Help me understand taxes (1 Viewer)

[Yoshi Sugawara]

I just got my W-2 form in the mail and decided to see how much of a tax return I'd get this year (using the 1040EZ) - and found out I owe nearly $1000 !

Nearly 1/4 of my pay went to taxes, yet I still owe more? Why? Is it the income bracket I'm in that determines this?

I felt like I already paid enough taxes..ugh

 

[Kenneth]

Tax brackets in the US are tiered and a function of income. In a certain income range you pay X%. If your income moves into a higher or lower range then the % will go up or down, accordingly.

How much they take out is based on your base income and your withholdings that you put on your W4. If you don't have any special deductions (like home interest or kids) you should only take a withholding for yourself and one extra. Sometimes you can go with one or zero withholdings if your taxes are always under. If you have bonuses or stock or other income that counts against your W2 but is not part of your base salary then that can shift you into a higher bracket which would make your withholdings too low.

Hope that makes sense.

Kenneth

 

[Anthony_J]

The taxes you owe depend on your income level, filing status, possible deductions, and the various sources of income you had during the year.

If you owe taxes, that means that you didn't have enough tax withheld from your income during the year (if you're an employee), you own your own business and didn't pay the required tax amounts based on your 2000 income and SE tax amounts, or you had income outside of your normal wages.

I'll assume you're an employee, because business owners usually know tax situations, or pay accountants to do that stuff for them.

First and most important is probably the number of dependents you claim on your W4. This dictates the amount of tax that is withheld from your pay. Basically, the lower the number of dependents you claim, the higher the amount of taxes gets withheld from your pay during the year.

Generally, if you're single, you'll claim zero or one dependent. Some people feel that claiming zero is like giving the government an interest free loan for a year, but I like having too much taken out during the year, because I like getting a big refund in April, and I know that I would spend the money on stupid stuff if I were to get it with my pay.

If you're currently claiming the correct number of dependents on your W-4, then you either calculated your tax wrong, or you had income outside of your normal salary.

Remember that anytime you sell stock at a gain, or win the lottery, or win on a gameshow, or get any income besides wages, that income is subject to tax. You have to pay tax out of your pocket on that extra income (things like gains on stock sales can be taxed as high as 50%) because there's nobody that will withold the tax for you.

If you had no other income besides normal employment wages, and you had the proper amount of tax withheld during the year (per your W-4 filing status), then there's a 95% chance that you calculated wrong. Check your math, check to make sure your taking the proper standard deduction (or itemizing correctly), and double check the tax per the tax tables.

Let me know if this helps, if you give more specifics as to your situation, I might be able to provide a more detailed explanation.

 

[Henry Carmona]

Could some one plz explain how this "marriage penalty" tax thing works and arent they going to do away with it?
My wife didnt see 1/3 of her paycheck last year.
Uncle Same took out $24k, yes $24k in taxes!!
We made some changes and i hope it looks better this year.

 

[SteveA]

The reason people say there is a "marraige penalty" is because the standard deduction for married folks is less than twice that for single. Single people can claim a standard deduction of $4550, but for married couples it is only $7600 (or $3800 apiece if filing separately).

 

[Yoshi Sugawara]

Wow, thanks for the replies.

Anthony:

I am single and have no dependents, and I had no other income besides interest from a CD account (which wasn't that much) I made a little over $50k last year. I'm pretty sure I had just 1 withholding on my W-4.

I used TurboTax on the web - maybe they calculated wrong? Or should I have my employer withold more? Hrmph...

 

[Jamie E]

Just to be clear, it's not "like" giving them an interest-free loan, it is giving them an interest free loan.
Just an idea for people who feel this way: If your employer has direct deposit, you might consider increasing your W-4 allowances to a "break even" target number, opening a savings account at a secondary bank, and having part of your paycheck direct deposited to that secondary account. That way you won't be tempted to spend it on "stupid stuff". At tax time, you can use the money to cover any taxes you might owe, and you could blow the extra savings (plus interest) and not have to wait for the IRS to refund it back to you.

