Splitting taxes...i'm stumped with the math

[Russell]

OK, so we're trying to adjusting our withholdings for 2009.

We know our federal taxes in 2009 will be approx $25000. Now if we made exactly the same amount we'd divide the tax amount by two i.e $12500 and then adjust our withholding so we each paid $12500 during the year. However, she makes 58% of my salary or I make 42% more than her.

So what would be the math to divide the $25k such that I pay 42% more than her? Would be $17750? i.e. 42% of $12500 plus $12500?

[simpletron]

for a proportional split, it should be 25000 times your income divide by total income for how much you should pay.

if she makes 58% of your pay, then this should be 15822.78 for you and 9177.22 for your wife.

if you make 42% more than her, then this should be 14669.42 for you and 10330.57 for your wife.

note: if she makes 58% of your pay, then you really make 72% more. and if you make 42% more, then she makes 70% of your pay.

[sweeps]

It sounds like it is really a 63/37 split. (Btw, if your wife makes 58% of your pay, you do not make 42% more than she does. As simpletron points out, you make 72% more.)

Unfortunately it's not as simple as just splitting it this way. As your pay goes up, your withholding rate becomes higher. The way we do it is have my wife (who makes less) just claim 0, and then I tweak my withholdings until I get it to a small refund. That puts me at 4.

Despite the web sites that claim to estimate your withholdings (including the IRS's calculator), getting the number right is a trial-and-error exercise.

[Russell]

OK this is embarrasing that I can't figure out this math but the way I came up with the 58% was I divided her salary by mine. So doesn't that mean her salary is 58% of mine? Then I subtracted 58% from 100% to get 42% which is the difference.

Sweeps, she'd freak if I told her to claim 0 she already thinks that she's paying more taxes because my salary drags her into a higher tax rate so I'm trying to allow her to pay her lower share of the taxes.

[loulou]

Go to paycheckcity.com. There you can list out your income and deductions, and by changing the withholdings, you will see how much taxes will come out of your respective paychecks. Keep adjusting until you have the exact amount you want to come out.

[Russell]

for a proportional split, it should be 25000 times your income divide by total income for how much you should pay.

Should I use 'taxable income' for this calculation and not 'gross income'? Our taxable income is about $35k less than gross.

[jIM_Ohio]

As long as the right amount is withheld as a sum, the percentage split only matters if you are trying to be equal.

In general it makes the most sense to have the lowest earning spouse claim zero then adjust the withholdings of the higher earning spouse to compensate... otherwise you will be shooting at moving targets with each raise.

[sweeps]

To illustrate this point... Let's say Pat makes $20,000/year but Pat's spouse makes $100,000/year. Pat's employer has no idea that their household income is $120K. The employer will barely withhold any taxes, assuming Pat makes $20K and that's it. But in reality, that $20K will be taxed at the high end.

Changing Pat's withholding doesn't do too much because Pat doesn't have much taxes taken out to begin with. The withholding on the spouse's income has a much bigger effect.

[SnoopyCool]

Originally Posted by Russell

OK this is embarrasing that I can't figure out this math but the way I came up with the 58% was I divided her salary by mine. So doesn't that mean her salary is 58% of mine? Then I subtracted 58% from 100% to get 42% which is the difference.

I can answer that! (I know nothing about the rest, unfortunately)

For computation's sake, let's say you (DH) make $40,000 and she (DW) makes $23,200. So DW/DH = 58%.

Dollar-wise, you make $16,800 more than her. DH - DW = $16,800.

But what percentage is that of HER salary? $16,800/DW = 72%

So you make 72% more than her.

I hope that helps.

[jIM_Ohio]

we followed the advice I gave (where my salary, about 66% of gross income, was modified) by having wife claim 0 married, and withholding an extra $50 for state tax each month too...

then I was at married claiming 7 allowances fed and 2 for state taking home most of what I earned.

When kids came we then adjusted wife's allowances down to get another $500/month into cash flow.

If you file as married with 9 allowances very little comes out of your check according to the tax course I took.

