Tax Question

[Lathum]

So my wife and I are filing our taxes, jointly like we always do. Using TurboTax which I have had no issues with in the past. This is the first year I have gone back to work since finishing school since we were married, so first time filing jointly with 2 incomes from a full year.

So we file hers, and we are getting back roughly 2K. Then we input all my info and it drops us down to owing roughly 4K, so a 6K swing. Then I took all the info out and entered my info first, with just my info shows I am getting back 3K, as soon as I enter hers drops us down to owing 4K again.

Now my first thought was it must put us into a different tax bracket with our incomes combined, but it doesn’t. My wifes income alone would put us in the same tax bracket with or without my added income (she makes a lot more than me). So why does adding another person make it so much less if the tax bracket stays the same?

I’m sure there is a perfectly logical reason, I just can’t quite wrap my head around it. Seems if we were filing seperatly we would be getting back 5 K or so, instead we owe 4K, seems odd.

I know we have some tax gurus, any input would help. If anyone would like specific numbers I can shoot them a PM.

[gstelmack]

That always happens with TurboTax with me, until I enter both our info, it's way off. You're just too early in the process for it to hit all the deductions, etc that apply and get it into the correct bracket and the like.

[Rizon]

What are your witholdings set at?
The lowest paid spouse should file as Single (or Married/2 incomes), generally. Follow the worksheet attached with the W4.

[Rizon]

2nd worksheet on page 2
http://www.irs.gov/pub/irs-pdf/fw4.pdf

[Suburban Rhythm]

I'm going with Rizon's line of thinking. If you are both listing 3 exemptions, claiming each other as well as yourselves and your son (only 1 kid if I am remembering correctly), you are paying too little throughout the year.

Originally Posted by W4 worksheet

C

Enter “1” for your spouse. But, you may choose to enter “-0-” if you are married and have either a working spouse or more
than one job. (Entering “-0-” may help you avoid having too little tax withheld.) . . .

[JPhillips]

Maybe when you add your incomes you're making enough to get hit by the AMT?

[Doug5984]

When only 1 income is listed your tax rate is set for MFJ at that income, once the 2nd income is listed (your actual income) you'll most likely be in the higher tax bracket. Also not knowing your situation it is possible that you are qualifying for EIC (earned income credit) with only 1 income listed, when the 2nd is entered you lose that, and you're in a higher bracket. I've never used Turbo Tax, but that could be it as well.

Like others have said, one of you needs to adjust your withholdings to withhold more since y'all are both working. Really both of y'all could adjust to withhold a little more, depending on the finances it is up to y'all really....but more does need to be withheld.

Edit to elaborate:

If one income is listed at 40,000 and 4,000 was withheld- at MFJ you'd be in the 15% bracket, and owe about 5,000 total tax
If the other income is 40,000 as well, and 4,000 was withheld again you'd be in the 25% bracket, and owe about 12,250 total tax


With such a huge swing, my guess is it has something to do with either getting different credits, or losing credits based on y'alls income.

[Lathum]

I am a 0, my wife was set at 1.


Whats AMT?

[Rizon]

Originally Posted by Lathum

I am a 0, my wife was set at 1.


Whats AMT?

http://www.irs.gov/businesses/small/...150703,00.html

[Rizon]

Originally Posted by Rizon

http://www.irs.gov/businesses/small/...150703,00.html

Well, looks like that doesn't tell you what it is, but here is the Wiki

Alternative Minimum Tax - Wikipedia, the free encyclopedia

[Rizon]

Originally Posted by Lathum

I am a 0, my wife was set at 1.

Are either of you have additional withholding deducted from your checks?

[Lathum]

Originally Posted by Rizon

Are either of you have additional withholding deducted from your checks?

no, but we have gotten back close to 5 figures every year.

I am wondering if there is something to the AMT. I'm at work and couldn't really look, but I saw something about the high rate starts at 175,000 and my income puts us above that amount.

[Doug5984]

Also, withholdings don't take into account any interest, dividends, schedule C (like a small business), or any other income- so if you have a lot of that, you'll want to either have extra withheld, or make quarterly estimated payments. Without knowing your whole tax situation it's really hard to say for sure, but one thing is certain and more needs to be withheld from each check. 4k extra withheld. Even if you have to go to Single & 0 on the W4 for one of y'all, do what you can to get the withholdings right, no one likes getting slapped with a 4k bill every year.

