Federal Income Tax Question - HELP

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Q. My wife and I both claim "1" exemption on our respective W-4's. We file our return jointly. This year the % of salary which was withheld for federal income taxes was to approx. 13%. We both are in the 50-60K salary range. Last year, with similar salaries and the same W-4 exemptions, the % was closer to 20-23% withheld. We work for separate companies. It was explained to me that the reduction was due to the "Tax Break" passed earlier in the year by Congress and the President. Last year, we received money back. This year we owe a sizable amount of money. Why? None of our deductions, salaries, or other income has had large changes. Our "other income" (interest, etc.) is low.

A. It sounds to me like you have fallen into one of the most common traps for married couples. When you prepare your W-4 at work and tell your employer you are Married, Claiming 1 exemption your employer withholds Federal tax at the rate of 10% on the first $12,000, then at $15% on the next $34,700, then at 27% on the next $66,150. Your spouse's employer does the exact same thing. Both employers disregard income earned by the spouses of employees. To simplify this example, let's consider you and your spouse separately for amoment when you file your joint return. Let's also assume that your taxable gross was $50,000 each, you both filed W-4s stating Married with ZERO exemptions. This is an oversimplified example, but it should illustrate your situation. You have a combined income of $100,000 and pay tax as follows: The first $12,000 = $ 1,200 The next $34,700 = $ 5,205 The next $53,300 = $14,391 Total tax is then = $20,796 But your withholding went like this: Your first $12,000 @ 10% = 1,200 spouse's first $12,000 @ 10% = 1,200 Your next $34,700 @ 15% = 5,205 Spouse's next $34,700 @ 15% = 5,205 Your remaining $3,300 @ 27% = 891 Spouse's reaining $3,300 @ 27% = 891 Total Withholding was therefore = $14,592 Total tax however was = $20,796 BANG - you are short = $ 6,204 Married couples need to be very careful when the prepare their W-4s.

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