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I'm hoping the collective knowledge on this board can help me sort through my thoughts regarding this tax year.

I've had a few big changes this year- I got married in October, and bought a house in August. Both of these have income tax implications, which I knew would happen, but the severity of this situation caught me off-guard.

My wife and I are both employed, earning ~35,000 and ~44,000 respectively. We have no children, and each put 15% pre-tax into tax-deferred retirement accounts- a 401(k), 403(b) and a NC State Employee employer-mandated pension. Neither of us have an IRA, yet.

While I've been withholding at the single rate and 0 allowances, somehow my wife has been withholding at the single rate with 3 (3!!!) allowances. I'm blaming it on her terrible HR department.

Since we bought the house so late in the year, we won't have paid enough interest ($2400) to benefit from itemizing.

After running our numbers through the IRS withholding calculator (http://www.irs.gov/individuals/article/0,,id=96196,00.html), it says that our estimated tax is $7000, but we're only on track to withhold $5300. That will leave us with $1700 due with the tax return in April! The calculator then goes on to suggest setting our allowances to 0 and withholding an additional $466 from my biweekly paycheck and $728 from her one remaining monthly paycheck.

This is not the way to go into Christmas season with a merry outlook.

So I'm pondering a few things:
I know there is a penalty for underwithholding. Is our underwitholding of $1700 going to trigger that penalty?

We have a small (~5000) savings that we were anticipating growing into an e-fund of 15,000 over the next year. Should we, instead, use that savings to fund an IRA with the goal of further reducing our tax while boosting retirement savings?

Perhaps we should crank up our withholding for the next month and live off our savings (withholding an additional $1700 over the next month is going to kill our budget).

Obviously we need to change our allowances and withholdings on Jan 1 for the 2006 tax year.

I also have a small (~4000 at 8%) credit card debt from our honeymoon and some reimbursed business expenses that I was planning to pay off between now and february.

Did I miss any options? Anyone have suggestions? Thanks in advance for being such a great community.
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