Edit: Based on that last reply, my guess is you're wife's is not withholding enough. I run into this from time to time, the withholdings is simply based on a formula taking that check and spreading it out over the entire year and getting the withholdings to match up with the amount of deductions on the W4. I've seen where the wifes is basing it on a lets say 15% tax bracket (making 45k a year) and the husbands is based on a 28% bracket (making 150k / year), at the end of the year the 28% bracket is the one that will be used and the wife is 13% short. (I have also seen it when of the spouses picks up a 2nd job making a little money on the side, the formula thinks they are making very little and withholds nothing even at Single & 0 on the W4- and they get hit owing come tax time)

[gstelmack]

Is the issue that you aren't witholding enough, or that TurboTax has such wild swings when entering the taxes?

[Lathum]

Originally Posted by gstelmack

Is the issue that you aren't witholding enough, or that TurboTax has such wild swings when entering the taxes?

I think it is more the swings, just seems, odd. We actually will still be getting money back when interest from mortgage, etc... is factored in. Just seems odd.

I'm thinking we may just go to a tax professional.

[Logan]

The "swings" are basically a marketing tool. People like the idea of seeing their refund grow as they do their taxes...this is part of how they sell the product in commercials. If you think it's being done correctly, no need to waste the money on a pro.

[Doug5984]

Originally Posted by Lathum

I think it is more the swings, just seems, odd. We actually will still be getting money back when interest from mortgage, etc... is factored in. Just seems odd.

I'm thinking we may just go to a tax professional.

Oh if it is just the swings you are concerned with, and you're getting money back once entering everything else then disregard everything I said about changing the withholdings.

Don't pay any attention to the how much you're getting back until you are done, if it updates it after every entry then it'll be pretty drastic- especially before all the wages are entered.

As far as going to a pro, if it is a simple return with just a couple W2s, and Schedule A stuff then save your money and use turbo tax. If it starts getting any more complicated, or you just want piece of mind then feel free to go to a pro (by pro I mean find a CPA firm that doesn't charge to much for a simple return- some firms prices for simple returns are actually pretty close to what you'd find at the H&R Block, Liberty Tax- those types of places, and they're a lot more qualified)

[dfisher]

I learned that the hard way when I got married. We went to HR Block since I wasn't sure if there was something different we had to do when we got married. We also bought a house that year and were using the first time home buyer's credit. I was watching on the screen and saw $3300 and was getting excited that I would be getting >10k with the credit. The guy told me that we owed $3000, and I was shocked. Luckily, we didn't owe anything because of the credit, but we could have gotten a pretty big hit. I went right to my HR department and added $100/check from my withholding. I've since taken it off because of the full year of mortgage interest plus a child makes it unnecessary.

[Lathum]

I have used Turbotax everyyear and I'm pretty sure they are correct, just odd that if I filed alone and she filed alone we would both be getting money back, yet file together we have almost a 10K swing

[Rizon]

Originally Posted by Lathum

I have used Turbotax everyyear and I'm pretty sure they are correct, just odd that if I filed alone and she filed alone we would both be getting money back, yet file together we have almost a 10K swing

Must be how TT shows it as the 2nd income/info knocks you into another tax bracket.

I just ignore the refund ticker cause I hate getting my hopes up.

[Ksyrup]

Originally Posted by Logan

The "swings" are basically a marketing tool. People like the idea of seeing their refund grow as they do their taxes...this is part of how they sell the product in commercials. If you think it's being done correctly, no need to waste the money on a pro.

Yep. The idea is that TurboTax "saved" you all this money from what you started with by walking you through all the deductions/credits. I always see about a $7-9K swing from W-2 download to finished product.

[britrock88]

In the case of married couples who both earn incomes, there's a certain situation in which filing MFJ leads to a higher family tax rate than filing MFS. Usually, it occurs when each spouse individually makes an upper-middle-class income (say, 100k-plus).

[Landshark44]

is there an option where married people can file separately? does that help, or are married people better off filing together....?

[Suburban Rhythm]

Originally Posted by Landshark44

is there an option where married people can file separately? does that help, or are married people better off filing together....?

Married couples can file separately, but usually not the best decision.

