Tax Confusion

[lovelylulu]

This topic isn''t so much fun, but I am utterly confused about whether DH & I are going to get socked by the "Marriage Tax Penalty"

Here''s some information - DH & I currently make roughly the same salary and that combined salary decent. From what I''ve read, couples get penalized the most when they are in our situation i.e. similar salaries, are we at risk?

Does anyone know any more specifics about the penalty. Also, DH made some change at work, on his W2 perhaps, indicating his status as married. By doing so, does that mean that we''ll be forced to file jointly?

Am I correct in believing that we have the option to file jointly or seperately to minimize the pain?

I''m confused about the 2003 laws, whether they are still in effect in 2006, etc.

also, we have some student loans -- will those interest deductions help?

 

[Dee*Jay]

Lovelylulu - I'll do my best here to give you the basics, but please keep in mind I am not an accountant and nothing I say should be considered as tax advice.

The "marriage penalty" was created because the amount of the federal exemption that married couples was entitled to was less than two times the amount that single filers were entitled to. If I recall correctly this was corrected in recent years so now married filers get the same exemption as adding up what two single filers get.

But I think something else that you're also referring to is that if you and your spouse both work your combined income will be taxed at a higher rate than each of your individual incomes would be taxed at. For instance (and I'm making these numbers up in this example) if you both made $50K, were taxed at 20% and were not married (therfore filed individually) you would each pay $10K in federal taxes, for a combined total of $20K.

But, if you got married your combined income of $100K would be taxed at (my made up number of) 25%, therfore you would be paying $25K in taxes; $5K more than you would in the previous instance.

Wait--you're thinking--we'll just keep filing separately even though we're married and get the more advantageous rate of our separated incomes. Nope. Doesn't work that way. There is a whole 'nother rate that gets applied to "married filing separately" people that is even more disadvantageous than the single or the married filing jointly rate.

As for your student loans; you have the option of deducting a portion of the interest you pay, but only up to a certain income level.

There is a bunch of info on all this on the web. Unfortunately I have to bolt off right now so I can't provide you with any good links, and I had to use made up examples because I don't have time to look up the real numbers/percentages right now but if you're interested in the specifics let me know and I'll try to give you some links a little later.

ETA: Here are a few links. This one deals with the marriage penalty:

link and this one deals with student loan interest deductions: link

 

[moremoremore]

I have no idea about specifics, but I used to get money back b/c of my loan interest, but now, we have to pay every year....you really don''t get to use the puny $2500 interest max....I have to have extra taken out of each check so I don''t owe too much....

 

[curlygirl]

lulu, I wish I had some advice for you but I'm actually in a similar situation and am anxious to hear what others have to say!

My DH owns a business (self employed?) which really makes life difficult! I still haven't changed my W-2 tax status but my accountant said to either keep it as single or change it to married but withhold at higher single rate. And he said filing jointly is definitely the way to go but I'm not sure why!

I'm looking forward to hearing what others have to say on this topc--it's all so confusing! If I learn anything else, I'll let you know.

 

[Kismet]

IRS publications are really quite helpful and they''re generally written in relatively plain English and not legalese. Publication 501 deals with filing information. The link is to the 2005 edition, but I don''t think it''s changed overly much for 2006.

If you''re married, the IRS really wants you to file jointly. To encourage this in addition to the tax rates being somewhat worse, married filing separately severely limits or denies some deductions and credits.

Changing your withholding status to "married" doesn''t affect your choice in how you file your return. If you are married at the end of the year then your choices for filing are "married filing jointly" or "married filing separately". It''s been a long time since I''ve done individual taxes but I think "married filing separately" is only cost effective if you really are keeping two seaparate households (i.e. separated or getting a divorce or living apart for some other reason.)

 

[lovelylulu]

thanks for the information thus far.

I''m going to investigate some of the links and see if I can come to any clearer conclusions.

what initially brought on this question was that my husband changed his status on the W-2 and afterwards received a slightly larger paycheck each month. so, I''m thinking from what i just read, that might be setting us up to owe more at tax time?

moremoremore: how do you compute how much extra to be deducted each paycheck?

again thanks and i realize no one is an accountant!

 

[Becky P]

I do think you have a choice as to whether you file jointly or separately, but I''m not sure what all the rules are. www.irs.gov has LOTS of information and all kinds of publications to read and check out. I''d consult with a tax advisor to be sure that you get the lowest possible tax - and, that''s probably gonna mean doing paperwork for filing jointly and paperwork for filing separately and then seeing which one will be the best for the two of you.

I do know that student loan interest does have a line item on a tax return. I can''t remember what effect it has, but unless it''s an exhorbant amount of interest, I don''t think it will make a big difference.

Good luck and let us know what you find out!

 

[Kismet]

The IRS has a withholding tax calculation which you might find helpful. You can find it here.

 

[curlygirl]

Ooh lulu, I have a cool site for paycheck calculations. My HR department turned me on to this: www.paycheckcity.com. Very interesting stuff!

And I agree with what Becky said. My accountant said that he will run the calculations on both options--married filing separately and married filing jointly--and see which one comes out the best for us.