Tax question

[frugalredhead]

Hi all, long time no see! SO last year we wound up owing about $800 in taxes, so I had extra taken out of my paycheck from my part time job. Thank goodness I did, because both of our incomes increased to the point of losing some tax credits, and we STILL owe $1000 this year.

What is my best plan of attack for next year? Our salaries will be higher in 2016 than 2015 (I got a large promotion that only went into effect in August).

Should I just have extra taken out of my check? Should I contribute more to my 401K? We are still working on paying off debt so I am only contributing up to my company match right now (6%).

Anything else I'm not thinking of?

Thanks for the help!

[Nutria]

I'd examine your W-4 to see if you're claiming too many dependents.

[Like2Plan]

I've had pretty good luck with the IRS tax withholding calculator.

Here is a link: https://www.irs.gov/Individuals/IRS-...ing-Calculator

[frugalredhead]

Thanks, I will try that calculator. I know we have the right number of dependents on our W4s, I think it's really my second job that is making all the difference, because we had never owed before last year.

My biggest question is should I just have more withheld (i.e. giving it to the IRS) or is it better to increase my 401K (i.e. give the money to myself instead, and have lower taxable income).

[Jluke]

My biggest question is should I just have more withheld (i.e. giving it to the IRS) or is it better to increase my 401K (i.e. give the money to myself instead, and have lower taxable income).

I am in a similar situation. I went the route of increasing my 401k to reduce my taxable income. I may also change my W-4 later this year.

I believe that there is an option to contribute a certain dollar amount (in addition to what is taken out) towards your federal taxes with each paycheck. say $25/pay (assuming 26 pays per year).

Also, be aware that you may have to pay in quarterly to the IRS if you owe above a certain amount at the end of the year. If above that amount, I think there is a penalty.

A quick google search or visit to irs.gov can confirm if what I wrote above is correct.

What is your W-4 - married, x? (x is dependents). maybe you have one too many listed

[autoxer]

Thanks, I will try that calculator. I know we have the right number of dependents on our W4s, I think it's really my second job that is making all the difference, because we had never owed before last year.

The number of allowances you claim on your W4, just instructs them how much tax to withhold. It doesn't need to match the number of dependents you claim on your 1040. It also doesn't matter whether the first employer or second employer withholds more, it all ends up in the same place on your tax return.

My biggest question is should I just have more withheld (i.e. giving it to the IRS) or is it better to increase my 401K (i.e. give the money to myself instead, and have lower taxable income).

I would always prefer to lower my tax liability, then to increase my withholding, but your question is really about balancing your priorities between retirement saving and paying off debt. Do you want to shift $ from paying off debt and put more towards retirement?

[creditcardfree]

Do you know which tax bracket you are in? The higher bracket the more tax benefit you get now by contributing to a 401K.

[frugalredhead]

I looked it up and we're in the 28% tax bracket. I think we were only in 25% last year, we're only a few thousand over the line.

Sorry, I meant allowances on my W4, not dependents. The W4 calculator, using the multiple jobs worksheets, says we should be declaring 2 exemptions. I have 2 on mine, and hubby checked and only claimed 1 allowance on his.

Paying off debt is my #1 priority right now, but if I'm going to have to give that tax money to somebody, wouldn't it be better to give it to myself instead of the IRS (by increasing my 401K and lowering my taxable income)? If I leave everything the way it is, sure, I get more in my paycheck, but then every February I have to stop my debt snowball to pay a big (to me) tax bill. I'll have to look up at what point the IRS starts making you pay quarterly tax payments and charging penalties. I don't owe a lot in the grand scheme of things (owe $1800 federal and getting a $800 state refund).

[autoxer]

If you are in the 28% tax bracket, then you should be maxing out the 401k. Unless the debts have really ugly interest rates, then just take the full tax break for the 401k.

[frugalredhead]

If you are in the 28% tax bracket, then you should be maxing out the 401k. Unless the debts have really ugly interest rates, then just take the full tax break for the 401k.

Really?? I had thought I should only be contributing up to my company match until the CC debt is paid off. Some of my CC debt is at high as 12%, but most is currently at 6.99% or lower. I should have it completely paid off in less than 2 years.

Edit: Sorry, I made an error! I was looking at my total income, not taxable income. I am in the 25% tax bracket (taxable income of $108K). Last year our taxable income was only $98K, hence the reason we owe again this year, even though I had some extra withheld from my check in 2015. I found that for 2016, the 25% bracket is $75,300 to $151,900. Even if hubby and I can't contribute enough to our 401K to bring us into the lower tax bracket, should we still be maxing it out to reduce our overall tax bill, or is it not worth it if it doesn't lower your tax bracket?

Thanks for the help!

[autoxer]

You don't do it just to try and get into a lower tax bracket, you do it to reduce your tax liability. If you have a debt problem then that should be your priority. Just adjust your withholding to an appropriate amount and continue to knock out the debt. When the dent is gone, then you can max out the retirement accounts and reduce your taxes.

[tripods68]

We've always kept our allowances to 0 for since we been married. I hate owing money to anybody, thus always received refund.

[Nutria]

We've always kept our allowances to 0 for since we been married. I hate owing money to anybody, thus always received refund.

So you've been loaning the Feds lots of money instead of using it yourself.

[tripods68]

So you've been loaning the Feds lots of money instead of using it yourself.

Actually I think of it more like "funding" our vacations each year.

[LivingAlmostLarge]

I'd like to get a refund of $200 or so. Instead we usually owe.