Off the top of my head, if one person has a large number of deductions, it may make sense to file separately, as they'll get more bang for their buck on those deductions when offset against the AGI rule of just their income, rather than the combined income.

And I guess if you don't trust your spouse's business dealings and fear an audit, it's better to keep your return separate. But then you have bigger issues than your return too.

[Landshark44]

And not to hijack Lathums' thread, but what are the risks/consequences for married couples to just each file "single".....

In my case, my wife and I have different last names for work reasons....

[lighthousekeeper]

Originally Posted by Landshark44

In my case, my wife and I have different last names for work reasons....

what's her stripper name?

[Lathum]

By all means piggyback with other questions if people have them

[Logan]

Originally Posted by Lathum

By all means piggyback with other questions if people have them

Cool.

Is she your secretary?

[Suburban Rhythm]

Originally Posted by Landshark44

And not to hijack Lathums' thread, but what are the risks/consequences for married couples to just each file "single".....

In my case, my wife and I have different last names for work reasons....

The risk? It's illegal.
The consequence? audit.

MFJ or MFS for married couples.

[digamma]

Yeah, to pick up on what Sub Rhythm said, the choice is Married Filing Jointly or Married Filing Separately. Unless one of you has big deductions for business or medical issues and you wouldn't hit the thresholds for claiming those together, it's generally better to file jointly because there are many deductions available for MFJ that aren't available for MFS.

For Lathum's question, I think it is likely the marketing ploy, but when you say you are zeroing everything out, are you starting completely over and saying you aren't married? I'm a little confused by what you are actually asking.

[Lathum]

Originally Posted by digamma

For Lathum's question, I think it is likely the marketing ploy, but when you say you are zeroing everything out, are you starting completely over and saying you aren't married? I'm a little confused by what you are actually asking.

no, just starting over and entering my info first, then starting over and entering her info first. Whomevers info I entered first we got money back, but together, drops like a stone. Just seems so odd.

[CU Tiger]

Is it possible that your income alone puts you into a "poverty" or net zero tax bracket, so alone it would show a refund.

However when calculated along with hers, your bracket increases and you actually underpaid significantly. Enough to offset her overpayment?

Is that scenario clear?

[CU Tiger]

To further my point as readin that it sounds confusing.

Perhaps your wife made (I am puling numbers out of the air) 35k and based on her with holdings she should get back 3k.

Now lets say you made 19,000. Since you didnt make enough to have a tax burden you would get back 100% of what you paid in.

However when you combine your income (35+19=54) you did not pay enough tax in for your new(her) bracket. So your actual tax burden was not met based on your new bracket. And insetad of getting all that back. You actually get none of it back and instead have an underpay and the difference more than offsets her pay in.

If that is the case Married filling separate may save you this year.

[Lathum]

Originally Posted by CU Tiger

Is it possible that your income alone puts you into a "poverty" or net zero tax bracket, so alone it would show a refund.

However when calculated along with hers, your bracket increases and you actually underpaid significantly. Enough to offset her overpayment?

Is that scenario clear?

no, not possible, our combined income is well over six figures.

Though sometimes it feels that way

[CU Tiger]

Originally Posted by Lathum

no, not possible, our combined income is well over six figures.

Though sometimes it feels that way

but is your individual piece in the same bracket as your combined

[Lathum]

Originally Posted by CU Tiger

but is your individual piece in the same bracket as your combined

my wifes is, mine isn't but it is far from poverty level

[CU Tiger]

Originally Posted by Lathum

my wifes is, mine isn't but it is far from poverty level

ok well that makes sense then.
If you were in bracket 2 the diff would have been very minor but 1 or 3+ would be significant.
Since you said you just finished I guessed (poorly).

So lets play with some hypothetical numbers.
Lets assume you started by selecting married in the TT software.
if you made up to 71k you are in a 15% tax bracket. If adding the wifes puts you between 71 and 143 you now jump to a 25% bracket.

(I'm guessing here but this is the biggest bracket jump)
So lets play with the numbers.
You wife made between 71 and 143....lets say 80k just for shits and giggles. Her tax burden is 20k. Now lets assume she paid in 24k. She is now owed 4 k.

