American Income Tax Question

January 30, 2017 10:18 PM

My husband and I both declare 0 exemptions on our W-2s every year, and every year we owe thousands of dollars when we file our federal income tax return.

We have no children and we own our home outright. We take the standard deduction. Our joint income is around $150,000 per year. We both have 10% pre-tax contributions to a 401k.

Logically it seems like the amount taken out of our checks should cover the standard deduction. Is this not how it's set up? How is the amount taken out of paychecks calculated, if not with the intention of preventing a huge payment at the end of the year?

I know we can ask our employers to take even more out of each paycheck, and we will both be doing that. But I don't understand why having what is supposed to be the max taken out doesn't cover us.

posted by anonymous to Work & Money (14 answers total)

Being married, the second income is taxed entirely at the marginal rate. But payroll calculates it at a lower effective rate.
posted by politikitty at 10:45 PM on January 30, 2017

Figure out how much extra you need withheld each paycheck to get a small refund, and file a new W-4 with that amount of additional withholding (line 6). You could split the additional withholding between the two of you, but there's really no point in that since all the money's going to one place anyway.
posted by kindall at 10:51 PM on January 30, 2017 [2 favorites]

This is due to the progressive (i.e. the tax rates increase for higher incomes) nature of the income tax and each spouse's employer having no way of knowing that the employee is actual in a higher tax bracket due to the combined income.

So for a married couple filing jointly, the overall effective tax rate on a total income of 280k should be a hair less than 25% for federal income tax. However, each spouse's employer has no way of knowing what other members of the household make, and so will presume that is the only salary and withholds taxes at about 17%, which would be the appropriate rate for 140k as the total income.

So you end up short, unless you let one or both employers know that they should withhold more. So every year it's a good idea to figure out how much you will expect to pay in taxes based on both spouses expected incomes, etc. and update the W-4s to request extra withholding.
posted by susiswimmer at 10:54 PM on January 30, 2017 [9 favorites]

The IRS has an online withholding calculator that can try to determine what you and your spouse should each put on your W4s to try and withhold the correct amount.

It doesn't ask for SSNs or anything so it won't connect back to your current tax returns or withholding amounts.
posted by JoeZydeco at 11:15 PM on January 30, 2017 [2 favorites]

There's also the whole phenomenon of the marriage penalty or bonus, in which the tax rate applied to a married couple can be different than if they were single, even though the total amount earned is the same. My spouse and I have very similar salaries and thus fall into the marriage penalty category, very startling to me the first year we filed together!
https://en.m.wikipedia.org/wiki/Marriage_penalty
posted by Gravel at 12:39 AM on January 31, 2017

Agreeing that this is an issue of having two jobs doing withholdings. Each job doesn't know about the other one, so you either need to try filing your W4 as "married but withhold at the single rate" or add additional withholding to one of your W4s.

Even if job situations don't change, I always try to remember to check my tax withholding vs. my income around the midpoint of the year to make sure we're on track, either using the IRS withholding calculator or just rerunning last year's taxes with this year's expected info.
posted by muddgirl at 2:50 AM on January 31, 2017

TurboTax has a free app called TaxCaster that should be helpful in planning. It's not super detailed when it comes to deductions but it should be helpful with broad strokes -- and you don't have to log in or give it any identifying information at all.
posted by chesty_a_arthur at 3:23 AM on January 31, 2017

Increase your 401k contributions. This will lower your taxable income. Doing this at least you get to keep the money instead of just increasing the tax withheld from your paycheck.

The max 401k contribution per person per year is currently $18k.
posted by LoveHam at 4:19 AM on January 31, 2017 [5 favorites]

Are you filling out the worksheet on page 2? Because it's right there in the instructions:

"• If you are single and have more than one job or are married and you and your spouse both work and the combined earnings from all jobs exceed $50,000 ($20,000 if married), see the Two-Earners/Multiple Jobs Worksheet on page 2 to avoid having too little tax withheld."
posted by Huffy Puffy at 5:08 AM on January 31, 2017 [1 favorite]

Make sure you both select "Married, but withhold at the single rate" on your W-4. Otherwise the IRS assumes that each income is the sole income for a two-person household and withholds less. Your other option is to select Married but calculate how much extra to withhold from each paycheck and include that in the W-4.

Only if you're already doing this and still owing thousands should you start to worry about contributing to 401ks and other ways to reduce your tax burden.
posted by misskaz at 6:03 AM on January 31, 2017

Are you owing so much that you have to pay a penalty? If not consider saving through the year for the expected bill rather than having it withheld. It's an option (that gets constantly debated).
posted by achrise at 7:57 AM on January 31, 2017

Is all of your income only wages from those jobs ? (ie do you own stocks/bonds that send you a 1099, or have stock options/bonuses/grants from your company that provide income either on the W2 or a 1099 ?) If no other sources of income, generally filling out the W-4 as single will work to take out enough per paycheck.

LoveHam's advice to up your retirement contribution to reduce your taxable income is for a traditional 401(k), but not a roth 401(k).
posted by k5.user at 8:51 AM on January 31, 2017

Frankly, I would itemize, if I were you. The amount of tax you pay in state income tax is probably in excess of the standard deduction.
posted by janey47 at 10:19 AM on January 31, 2017

You own your home outright, so there is no mortgage interest deduction, but are your property taxes + state income taxes not enough to go over the standard deduction? If you are using tax prep software it should figure this out for you, but if you're not, run your numbers through H&R Block's tax calculator and see what it spits out. They also have a W-4 calculator.
posted by bedhead at 1:53 PM on January 31, 2017