[zetta]

Do you share all money coming in, or do you split bills proportionally as well? If the latter, then maybe you should split bills according to take-home rather than gross.

In either case, if your wife can't be pursuaded that 0 allowances on her paycheck is the best course, how about the following. Let's say you make 100k and she makes 58k. The total income for the family is 158k -- her salary is 37% of the total, yours is 63% of the total. The total taxes you want withheld are 25k. She should withhold 37% of 25k = 9,500. You should withhold 63% of 25k = $15,750. Note that you will need to adjust this every time either one of you gets a raise.

[Russell]

Zetta, we don't share the money in the sense that we don't use one account. We do split the bills proportionally. I do like your idea of taking our income and dividing it by our salaries to come up with the percentage split. However, the gross income vs. taxable incomes are different so the question is should we use our taxable incomes?

SnoopyCool, thanks for your help with the math.

Sweeps, Jim, I'll reread your posts when I get home and try to wrap my head around what you guys are suggesting.

[jIM_Ohio]

Originally Posted by Russell

Zetta, we don't share the money in the sense that we don't use one account. We do split the bills proportionally. I do like your idea of taking our income and dividing it by our salaries to come up with the percentage split. However, the gross income vs. taxable incomes are different so the question is should we use our taxable incomes?

SnoopyCool, thanks for your help with the math.

Sweeps, Jim, I'll reread your posts when I get home and try to wrap my head around what you guys are suggesting.

Its best to make a decision, then just make it work using a paycheck calculator. Basic scientific principals suggest you keep everything constant, then modify one variable... that will work well to solve simple problems like this too.

If you go by taxable income it will work, but by withholding taxes you will be modifying the exact variable you need to control- that might not be the easiest thing to do.

If you go with gross income, remember most tax cuts favor the rich, so the person earning less is going to get screwed.

If you are trying to keep things proportional because of a divorce or something like that, realize that filing as married filing jointly and filing as married filing seperately and filing as head of household each of the three statuses each has their own tax table, so whatever planning being done now will have no impact on a different filing status.

Come tax time look at pool as one money (the IRS does), and one tax (the IRS does). How it gets paid will matter little.

It might be easier to have lowest paid spouse withhold the most, highest earner withold the least, then have higher earning spouse pay the other spouse- because that will have fewer raise implications than any other technique.

[carlsguide]

I like simpletron's answer.

[zetta]

Zetta, we don't share the money in the sense that we don't use one account. We do split the bills proportionally. I do like your idea of taking our income and dividing it by our salaries to come up with the percentage split. However, the gross income vs. taxable incomes are different so the question is should we use our taxable incomes?

Figure it out both ways and do whichever comes out in your wife's favor. Here's my reasoning: as the lower-income earner she's more vulnerable, she's likely picking up more of the non-income-generating work of the household, it's better for martial harmony, and it's the gentlemanly thing to do.

[wnlbutterfly]

Keep in mind that you can always pay in a set amount of withholdings to either state or federal. Just put on the W-4 "withhold $400", you have to say where you want it to go or it will go to federal. Our state now has their own W-4 to fill out. It might be easier to do this than to try to do %.

[feh]

Originally Posted by jIM_Ohio

As long as the right amount is withheld as a sum, the percentage split only matters if you are trying to be equal.

In general it makes the most sense to have the lowest earning spouse claim zero then adjust the withholdings of the higher earning spouse to compensate... otherwise you will be shooting at moving targets with each raise.

This is what my wife and I do; she makes much less than I do (works part-time).

[disneysteve]

Originally Posted by sweeps

To illustrate this point... Let's say Pat makes $20,000/year but Pat's spouse makes $100,000/year. Pat's employer has no idea that their household income is $120K. The employer will barely withhold any taxes, assuming Pat makes $20K and that's it. But in reality, that $20K will be taxed at the high end.

Changing Pat's withholding doesn't do too much because Pat doesn't have much taxes taken out to begin with. The withholding on the spouse's income has a much bigger effect.

That's exactly what happens in our case. My wife works part-time and, after 401K contributions, is only taxed on about 5K. She had $0 taken out for federal taxes.