Now lest assume you made 60 k. Which is below your combined bracket and allows you and the wife to still fall in that bracket. Now lets assume you paid in 13k in taxes. At the 15% number (which is where you fall by yourself) you owe 9k and would be due a 4k refund. However when we throw your wife into the mix you are actually in a 25% bracket and owe 15k or 2k more than you paid.

Separately it looks like you would get 8k but combined you would only get a 2k refund.


That was the point I was trying to make. Although I did it very poorly.

Only the portion of your income above the threshold is taxed at the % but since your wife gets you into the bracket by herself your entire income is now taxed 10% more than it was estimated by your company payroll.

[Masked]

I think the following explains what you are seeing.

I'm assuming at the outset that you have specified that you are married finally jointly.

The income entered first is taxed at a lower effective rate than the second income. For example, let's assume that the following rates are applied when you enter the first income: 0% for the first $X, 10% for the next $Y, and 25% for the last $Z). In this case 25% is your marginal tax bracket that is applied to the last dollar that the first person earned.

Now when you enter the second income on top of the first, every dollar immediately gets taxed at the 25% marginal rate. Some may get taxed at a higher rate if the second income is enough to push you into a new marginal bracket.

Every dollar of the second income is being taxed at a rate that equals or exceeds the highest rate for the first income entered.

Note, all % are made up and don't correspond to the actual numbers in the tax code.

Edit: What CU Tiger said

[CU Tiger]

Tax Brackets ........ ...2012 Single ... . ....... .......Married Filing Jointly
10% Bracket . ........ . .$0 – $8,700 . . . . .....................$0 – $17,400
15% Bracket . . . ...... $8,700 – $35,350 . . . . .......... ..$17,400 – $70,700
25% Bracket . . ...... $35,350 – $85,650 . . . . .... ....... $70,700 – $142,700
28% Bracket . . ...... $85,650 – $178,650 . . . . ......... .$142,700 – $217,450
33% Bracket . . ......$178,650 – $388,350 . . . ........... $217,450 – $388,350
35% Bracket . . ......$388,350+ . . . . . . . .....................$388,350+

[Lathum]

Originally Posted by CU Tiger

Tax Brackets ........ ...2012 Single ... . ....... .......Married Filing Jointly
10% Bracket . ........ . .$0 – $8,700 . . . . .....................$0 – $17,400
15% Bracket . . . ...... $8,700 – $35,350 . . . . .......... ..$17,400 – $70,700
25% Bracket . . ...... $35,350 – $85,650 . . . . .... ....... $70,700 – $142,700
28% Bracket . . ...... $85,650 – $178,650 . . . . ......... .$142,700 – $217,450
33% Bracket . . ......$178,650 – $388,350 . . . ........... $217,450 – $388,350
35% Bracket . . ......$388,350+ . . . . . . . .....................$388,350+

This is I guess what I have trouble wrapping my mind around. With just my wifes income we make between $142,700 – $217,450, my income added in doesn't bring us above 217,450. I guess that is where I am having trouble wrapping my brain around it.

[britrock88]

Maybe slightly more to the point in your case:

Married Filing Jointly or Qualifying Widow(er) Filing Status

10% on taxable income from $0 to $17,400, plus
15% on taxable income over $17,400 to $70,700, plus
25% on taxable income over $70,700 to $142,700, plus
28% on taxable income over $142,700 to $217,450, plus
33% on taxable income over $217,450 to $388,350, plus
35% on taxable income over $388,350.

Married Filing Separately Filing Status

10% on taxable income from $0 to $8,700, plus
15% on taxable income over $8,700 to $35,350, plus
25% on taxable income over $35,350 to $71,350, plus
28% on taxable income over $71,350 to $108,725, plus
33% on taxable income over $108,725 to $194,175, plus
35% on taxable income over $194,175.

[britrock88]

With MFJ, because of your wife's income, all of your income is taxed at the 28% margin.

With MFS, your wife would pay a higher 33% rate on the portion of her income exceeding $109k, but your entire income would be taxed in the 10-15-25% brackets.

The "marriage penalty" (which is not actually contemplated as a penalty) has the effect of taxing married couples with a fairly evenly split income above ~$200k at a higher rate if they file jointly, counter-intuitively.

All that said, I can't be sure what is happening in TurboTax to produce the results you've spoken of. But this is hopefully something of an explanation as to why you owe a bit more than expected.