38:01 PM
Author: cara
It is only beneficial to get married (income-tax-wise, at least) for couples with highly disparate incomes. For most couples that earn on the same order as each other, there is a marriage penalty ie. they would pay less income tax by remaining unmarried. System was designed in a different era to offer a modest marriage benefit to the stereotypical married couple consisting of a breadwinner and a non-breadwinner. Politicians haven''t managed to fix or redesign it for the modern era where both spouses often materially contribute to family earnings.
So if me and my FI earn the same (maybe a difference of 1.5 or 2k a year), we''re screwed?
You have to check the tax rates: http://www.taxfoundation.org/publications/show/151.html

The income levels where tax brackets change for married couples are not simply double what they would be for singles. Therefore, singles who would not have reached a higher tax bracket on their own end up hitting one with their combined incomes because the married thresholds are lower.
 

lilyfoot

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Date: 2/26/2010 3:28:00 PM
Author: lucyandroger

Date: 2/26/2010 3:04:40 PM
Author: lilyfoot


Date: 2/25/2010 11:38:01 PM
Author: cara
It is only beneficial to get married (income-tax-wise, at least) for couples with highly disparate incomes. For most couples that earn on the same order as each other, there is a marriage penalty ie. they would pay less income tax by remaining unmarried. System was designed in a different era to offer a modest marriage benefit to the stereotypical married couple consisting of a breadwinner and a non-breadwinner. Politicians haven''t managed to fix or redesign it for the modern era where both spouses often materially contribute to family earnings.
So if me and my FI earn the same (maybe a difference of 1.5 or 2k a year), we''re screwed?
You have to check the tax rates: http://www.taxfoundation.org/publications/show/151.html

The income levels where tax brackets change for married couples are not simply double what they would be for singles. Therefore, singles who would not have reached a higher tax bracket on their own end up hitting one with their combined incomes because the married thresholds are lower.
Thank you thank you thank you!
 

ChargerGrrl

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I didn''t really pay income taxes UNTIL I was married, and had never heard of Alternative Minimum Tax (yuk). From Wikipedia:
************************************
A brief issued by the Congressional Budget Office (CBO) (No. 4, April 15, 2004), concludes:

"Over the coming decade, a growing number of taxpayers will become liable for the AMT. In 2010, if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax. Rather than affecting only high-income taxpayers who would otherwise pay no tax, the AMT has extended its reach to many upper-middle-income households. As an increasing number of taxpayers incur the AMT, pressures to reduce or eliminate the tax are likely to grow."[12]
************************************

DH and I have MANY convos with our tax guy and he runs the numbers for us a couple of times during the year to see if we need to revise our withholding. Regardless of what we do, we still end up owing. And yes, we''re homeowners. The issue is that our mortgage is too "modest" compared to our income so the advantage is nill. We''re house-hunting now (upgrading from a townhouse to detached single-family home), so hopefully that will help come tax time next year.

I''m not against paying taxes, just against the current "system"
 

cara

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Chargergrrl, did you not earn money before you were married? Or do you mean that withholdings were sufficient when you were single and you never owed extra money in April? I think W-4 withholdings work beautifully when you are single and have uncomplicated taxes. Its just doesn''t work as well when you have married couples and other complications.

Yes, I agree that the current system has issues. The marriage penalty is a crying shame. And the AMT is a time bomb. But I can''t imagine our politicians fixing it with something reasonable anytime soon!
 

ChargerGrrl

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Cara- to clarify, my withholdings were sufficient to not owe. And I did receive a refund during the years I was a homeowner (while single).

re: fixing AMT anytime soon, DH and I can only hope... but yeah, we''re realists and know that it''s not going to happen. Hence, purchasing more "home"- although that''s not the main reason- LO is due in June, and we need more space!


sorry to threadjack, Janine
 

diamondseeker2006

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Janine, are you saying that you owed a large amount when your taxes were done? In that case, I''d adjust it so it is enough to cover the amount for next year. But if you just didn''t get a large refund, I''d leave it alone. It is not good to let the government earn interest off your money! Buying a home really does help reduce the tax burden once you can do that. I''ve always made my witholding Married 0 and it has always worked as long as we had a mortgage deduction and/or kids!
 

janinegirly

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diamond: we actually do own a home and an inv. property so did receive a refund. My concern is going forward-I don't want surprises. Plus we had anticipated a larger return (and are embarking on an expensive house project) so that' wasn't too fun.

What I didn't realize (and now do thanks to this thread and some research) is it is common for one person to take single status while the other takes married status when both are working and make around the same amount. I hadn't considered the fact that the marriage "benefit" is based on the premise that only one party works--therefore both of us opting for it meant not enough witheld. The other big annoyance is AMT--you can hit it with 2 incomes plus move into higher bracket even if as a standalone income you are no where near it. Seems unfair to m especially if you live in an area where a certain income is required to handle high cost of living but then the income is considered "high" relative to other parts of the country and Uncle Sam treats it so.

Does anyone work and file separate--when does it make sense?
 

Hudson_Hawk

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This was the first year of marriage so we filed married but didn''t know whether it would be more beneficial to go separate or joint. For some reason I had to itemize (not sure why, perhaps because DH did?) so I ended up owing a lot ($1200) when filing separate. To file joint brought my amount down to $700. DH''s refund was healthy enough (more so than we thought we were getting! YAY!) so it offset my balance owed and we still have a good amount left over. While I''d prefer to have the extra $ in my check every month, DH would rather get a lump sum every spring. He says it''s like getting a bonus every year. So while he could technically change his witholdings to 1, he wants to keep them at 0. I will keep mine at 1.
 
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