Q. I recently got married in April. My wife is starting her job next week. In the past I have claimed 4 witholdings and usually get around $1,500 -$2,000 back each year. Need some help in determining if I need to adjust my withholdings… if so … how much. Also… how many withholding should my wife have taken out of her paycheck.
A. This is one of the most frequently asked questions. Unfortunately, it is not possible to answer without knowing your entire situation. I can tell you that you both need to complete a Form W-4. This form tells your payroll department exactly how many allowances you are claiming for your situation. By answering these questions as correctly as possible, you will get just a little bit too much withholding. Getting a refund of $1,500 to $2,000 shows that in the past, you could have claimed additional allowances. The objective is to get as close as possible to a zero refund, even paying a little bit. That way, you are getting the full use of your money, instead of loaning it to the government interest-free.
The key in your situation is that married tax tables usually result in lower withholding. Both of you likely need to move to the “Married” filing status. However, it is important to remember that there is a total number of allowances to which your family is entitled. These allowances must be split between the two of you. For every $3,650 of non-taxable income, you are entitled to one allowance. If you claim the standard deduction ($11,400 in 2009), meaning you don’t have enough mortgage interest, state tax or charitable deductions (for example) to itemize, your situation provides for a maximum of 3 allowances plus one for each of you. That means a total of 5 to split on your W-4s. I usually reccommend that the spouse with the higher paying job claims the allowances. The lower paying job claims zero.
There are some handy free calculators available at PaycheckCity.com that can help you plan. The Form W-4 Assistant helps you complete a Form W-4 and the Salary Paycheck Calculator helps you see what your paycheck(s) will look like when you change allowances. For specific help on your situation, contact a CPA or tax advisor in your area. They will be able to take into consideration all of the aspects of your financial situation to help you plan on paying the lowest legal amount of taxes.
MARCH 4TH, 2009
By CPA SAM
The IRS just released it’s taxpayer statistics for the 2006 tax year. With all the press dedicated to analyzing the new administration’s tax proposals, I thought it would be good to look at just who is paying taxes these days.
First, the average tax rate paid on all returns was 13.8%, which is slightly higher than the year before. There were 138.4 million tax returns filed that year of which 67% had some level of income tax reported. This is line 61 of the 1040, line 28 from the 1040A and line 11 of the 1040EZ form. I think if more people looked closely at how much tax is assessed for their situation, they would be stunned.
Back to the statistics, the top 1% of taxpayers paid 39.9% of the tax paid that year. The top 5% of taxpayers paid 60.1% of the total tax. The top 5% of taxpayers includes those with Adjusted Gross Income of at least $153,542. That means 95% of the taxpayers only pay 40% of the taxes on returns.
What does this mean? There is only so much money that can be squeezed from the population of taxpayers. If one takes into consideration the total Federal, Social Security, Medicare, State, Local, sales and property tax that each person in this country pays, it is truly a staggering number that in some cases could exceed 50% of income.
As I have stated before on this blog, individual consumers must find a way to live within their means. No person can continue to spend more than they take in. Eventually, they must repay the debts. Invariably, in the lives of ordinary taxpayers, we have unforeseen issues occur that require we maintain a “slush fund”. If no financial cushion is available, the average person would be forced into bankruptcy. Let’s hope our federal, state and local governments can learn this principle soon as well.
NOVEMBER 12TH, 2008
By CPA SAM
Q. How can I determine whether or not I am eligible/qualify for the child or dependent care expenses deduction? I have a child that I claim –18 yrs old live at home— I receive support from his mother – we are divorced.
A. The IRS has very specific requirements regarding to gets to claim the Child and Dependent Care Credit. In fact, there is an entire chapter (32) of Publication 17 devoted to it. The basic requirements you must meet in order to be eligible for this credit follows:
Eligibility requirements:
- The care must be for one or more qualifying Read more »
OCTOBER 1ST, 2008
By CPA SAM
Q. I live in Michigan and just started a new job working in Illinois. I’ve never been in a situation with two states before. My payroll department wants me to fill out all these different forms. What should I do?
A. I love multi-state tax situations! It’s like job security for accountants. The answer to your question Read more »
JUNE 11TH, 2008
By CPA SAM
Q. My spouse has a sole proprietor business and would like to hire me as an employee. How do I go about paying myself?
A. The IRS has a special category for this type of business where a “sole” proprietor can actually be two spouses in certain cases. This election is called a “Qualified Joint Venture”. Further in-depth discussion of this can be found on this page. Per the IRS website, “The spouses must share the businesses’ items Read more »
APRIL 24TH, 2008
By CPA SAM
Q. How do I complete the Form W-4 if my spouse is working or out of the country or retired?
A. Keep in mind that what I can discuss here is very general due to the nature of the question. The Form W-4 as mentioned before is the road map your payroll department uses to calculate your withholding correctly. A good rule of thumb is that if you claim an allowance on the W-4, your spouse cannot claim that same allowance. For instance, if you are married and put a “1″ in box A, then your spouse cannot Read more »
