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I'm looking for some basic advisement regarding how marriage might change one's tax situation. DF and I are marrying next month and I want to make sure we're well-situated this year to avoid an unpleasant suprise from the IRS next year.

Background: We're going to have a combined income of somewhere around $140K gross this year; currently he puts about $4500 a year into his 401K (6% - just enough to get the match, we're also paying down debt). I'm starting a new job and don't know yet whether I'll qualify for a match in their 403B; in the past I have just contributed to a Roth IRA. We pay a couple thousand in student loan interest, and don't own a home. We have always taken the standard deductions because we don't have enough to itemize.

According to the IRS Tax Calculator, we should be claiming 0 deductions and witholding about another $500 a month from our gross pay to cover our tax bill next year. I have no reason to doubt the accuracy of the calculator, but it just comes as a shock to me, having always claimed 1 deduction, not withheld anything extra, and come out more or less even at the end of the year. Guess married life is different!

Anyway, I'm just checking in here to see if there's anything obvious I've overlooked in our tax situation, or if we should go ahead and adjust our W2s to reflect our new tax situation.

I'm just glad we're getting married early in the year! If we had had a fall wedding, I probably wouldn't have given this a second thought and been stuck with a huge tax bill next year.
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Is the calculator recommending you fill the W-4 'married filing jointly' and then doing that? That very well be much the same thing as filing 'single' and claiming one exemption.

The thing is that the 'MFJ' brackets are much greater, but when you have two of you working, that effect is basically removed - so you'll need up up your deductions just to stay where you are (unless you keep your W-4 as single, which is an option too).

Two people working getting married should leave them in roughly the same shape, all told. You might see some minor different after a taxable income of $130K or so, but it'll be small for a while (remember after the standard deduction and personal exemptions, you're definitely not of $130K worth of taxable income).


What I would suggest you do, if you really want to be sure, is the following:
Take your expected gross income, subtract the MFJ standard deduction and two personal exemptions (unless you expect to itemize or have some reason to suspect fewer (or greater ;) ) number of exemptions). Also subtract 401K contributions and anything else you expect to deduct.

Then use this page to calculate your total tax due for the year on your MFJ income (it also shows deduction and exemption numbers):
http://www.edwardjones.com/cgi/getHTML.cgi?page=/USA/resources/tax/brackets_this_year.html


Then, go to PayCheckCity.com and use their Paycheck Calculator (under Personal Calculators). Enter your information, as well as your intended W-4 information, and see how much it tells you will be deducted per pay period. Multiply that times your number of pay periods in a year and see if its about right.


Oh, and congratulations!
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Thanks Delta.

I did try what you mentioned, and it came to within $600 of what the IRS calculator said we would owe, so it looks as though it's pretty much right on. This is the first year that I am "moving on up" into the 25% tax bracket as well (based on my income, not by virtue of the marriage), so I guess part of the adjustment is getting used to the bigger bite overall.
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bethdig writes (in part):

We have always taken the standard deductions because we don't have enough to itemize.

I reply:

I suspect that may change. I see from your profile that you live in California. At your income, California's taxes are high enough that state taxes alone may well get your itemized deductions high enough to exceed your standard deduction. --Bob
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Bob,

Can you explain this a little further? I've never had a high enough income to have to think about it before. So do you get to write off the full amount of your state taxes on your federal return?

In that case I think you may be right - say, if our taxable income in California is $125K, our state taxes owed would be $11,625 (9.3%). Could that whole amount then be deducted on our federal return?
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State income, VLF fee part of car registration, and chartible contributions are Schedule A deductions. Taxes do not decrease until the Schedule A deductions exceed the standard deduction.

Debra
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In that case I think you may be right - say, if our taxable income in California is $125K, our state taxes owed would be $11,625 (9.3%). Could that whole amount then be deducted on our federal return?

