Money Matters
labro
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Our tech team has launched updates to The Nest today. As a result of these updates, members of the Nest Community will need to change their password in order to continue participating in the community. In addition, The Nest community member's avatars will be replaced with generic default avatars. If you wish to revert to your original avatar, you will need to re-upload it via The Nest.
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Ideas on Taxes?
I just did a check on our 2016 annual taxes to make sure we didn't owe a bunch of money to the government at the end of the year. In 2015 we paid nearly $4k because we under-withheld. This year the IRS withholding calculator is saying we'll owe around $5k with the standard deduction or around the same amount as last year ($4k) if we itemize and make at least a $1k charitable contribution.
I guess I just don't know what we're doing wrong. We both increased our 401k contributions to meet the federal maximum for the year ($18k each) and I thought that would have reduced our tax liability enough in order to avoid this without having to withhold extra $$$.
So what can we do with just 3 months left in the year? We can update our w-4s to withhold a few hundred dollars extra apiece per paycheck...which sucks. It really bugs me that we can't keep with the Married + 0 on our w-4s and that isn't enough from the government's perspective. I just want to avoid paying another penalty again and I would PREFER to not write another large check on April 15th to the IRS if we can help it.
I guess I just don't know what we're doing wrong. We both increased our 401k contributions to meet the federal maximum for the year ($18k each) and I thought that would have reduced our tax liability enough in order to avoid this without having to withhold extra $$$.
So what can we do with just 3 months left in the year? We can update our w-4s to withhold a few hundred dollars extra apiece per paycheck...which sucks. It really bugs me that we can't keep with the Married + 0 on our w-4s and that isn't enough from the government's perspective. I just want to avoid paying another penalty again and I would PREFER to not write another large check on April 15th to the IRS if we can help it.
Re: Ideas on Taxes?
We don't have any side jobs or gigs. Just our 9-5s. It's bull.
Do you have any other deductions you are missing that might help bring it down rather than taking the standard?
Looking at last year, did your income(s) increase? Are you projected to withhold at least the amount of 2015's tax liability?
My only other guess is, you all don't have any student loan interest to write off, and you also probably don't have a ton of mortgage interest to write off since your mortgage is pretty low compared to your income. But yeah, the tax codes sure aren't written to favor the higher earners (ie 100kish + a year) couples who don't have children.
We deduct home office space for DH and me, our mortgage interest, some businesses expenses (DH has a small side business for web design) and charitable contributions and we usually get a pretty substantial refund.
If you are both at Married + 0 I can't imagine that you would continually owe that much! I would have a professional (not H&R Block but a CPA type person) do your taxes this year to make sure sure everything is correct.
@smerka @AprilZ81 @julieanne912 Yes, we had a professional CPA do our taxes last year after TurboTax told us we were going to owe. His number came out slightly less than TurboTax but he wasn't really able to find any mistakes or major savings for us. We made too much money at the time to deduct our student loan interest (which is gone now anyway). I shot him an email this afternoon after seeing the results on the withholding calculator to see if there was much we could do other than start contributing additional money towards our taxes.
@smerka I don't think we qualify for a tax deductible tIRA. Our joint gross income is way way over the federal limit.
I'm trying to think of anything else we could be missing. The last two years we've itemized rather than take the standard deduction and the itemization included -
Taxes (state taxes and property tax)
Interest (mortgage)
We've never done significant charitable contributions because we've been so so focused on our debt payoff. We finally got to that point in July and I've started the discussion with my H about charity...he's not exactly enthusiastic about it but he understands why I want to do it. But we hadn't planned on starting anything regular until after we had met some additional savings goals early next year.
Sorry for the novel but the only thing I can think that's dragging us down so much is that I'm putting 25% of my gross pay into a 401k in order to reach the federal annual max. I've put in around $4,700 in federal taxes to date, which seems kind of low.
How much were you contributing to 401(k) in 2015? It's possible that the increase bringing you to the max wasn't enough to offset what you owed, plus the increase in income. 401(k) isn't a dollar-for-dollar decrease in tax liability, it's only going to decrease your liability by the value of your effective tax rate. So if you owed $4k, and put $4k more I'm 401(k), the potential decrease in your tax liability is more like $4,000 times 20-28%. So to offset $4k owed, you'd need to increase 401(k) by $16k, roughly. And then you'd need to account for any increased income or decreased deductions.
ETA Your calculation really is helpful! It makes a bit more sense why we still owe even with such a significant increase in pre tax retirement savings.
If it makes you feel any better, we have a similar problem. Last two years we've owed money. The first year was my fault. I claimed married with all the relevant withholding deductions as I was the only one working. About 6 months later, my wife found a job the same time we found out she was pregnant. So I made the decision not to change our withholding as I wanted the big refund after we got the dependent deduction. Unfortunately, in the excitement, I forgot about the job. Needless to say, we were about $2k short and had to pay a $12 penalty.
So we fixed the withholding. Now we're both married+0. Still owed $458 to feds, but got $260 or so back from state.
I'm waiting to see how this year plays out, but I suspect we'll owe again as my wife and I are severely lopsided and neither is taking enough out on their own. I hate the idea of taking any more out of her checks as they're small enough already, so it'll probably end up coming out of mine. It's also easier to do from mine since I can do it online.
I've debated doing married, but withhold at the single rate, but like you said, you just shouldn't have to do it.
I looked into increasing the 401k, but as you've found out, it doesn't work the way you think it should. I ran into an article explaining in once, but can't find it at the moment.
We'll also have the problem soon that our deductions won't be enough to keep us above the standard deduction.
@jtmh2012 That really sucks regarding your itemizations!
Anyway, I adjusted my W-4 to withhold an additional $600 per paycheck for the remainder of the year and I think this will bring us closer. It really sucks...my take home per check is around $1650 and I feel like I'm basically working for free. I went and re-checked the calculator doing a better estimate of what our itemizations will be and came up with a total tax bill of $3600 and some change.
Finally found the link I was looking for:
https%3A%2F%2Fanswers.yahoo.com%2Fquestion%2Findex%3Fqid%3D20100703220136AAF0BhK&usg=AFQjCNHhm42qZw0XJnEJoKF2_AXUz_CO0A&sig2=boRoXnCAjKXAe3akgBgN6w
Basically, the explanation being that increasing your 401k contributions decreases your income, but also decreases the amount withheld. So unless you're right on the edge of a tax bracket, it doesn't help.
Donald Trump was right in my opinion when he said he was "smart" to not pay any taxes by taking advantage of the current tax code. He earned that money and just because he makes more than most doesn't mean that he needs to pay more than others.
A consumption tax doesn't tax on income, but what you spend. You buy a brand new car? You pay taxes to the federal government. You buy a used car? Taxes are already paid from the original transaction. Those with higher incomes and bigger spending habits will naturally pay more in taxes than those with lower incomes so it will tax the "rich".
The plans I've seen carve out that necessities (food) wouldn't be taxed and all taxpayers would receive an exemption on the first X number of dollars spent before a tax would kick in.
Another benefit of a consumption tax is we'd snag all those people who make money under the table and either pay no income tax or don't pay enough income tax. And certainly a good sized group of those people are criminals. Who make their money illegally (ie drugs, theft, trafficking) so they can't report it.
I don't think Donald Trump made the point he wanted to, at least for me. While I don't blame him for taking advantage of whatever tax loopholes he can, we all do that. At the same time, when one of the richest men in the world is gloating about how he pays no taxes, that is screaming alarm bells about how completely and totally messed up our tax code and tax system is.