Tax planning help

[Cassius King]

I'm trying to change up my payroll with-holdings so that I neither owe or get a return at tax time. Even if I owe less than a grand at tax time that's fine. Just don't want any surprises. Is there a good site to go to to calculate this.

Some detail:
-Married filing jointly.
-two kids
-mortgage interest
-student loan interest
-7% contributed to 401k
-Approx $63k salary.

I'll be the first to admit that I don't understand as fully as I should taxes. Thanks for any insight or direction you might be able to lend. I'm losing sleep thinking I'm going to have a huge tax bill next April.

Thanks.

[MonkeyMama]

What kind of refund did you get for 2010? How many withholdings did you claim? I can easily calculate from there - assuming 2010 was similar to 2011 for you.

[Cassius King]

I changed employers in 2010. We got a federal return last year, but owed the state $40.

I have currently 6 exemptions for federal and 4 for state. Thinking I may need to bump it down to 5 and 3.

The return we got this year was $2500, but it was usually around $3700 in years past. I changed jobs in September and my wife had messed up on her W2 and had next to no taxes taken out. She's fixing her's on her end, and I'm wanting to adjust mine as well.

If I can break even, or owe less than $1k I'll be happy. Just don't want to see a payment due of $2500 or so.

[MonkeyMama]

This is really difficult to figure without your wife's income/big picture.

Assuming she does not change anything:

$2500 refund will probably be a $1700 refund for this year - all else being equal. $800 Making Work Pay tax credit is gone. Withholding should automatically adjust for that, but doesn't always.

$1700 refund (expected in 2011, all else equal) divided by 25% tax rate = $6800

$6,800 divided by $3,700 (2011 exemption amount) = 2 more exemptions (er, 2 more allowances - same thing).

You can probably claim 8 exemptions this year (6 from prior year, plus 2 more), and break even. I'd probably advise claiming 7 and seeing how it goes this year. Make it 8 next year if you are still getting a refund. It's not an exact science - lots of ins and outs. This is just quick and dirty.

I presume your wife will lower her allowances to have more taxes withheld. For every allowance she takes away, you can add to your own for the same end result. For example, if she goes from 10 to 5, then maybe you can go from 7 to 12. IT should all mostly be the same in the end.

I live in California - I have found no rhyme or reason to their tax withholding tables. If you owed $40, I'd leave state as is. State withholding can be harder to manage.

[Cassius King]

My wife works part time and probably will make $10k this year.

It appears on the surface that I shouldn't be expecting a large tax bill from Uncle Sam next year. That's what I was the most fearful about. I guess I can fine tune it more once I run those calculations next year.

[MonkeyMama]

Then you are probably in the 15% tax bracket, and could claim even more allowances.

So, yes, I wouldn't worry about a big tax bill. That income + 2 kids and a mortgage means a pretty small Federal tax bite.

[Slug]

Apologies for the self-promoting link, but here's a post I wrote that might be helpful:

IRS W-4 Income Tax Withholding Optimization | Sunk Costs Are Irrelevant

[Cassius King]

If we need to have more withheld from my wife's paycheck do we lower the number of exemptions or make it higher?

[MonkeyMama]

lower the number of exemptions to withhold more taxes.

[Cassius King]

Thanks MonkeyMama!

[DKAS]

You may also increase your contribution to 401K if you can afford to. Evan a small percentage increase over six months should make some difference.