hungryhorace

Hello!

Since I got married, the IRS recommended (via their website w4 calculator) that I withold an extra ~$300 per paycheque to ensure I don't owe too much tax at the end of the FY.

Having checked with other colleagues who are married, none of them withold anything extra from their fortnightly paycheques. Is this the norm? Am I witholding money that I don't need to?

Appreciate everyone's tax circumstances are different, just interested in the general approach people have taken.

Owen778

It's normal if both spouses work, yes.

hungryhorace

Thanks, Owen.

MsElui

we have never made that kind of adjustment - and we have had refunds of varying amounts every year so far.

my friend puts her details through a tax calc package to determine how shes doing - like a half year worth or data/forecast. maybe you could do the same?

Bluegrass Lass

We usually do the "married but withhold at higher single rate" on a W4.

hungryhorace

I did, it said we will owe just over a thousand next year, which I just can't understand :-/

Michael

If you look at the marginal tax brackets below the following tax calculator, you'll see that the for the 10%, 15%, and 25% marginal tax brackets, married filed jointly starts at double the income of a single person so therefore there isn't a marriage tax penalty for married couples making less than $148,850 after deductions and exemptions since the standard deduction and exemptions are double that of a single person. However, once $148,850 is exceeded, the married couple goes into the 28% tax bracket while the single person stays in the 25% tax bracket so therefore at that income, there starts a 3% marriage tax penalty. Between $148,850 and $405,100, the penalty gradually increases to 6.6%.

Therefore how much extra you should withhold compared to when you were single depends on the combined income after deductions and exemptions. If combined income is below $148,850, there shouldn't be any extra withheld but above that, extra should be withheld.

Although there is a marriage tax penalty when both work and total income is above $148,850, there can be is a major tax advantage when only one works. If you had married someone that didn't work, you would have a tax refund if your income is under $457,600 if you kept withholding the same as when you were single.

1040 Tax Calculator

The American tax system is geared towards giving 99% of one earner families a tax break where as the UK system is geared towards screwing one earner families. However the UK tax system is better for families with two high income earners (combined income of more than $148,850).

hungryhorace

Thanks, Michael. This is very insightful! I appreciate the knowledge sharing.

We definitely exceed the $148,850 income bracket, how much of that I can deduct to get as under this figure, I'm not sure as I've only been here just over a year now and still getting up to speed with the tax system.

Looks like I'm going to have to continue withholding then. Last year we filed married filing separately, to avoid a significant tax bill (in the thousands), maybe it'll be the same for FY14, will just have to run the numbers when the time comes both ways and find out.

Michael

The easiest way to determine approximately the difference is to use the calculator in the link for each of you as if you were single and record the tax for both. Then use the calculator for married filing jointly for both of your incomes and record the tax. Then take the difference between the two and divide by 12 to determine the additional monthly tax or divide by 26 to determine the additional tax every two weeks. For each, take the standard deduction (that's automatic if you don't itemize and the exemptions (1 if single and 2 if married filing jointly).

Example:

Person A has an income of $150,000 and tax = "X" as single.
Person B has an income of $100,000 and tax = "Y" as single.
Total tax X + Y = Z as single.

Then calculate tax on $250,000 for married filing jointly and that = J.

J - Z = extra tax owed for the year. That extra tax can be withheld from your income, your wife's income, or from both of your incomes.

When I had major changes to my income during the year in the past (exercised stock options and bonuses (withheld at a 25% rate), capital gains (no withholdings), etc.), I used to use the calculator to determine the additional tax and temporarily change my W-4 so I wouldn't need to file quarterly estimates on that extra income. Some times I changed my W-4 several times per year. Long term capital gains and qualified dividends are taxed at a different rate than normal income so that income would be entered in a different place in the tax calculator.

hungryhorace

Our accountant ran the figures both ways and filing separately saved us around $2k. I believe me being a dual status resident for tax purposes last year had a lot to do with this, as we couldn't use the standard deductions; both of us had to itemise (which worked out to below the standard deduction).

Michael

I realized that after I made that statement and removed it from my post. Reread my post since I made some changes.

hungryhorace

Thanks, just re-reading, will use that calculator as you suggest. Currently, with a IRA contribution it's putting us in the 25% tax bracket, with non IRA contribution we're at 28%.

Michael

Remember those are marginal tax brackets. The extra 3% tax is only on the amount that's above where the bracket starts so if you go over by $10, there is 30 cents extra tax then if you would have remained in the 25% bracket.

Michael

Not necessarily until you use the calculator since the tables is income after deductions and exemptions.

Michael

Although I said there is a tax penalty at $148,850 when married filing jointly, that is only true if both spouses are making the same income. If there is an income imbalance, then the figure is higher. That is because a single person with a high income may be in the 33% marginal tax bracket and the person with the low income may only be in the 10% bracket. In that case, there may be a tax advantage to being married.

Example:

Spouse A makes $200,000 after deductions and exemptions and is in the 33% tax bracket as a single person.

Spouse B makes $9,000 after deductions and exemption and is in the 10% tax bracket as a single person.

Married filing jointly for $209,000 puts the couple in the 28% bracket.

Since most income comes from spouse A, most of that income will be taxed at the lower marginal tax brackets when married.