Yet another tax question... help us understand

February 1, 2007 8:34 AM

Yet another tax question, sorry. We're confused about our tax situation this year. Details: we were married last June, so this is our first time filing together. We make almost equivalant salaries (48,000 and 54,000), sold ~14,000 in mutual funds this year, invested ~900 in one 401k, and paid about 2400 in student loan interest. We don't own a home. One of us claimed 1 exemption, the other claimed 2. (more inside)

The question is- what happened to the size of our refund? We ran the numbers through turbo tax (using the standard deduction) and it's much less than expected. It's the same amount that only one of us got last year, when they were earning a salary of 18,000. We know this is a good thing, but were expecting a refund because we both seemed to "overpay" this year. How is this possible?

posted by leotrotsky to work & money (8 comments total)

big increase in salary + marriage penalty + $14k in mutual fund *taxable* income = a punch in the stomach

Maybe a CPA can find more deductions for you?
posted by nineRED at 8:42 AM on February 1, 2007

You know the exemptions work in reverse, right - the more "exemptions" you claim on your W-4 form, the less tax is withheld.

For your situation, there's even a two-earner worksheet on the back of the W-4. If you follow that form closely, not only does it say that both of you should be at zero exemptions (maximum withholding), it suggests you should have extra tax withheld!

If, however, you are ending up with a refund, even a small one, you have done it just right.

I would suggest that you alter your withholding for next year (file new W-4 forms with your employers) to be 0 or 1 for each of you, to ensure you don't end up owing at April 15 next year. Personally, I prefer to end up with the government owing me in the range of $0 to $500 - that way I neither have to come up with funds around April 15, nor did the government hold on to excessively large amounts of my money for the year.
posted by jellicle at 8:52 AM on February 1, 2007

Re the $14,000: If this was a regular redemption, make sure that in TurboTax you entered the "Cost Basis" as well as the amount you sold. Otherwise the program -- and the IRS -- will assume that the whole $14,000 is taxable as a capital gain, instead $14,000 minus what you paid for it (the basis).
posted by richsim at 9:04 AM on February 1, 2007

It's often useful to look at the actual 1040 form in TurboTax. You can see each of the components of your income and withholding and it can be clearer where the money is going.
posted by smackfu at 10:49 AM on February 1, 2007

Did you pay AMT? Sometimes this isn't obvious when using TurboTax.
posted by docpops at 11:05 AM on February 1, 2007

You claimed one and two, that's what happened.
You should both be claiming zero, and at least one should have checked "withhold at the higher single rate" as the rules regarding withholdings are anachronistic and date to when one person would be the sole breadwinner.

Heck, I make less than half what one of you does, claim zero, have an extra $20 taken out every month, and still only get a very modest refund.

(also, on preview- you're in the six figure range, it wouldn't surprise me at all if you've been hit by AMT.)
posted by Kellydamnit at 11:10 AM on February 1, 2007

They probably didn't pay AMT - that usually only gets applied in the tax programs if there are a lot of deductions going on, and it doesn't look like that is happening.

Yes, part of the reason you are not getting as much back is because you didn't pay enough in. (The other parts are that you are in a higher tax bracket and you're married now; those things combined lead to a higher tax liability.) Claiming one and two exemptions on your W-4 makes your company take less tax out of your paycheck. I'd do what the others have suggested - change your exemptions to zero and tell them to withhold at the higher single rate - IF you owe money at the end of the year.

If you are still getting a refund with your current withholdings, you are probably okay. If you start having more withheld, you will get a bigger refund, but that's essentially like putting money into an interest-free account that you can't touch until next year. It's best to aim for a small refund, as mentioned above.
posted by bedhead at 11:29 AM on February 1, 2007

2006 Federal Tax Schedules. Peruse them for a moment, comparing your old tax brackets, in the "single" column, to your new joint tax bracket, in the "married filing joint" column.

The two of you, filing together, almost certainly soared well into the 25% bracket for the majority of your income; previously the majority of your incomes fell into the 15% bracket.

This, as noted above, is called the "marriage penalty." It sucks. Your tax situation has changed: you pay more tax now.

In addition to the good advice about making sure TurboTax knew about your cost basis on those mutual funds, it's important to know how much of the gain ($14,000 - cost basis) was long-term gain (taxable at a flat 15% rate), and how much of it was short term gain (which is taxed along with your regular income, possibly at that marginal 25% rate.) If you don't know exactly what I'm talking about you need to either read up on it or call an accountant to help you.
posted by ikkyu2 at 6:52 PM on February 1, 2007