Taxes are tricky.
January 25, 2011 7:42 AM Subscribe
I always do my own taxes, but this year I've got a new baby and a bunch of questions. Will you help me choose the best route?
I'll try to be as brief as possible. Myself and my fiancee are still engaged, not married. We just had a baby on December 15. I'm trying to sort out the tax situation that helps us the MOST.
I make a little north of about $28,000 a year at my regular job. I have a small side business, but I manage to make it operate in the red for tax purposes. Really it just gives me pocket money anyway.
My fiancee makes like $25,000.
We own a home, I make the mortgage payment, she pays the other bills for the most part. We each have some student loan payments, but mine are federal, subsidized, and hers are private and not. She has significant medical expenses this year, enough that it will show up on her taxes. We also have about $800 in energy-efficiency write-offs.
We have this new baby, and he is awesome. What we need to figure out is who should claim him on their taxes, and who should add the deduction to their W-2.
I feel like it should be me, because I feel like because you get a percentage, my higher income will mean more money---but it's entirely possible that I misunderstand entirely.
So, the questions: Who changes their W-2 from a 1 to a 2? And who claims him on their taxes? Either of us will qualify for EITC. If it's not an easy answer for someone with more experience than me, I suppose I could be convinced to go to an accountant.
I'll try to be as brief as possible. Myself and my fiancee are still engaged, not married. We just had a baby on December 15. I'm trying to sort out the tax situation that helps us the MOST.
I make a little north of about $28,000 a year at my regular job. I have a small side business, but I manage to make it operate in the red for tax purposes. Really it just gives me pocket money anyway.
My fiancee makes like $25,000.
We own a home, I make the mortgage payment, she pays the other bills for the most part. We each have some student loan payments, but mine are federal, subsidized, and hers are private and not. She has significant medical expenses this year, enough that it will show up on her taxes. We also have about $800 in energy-efficiency write-offs.
We have this new baby, and he is awesome. What we need to figure out is who should claim him on their taxes, and who should add the deduction to their W-2.
I feel like it should be me, because I feel like because you get a percentage, my higher income will mean more money---but it's entirely possible that I misunderstand entirely.
So, the questions: Who changes their W-2 from a 1 to a 2? And who claims him on their taxes? Either of us will qualify for EITC. If it's not an easy answer for someone with more experience than me, I suppose I could be convinced to go to an accountant.
That's what I was going to say, too. Also, I think some of them are available free on-line, and the only charge is to file electronically. That way, you may be able to have the web application crunch the numbers for you for free, see which way produces the highest net benefit, and then do the taxes by hand offline.
posted by Admiral Haddock at 7:50 AM on January 25, 2011
posted by Admiral Haddock at 7:50 AM on January 25, 2011
At your income level, you're eligible for free e-filing, so you can use most of the major commercial software packages for free. I think I pay about $8 to also file my state taxes, but the federal is totally free.
posted by decathecting at 7:55 AM on January 25, 2011
posted by decathecting at 7:55 AM on January 25, 2011
Yeah, you'd need to run the numbers.
By the way, be careful about the side business--if you are running it to generate a loss year after year, that is likely to trigger an audit (the rule is it can't run losses in more than 2 out of 5 consecutive years).
posted by phoenixy at 7:59 AM on January 25, 2011
By the way, be careful about the side business--if you are running it to generate a loss year after year, that is likely to trigger an audit (the rule is it can't run losses in more than 2 out of 5 consecutive years).
posted by phoenixy at 7:59 AM on January 25, 2011
Response by poster: Thanks. I actually have TurboTax professional, and I realize it makes me sound epically lazy, I was just hoping someone's been in this situation or one similar to it and could save me a few hours of plunking around with available options. The lady is also untrusting of such pieces of software, but she seems more trusting of random semi-strangers on the internet. :)
The side business is exactly 7 months old and generated a sum total of about $5,000 this year, so I'm not toooo concerned with it and an audit just yet. Thanks for the warning though.
posted by TomMelee at 8:25 AM on January 25, 2011
The side business is exactly 7 months old and generated a sum total of about $5,000 this year, so I'm not toooo concerned with it and an audit just yet. Thanks for the warning though.
posted by TomMelee at 8:25 AM on January 25, 2011
"The lady is also untrusting of such pieces of software, but she seems more trusting of random semi-strangers on the internet. :)"
The lady wants to claim the baby. There's an old saying happy wife, happy life. The saying doesn't fit your situation, modify as you best see fit.