The 9.3% is the highest rate, so the state taxes owed is not quite that high. There is an example in the CA tax booklet, MFJ with income after CA MFJ std. deduction = $125,000 (That might not be too different from your married situation since the MFJ std deduction is $6820)

The state taxes in the example end up being $7367.70



Hohum
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Hmm, I don't follow because the highest tax bracket, 9.3%, kicks in at around $40,000 so we will definitely fall into that bracket. But I will take a look at the CA tax booklet that you mentioned.
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In that case I think you may be right - say, if our taxable income in California is $125K, our state taxes owed would be $11,625 (9.3%). Could that whole amount then be deducted on our federal return?

The amount of state income paid during the calendar year is the amount that is deducted on Schedule A. If you receive a refund, the amount of the refund that resulted in a tax deduction is declared as income the next year.

Debra
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Hmm, I don't follow because the highest tax bracket, 9.3%, kicks in at around $40,000 so we will definitely fall into that bracket. But I will take a look at the CA tax booklet that you mentioned.

The 9.3% rate only applies to your income above the ~$40K threshhold. Your first $40K of taxable income is taxed at rates below 9.3%. Tax rates are marginal. That is, they only apply to the last dollar of income. When you reach a new tax bracket you don't go back and tax all the earlier income at the higher rate.

Ira
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bethdig writes (in part):

So do you get to write off the full amount of your state taxes on your federal return?

I reply:

To be precise, the state income taxes that you and your husband pay this year will be an itemized deduction. This will prove to be a tax benefit if your itemized deductions exceed your standard deduction. --Bob
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Let me add to my previous post that your CA SDI tax (and the portion of your car registration that constitutes an ad valorem tax) are also itemized deductions. Other common itemized deductions are charitable contributions and medical expenses in excess of 7.5% of your AGI.

If you buy a house this year, interest payments on the mortgage and points paid for acquisition debt will also be itemized deductions, but if you live in Los Angeles, buying anything decent is asking a lot on your income. I live in Los Angeles myself, but I was fortunate enough to get married in 1997, so that's when we bought. Fortunately for us, that turned out to be the bottom of the market. If we had to buy now, I doubt we could afford it. --Bob
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bethdig--
Hmm, I don't follow because the highest tax bracket, 9.3%, kicks in at around $40,000 so we will definitely fall into that bracket. But I will take a look at the CA tax booklet that you mentioned.

Ira--
The 9.3% rate only applies to your income above the ~$40K threshhold. Your first $40K of taxable income is taxed at rates below 9.3%. Tax rates are marginal. That is, they only apply to the last dollar of income. When you reach a new tax bracket you don't go back and tax all the earlier income at the higher rate.


BTW, that marriage issue comes into play again!
9.3% kicks in for TI
over 43,467 (if filing single)
over 86,934 (if married filing jointly)
over 59,166 (if filing Head of Household)

See page 26, CA 540/540A tax booklet


Hohum

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Hmm, I don't follow because the highest tax bracket, 9.3%, kicks in at around $40,000 so we will definitely fall into that bracket. But I will take a look at the CA tax booklet that you mentioned.

I'm not sure in all of this whether anyone has mentioned that you need to do the same analysis of your state withholding that you did for the Federal.

As for the itemized deduction stuff, it will take care of itself when the year is over. Just keep the good financial records you should already be keeping.

Phil
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According to the IRS Tax Calculator, we should be claiming 0 deductions and witholding about another $500 a month from our gross pay to cover our tax bill next year. I have no reason to doubt the accuracy of the calculator, but it just comes as a shock to me, having always claimed 1 deduction, not withheld anything extra, and come out more or less even at the end of the year. Guess married life is different!

Best wishes on your upcoming marriage! And congratulations on considering the financial implications.

When VickiSpouse ran the numbers before we got married, the marriage penalty was high enough that I tried to talk him into just having the party and not making it legal. Taxes were one factor in me deciding to stay home with the kids.

Vickifool
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