 

[Thomas Newton]

The reason people say there is a "marraige penalty" is because the standard deduction for married folks is less than twice that for single. Single people can claim a standard deduction of $4550, but for married couples it is only $7600 (or $3800 apiece if filing separately).

Less widely noted is the singles penalty. Single filers get to pay HIGHER taxes than married filers who have non-working spouses, even after you set aside the deductions and exemptions that the married filers get.

If you don't believe me, just open up your 1040 booklet to the Tax Table section, and ask yourself, "why are there multiple columns for computing the amount of income tax for a given amount of taxable income?"

 

[Vince Maskeeper]

Quote:

Well, making $75,000 a year will probably put you into the topic tax bracket
-Vince

 

[Scott Merryfield]

To all of you folks who think getting a big refund back in April is a good plan, I have a proposition. If you normally get back a $1,200 refund, adjust your withholdings so you will break even on your taxes, and send me $100 per month. I will gladly pay you back $1,200 the following April. You'll still get your non-interest earning saving plan, but the check will just come from me instead of Uncle Sam.
If enough people would do this, I could retire on the interest income alone.

 

[BrianB]

And with the smallest amount of self control you could make money on that withheld. I think it is simply amazing how many people think over-with holding is a good idea. It isn't.

I had a huge argument with my wife over this just the other evening. She was taught by her parents to always withhold too much. After a refund of over $3000 last year, I dropped it quite a bit - enough to cover taxes with a little to spare. She's scared stiff we'll have to 'pay back' a huge chunk of cash.

How do I show her that we're better off with more money each month vs one big interest free lump sum?

 

[Vince Maskeeper]

I had a huge argument with my wife over this just the other evening. She was taught by her parents to always withhold too much. After a refund of over $3000 last year, I dropped it quite a bit - enough to cover taxes with a little to spare. She's scared stiff we'll have to 'pay back' a huge chunk of cash.

How do I show her that we're better off with more money each month vs one big interest free lump sum?

Well, step one would be to make it clear that either way, you're paying the exact same amout of taxes. It's not that you'll have to "pay back" anything- if you withhold 0 or withhold $5000- you're paying the same amount of tax- it's just a question of when you're paying it.

I would sit down and figure out what your savings account pays in interest, and show what the money would have made you if Uncle Sam and Crew didn't have it.

You said you got $3000 refund, so let's assume you withheld nothing and not only didn't loan Uncle Sam $3000 but also held onto your own tax money until the last minute... let's assume $9000. So Sam held onto your $12,000 for the year.

Sit down and figure the saving account stuff for depositing $1000 into a savings account monthly for 12 months, at 3% it would probaby only be a hundred bucks or so- but that's basically "free money" compared to nothing otherwise.

You put away the couple hundred bucks interest earned on the money every year until you retire, or better yet put it into long term higher yield investments or retirement accounts- and you're looking at probably $10,000-$20,000 for doing nothing more than withholding your own money.

With direct deposit, you could setup your back to withold exactly like the Government does, and you won't see a difference. Even have it setup into an account that you cannot acces without going into the bank and signing for it... and just let it grow until April!

-Vince

 

[andrew markworthy]

If it's any consolation, guys, just be grateful you don't live in the UK. Ridiculously lenient corporate taxation, but a personal taxation system seemingly based on puritanical envy of the middle classes, but slavish worship of the filthy rich.

 

[BrianB]

Thanks for the good advice, Vince.

And Andrew, I know exactly what you're talking about unfortunately.

 

[Ken_McAlinden]

Sort of a sidetrack, but Andrew's post got me thinking. How are taxes assessed in Britain w.r.t. legislation? In the USA, legislation related to revenue must originate in the House of Representatives (where representation is proportional to population) but must ultimately also be approved by the Senate (two senators per state - the closest thing we have to "lords" ).
Regards,

 

[Anthony_J]

You said you got $3000 refund, so let's assume you withheld nothing and not only didn't loan Uncle Sam $3000 but also held onto your own tax money until the last minute... let's assume $9000. So Sam held onto your $12,000 for the year.