posted by notned at 8:32 AM on January 25, 2011
The lady wants to claim the baby. There's an old saying happy wife, happy life. The saying doesn't fit your situation, modify as you best see fit.
posted by notned at 8:32 AM on January 25, 2011
We have our taxes done by an independent accountant every year and it costs less than $200. This is why. She has figured out that if we file "married filing separately" we're the only couple in America who saves money. It is worth every penny. The one year I did them myself after we got married resulted in a letter from the IRS a year latter telling me we owed an additional $25,000 in taxes. I knew that was wrong, since we don't pay that much in taxes in the first place, and she straightened it out for me, but an ounce of prevention is worth a pound of cure.
posted by dpx.mfx at 9:14 AM on January 25, 2011 [1 favorite]
posted by dpx.mfx at 9:14 AM on January 25, 2011 [1 favorite]
Not sure how much your finances are otherwise entangled. But if your soon-to-be-wife wants to take the deduction and keep the money for herself, I would let her this year. Presuming you'll be married in 2011, it won't matter in the future. And she's the one who did a lot of the child-rearing work last year as she incubated the bebe for 10 months. You just helped take care of it for 16 days.
But if you guys share everything, it's easier to run the numbers on the software, or online, or anywhere people are recommending.
posted by Kronur at 10:12 AM on January 25, 2011
But if you guys share everything, it's easier to run the numbers on the software, or online, or anywhere people are recommending.
posted by Kronur at 10:12 AM on January 25, 2011
I'm not your accountant. I'm not in any way guaranteeing this information. Total bank-of-the-envelope math at work here. Take with as many grains of salt as you can stomach. I'm ignoring a few things since I don't have exact numbers for them. And I'm totally guessing at the medical deduction numbers. And I'm assuming you qualify for all the things you say you qualify for.
SUMMARY: You should claim the kid on your taxes and let your fiancee take the energy credits. Also, it doesn't matter who claims the kid on your paycheck.
Let's tackle your first question. Who should claim the additional exemption on your 2011 paycheck withholding? We need to do a bit of math first. I've consulted the tax tables and done the rudimentary math. Forgive me for not showing all my work -- it would have taken forever.
You: $28,000
Your withholding with 1 exemption = $2,905 taken out ($25,095 left over)
Your withholding with 2 exemptions = $2,350 taken out ($25,650 left over)
Her: $25,000
Her withholding with 1 exemption = $2,455 taken out ($22,545 left over)
Her withholding with 2 exemptions = $1,900 taken out ($23,100 left over)
WITHHOLDING SCENARIOS
You 1, Her 2 = $48,195 left over
You 2, Her 1 = $48,195 left over
i.e. Total wash.
** Now to the next question, what should you do for your 2010 tax forms? **
SCENARIO 1:
You claiming child, filing with Head of Household filing status:
-- $28,000 wages
-- Side business breaking even on paper ($0 effect)
-- Standard deduction
-- 1 personal exemption for you
-- 1 awesome child claimed as a dependent
Federal tax: $1,251
MINUS 1 awesome child claimed for the Earned Income Credit ($1,200 credit)
Total federal tax for you = $51
The lady files Single, with no dependents
-- $25,000 wages
-- Itemized deductions ($10,000 medical expenses, $478 standard sales tax deduction for Morgantown, WV)
-- 1 personal exemption for herself
Federal tax: $1,213
MINUS $800 for residential energy credits
Total federal tax for her = $413
** Reverse scenario **
You: single, standard deduction, 1 personal exemption = $2,383
MINUS $800 Residential energy credits = $1,583
Her: Head of Household, itemized deductions, 2 exemptions = $723
MINUS $1,680 Earned Income Credit = $957 REFUND
SCENARIO 1 TOTAL TAX BURDEN: $464
REVERSE SCENARIO TOTAL TAX BURDEN: $626
posted by texano at 11:39 AM on January 25, 2011
SUMMARY: You should claim the kid on your taxes and let your fiancee take the energy credits. Also, it doesn't matter who claims the kid on your paycheck.
Let's tackle your first question. Who should claim the additional exemption on your 2011 paycheck withholding? We need to do a bit of math first. I've consulted the tax tables and done the rudimentary math. Forgive me for not showing all my work -- it would have taken forever.
You: $28,000
Your withholding with 1 exemption = $2,905 taken out ($25,095 left over)
Your withholding with 2 exemptions = $2,350 taken out ($25,650 left over)
Her: $25,000
Her withholding with 1 exemption = $2,455 taken out ($22,545 left over)
Her withholding with 2 exemptions = $1,900 taken out ($23,100 left over)
WITHHOLDING SCENARIOS
You 1, Her 2 = $48,195 left over
You 2, Her 1 = $48,195 left over
i.e. Total wash.
** Now to the next question, what should you do for your 2010 tax forms? **
SCENARIO 1:
You claiming child, filing with Head of Household filing status:
-- $28,000 wages
-- Side business breaking even on paper ($0 effect)
-- Standard deduction
-- 1 personal exemption for you
-- 1 awesome child claimed as a dependent
Federal tax: $1,251
MINUS 1 awesome child claimed for the Earned Income Credit ($1,200 credit)
Total federal tax for you = $51
The lady files Single, with no dependents
-- $25,000 wages
-- Itemized deductions ($10,000 medical expenses, $478 standard sales tax deduction for Morgantown, WV)
-- 1 personal exemption for herself
Federal tax: $1,213
MINUS $800 for residential energy credits
Total federal tax for her = $413
** Reverse scenario **
You: single, standard deduction, 1 personal exemption = $2,383
MINUS $800 Residential energy credits = $1,583
Her: Head of Household, itemized deductions, 2 exemptions = $723
MINUS $1,680 Earned Income Credit = $957 REFUND
SCENARIO 1 TOTAL TAX BURDEN: $464
REVERSE SCENARIO TOTAL TAX BURDEN: $626
posted by texano at 11:39 AM on January 25, 2011
Response by poster: Dang, now I'm gonna get flagged for asking MeFi to do my homework for me.
What I'm not seeing there, and it's likely that I'm dumb, is you factoring in what we've individually paid in taxes this year less the deductions to factor real return? I'm not expecting you to have done that, but it looks to me like you're expecting me to have a tax liability at the end of everything, and I don't think that sounds right.
posted by TomMelee at 12:12 PM on January 25, 2011
What I'm not seeing there, and it's likely that I'm dumb, is you factoring in what we've individually paid in taxes this year less the deductions to factor real return? I'm not expecting you to have done that, but it looks to me like you're expecting me to have a tax liability at the end of everything, and I don't think that sounds right.
posted by TomMelee at 12:12 PM on January 25, 2011
Ha! No flagging, please, I just got absorbed in writing my answer.
Re: My Figures
No, you're right, I didn't factor in what your withholding from 2010 would've been. Subtract the 2010 withholding from the total tax numbers, and you would get an estimated total refund amount.
Personally, I think tax software is the best combination of easy, accurate, and cheap (possibly free) to prepare your taxes. If you and your fiancee play around with scenarios, you should be able to get an answer that you can actually count on, as opposed to this.
You can figure out which software will provide you with free tax prep by going to the IRS website and answering a few questions.
West Virginia's page is here, but they don't seem to have any information available at the moment.
posted by texano at 2:06 PM on January 25, 2011
Re: My Figures
No, you're right, I didn't factor in what your withholding from 2010 would've been. Subtract the 2010 withholding from the total tax numbers, and you would get an estimated total refund amount.
Personally, I think tax software is the best combination of easy, accurate, and cheap (possibly free) to prepare your taxes. If you and your fiancee play around with scenarios, you should be able to get an answer that you can actually count on, as opposed to this.
You can figure out which software will provide you with free tax prep by going to the IRS website and answering a few questions.
West Virginia's page is here, but they don't seem to have any information available at the moment.
posted by texano at 2:06 PM on January 25, 2011
Response by poster: Thanks. I really do appreciate it.
posted by TomMelee at 5:24 PM on January 25, 2011
posted by TomMelee at 5:24 PM on January 25, 2011
If she is untrusting of software, just print out the 1040 forms and instructions and work through it both ways following the line-by-line instructions. It's really not as complicated as most people seem to think it is, and going line-by-line is a great way to catch deductions and credits you might not have otherwise even known about.
posted by Jacqueline at 11:21 PM on January 25, 2011
posted by Jacqueline at 11:21 PM on January 25, 2011
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posted by decathecting at 7:47 AM on January 25, 2011 [3 favorites]