Sit down and figure the saving account stuff for depositing $1000 into a savings account monthly for 12 months, at 3% it would probaby only be a hundred bucks or so- but that's basically "free money" compared to nothing otherwise

I'll have to check the regs, but there may be a penalty if you don't make proper quarterly tax payments based on your prior year income (it's called safe harbor, I think it states that you should pay around 90% of your prior year tax liability during the current year). This is why certain individuals have to make quarterly tax payments - because normal salary withholdings wouldn't cover 90% of their prior year tax liability.

I'm not sure if this applies to all individuals, including those with only employee wages, so be wary if you go the zero withholding route. The penalty could end up costing more than the return you got on the money.

 

[Anthony_J]

Anthony:

I am single and have no dependents, and I had no other income besides interest from a CD account (which wasn't that much) I made a little over $50k last year. I'm pretty sure I had just 1 withholding on my W-4.

Do you have any special circumstances with your income (certain withholdings, bonuses, etc.?) that wouldn't be taxed with your base salary? I can't think of what would be causing your witholding shortfall.

If nothing else, I'd try doing your return the normal paper and pencil route. See if that gets the same results as TurboTax. With only normal wages, it shouldn't be too much of a hassle.

 

[Ken_McAlinden]

If nothing else, I'd try doing your return the normal paper and pencil route. See if that gets the same results as TurboTax. With only normal wages, it shouldn't be too much of a hassle.

Good point. The 1040EZ form can usually be done manually and double-checked in a good 15 minutes with no other reference than your W-2

Regards,

 

[Brian Perry]

Andrew,

I'm curious as to what the top tax rate in England is. Here it is 39.6% (plus state taxes, plus Social Security, plus Medicare, plus property taxes, plus sales taxes, etc.) I can't imagine it's much worse anywhere else (overall, when all the various taxes are combined).

 

[andrew markworthy]

Ken, British taxation system in a nutshell:

(a) income tax works pretty much like the American system - you can earn so much income tax-free (if memeory serves correctly, about 6k), and thereafter the tax rate increases in bands. The top rate is 40 per cent, which kicks in at about 27k p.a. (only your income above the threshold is taxed at 40 per cent, but all of your savings are taxed at this rate, no matter if your salary is only 1 penny into the top tax bracket; thus you've got either to earn masses more than the threshold or stay below it if you've got substantial savings). The rates and bands are fixed by the Chancellor of the Exchequer (i.e. the minister in charge of finance). Almost always any changes are made in the annual Budget, held in April. The main rates have been unchanged for a good few years, but typically the threshold for entering the next band is raised by a few hundred pounds each year. Anyway, at the Budget, the Chancellor announces the changes, which are then debated by the House of Commons before (almost inveitably) being passed unaltered. They are then sent to the House of Lords, in essence for rubber stamping. In addition to income tax, there is also National Insurance, which basically pays for the state pension, health care, etc. This again is in bands. Why National Insurance can't be swallowed up into income tax baffles most people (myself included).

(b) indirect taxes are also altered at the Budget. The main one of these is VAT (value added tax) which is added to most goods barring essentials, such as basic foodstuffs, etc. In addition, there are duties on petrol and alcohol (both unbelievably massive compared with the USA), an annual car tax, etc. There are also some ancient oddities, like stamp duty (paid on some legal documents, such as house deeds), which in any rational society would be scrapped.

(c) there are also local taxes. These are fixed by the local governments (akin to state taxes), but there is legislation which prevents massive increases in these (this was brought in after some far left councils increased local taxes to ridiculous levels).

However, all taxes ultimately have to be formally approved by the government. We've been quite fussy about this sort of thing since King Charles got it into his head that he could raise taxes without getting the approval of the people.