Lowering Tax Liability

[Preston]

For the past two years we have been having to owe the IRS a lot of money. I'm figuring it has to do with us claiming 1 exemption a piece on our witholding, so I will contact our employer about claiming 0. But i'm also looking at how we can reduce our tax liability for 2010.

Our income is roughly $65000. H&R Block and Turbotax (using estimated numbers based on last paycheck and the info I already have) puts us owing around $1800 altogether (on top of what was already witheld). We owed about $1500 last year. I thought this was just a freak accident, now I'm thinking I'm doing something wrong. Even with all the medical bills and mortgage costs and everything, it still works out better to take standard deduction. (Bought house in June)

Can I deduct the amount I owed the IRS for 2008 (paid in 2009) from our taxes?

Our income has grown for the past few years but this year most likely won't. I now have a Flexible Spending Account, and max out the 401k.

I am also figuring I can start doing a Roth and maximize those, but we're not out of debt yet. Should I just do estimated payments in Dec so I won't owe this huge amount (which may be subject to penalty!)

Any ideas will help!

[Greebo]

For the past two years we have been having to owe the IRS a lot of money. I'm figuring it has to do with us claiming 1 exemption a piece on our witholding, so I will contact our employer about claiming 0. But i'm also looking at how we can reduce our tax liability for 2010.

The rule of thumb I have heard for exemptions is 1 exemption is roughly $3,400 off of your taxable income. That means you are having taxes withheld as if you're going to have that 3,400 taken off - but then you aren't for some reason. So if you remove that exemption, that will knock - given your income - about $500 off your future tax bill in 2010.

Our income is roughly $65000. H&R Block and Turbotax (using estimated numbers based on last paycheck

STOP - don't use those numbers. Your gross pay from your last paycheck and your actual net pay on your W2 are going to be VERY different. So don't panic!

and the info I already have) puts us owing around $1800 altogether (on top of what was already witheld). We owed about $1500 last year. I thought this was just a freak accident, now I'm thinking I'm doing something wrong. Even with all the medical bills and mortgage costs and everything, it still works out better to take standard deduction. (Bought house in June)

That's a Turbo Tax decision? It suggested the standard deduction? That surprises me - but if you only started paying interest in August it could make sense.

What is your mortgage balance as of 1/1 and what is your interest rate? Use that to figure out how much of a mortgage tax deduction you'll get in 2010.

Can I deduct the amount I owed the IRS for 2008 (paid in 2009) from our taxes?

Not on the federal level, I think. However, your state may allow it.

Our income has grown for the past few years but this year most likely won't. I now have a Flexible Spending Account, and max out the 401k.

I am also figuring I can start doing a Roth and maximize those, but we're not out of debt yet. Should I just do estimated payments in Dec so I won't owe this huge amount (which may be subject to penalty!)

Any ideas will help!

I think you may end up not owing as much as you think. There was, for me last year, a 6% difference between my base gross income and my W-2 amounts, and I have no clue how they get to the W-2 numbers to be quite frank.

So I would suggest for NOW, only remove the exemption. Then when you have real numbers from your W-2, you'll have a better picture. After you get real numbers - play with it a bit. change your mortgage interest from what you paid in 09 to what you will pay in 10, for example, and increase the taxes you already paid in 2009 by 3,400 (the exemption amount) - just to see what Turbotax does.

Finally - if you think you will owe more - instead of having the IRS withhold it, take the money you estimate you'll need and each pay, put it in an interest earning account separate from all other accounts. Try ING or Schwab - and set up a payroll deduction to send the money, so you never have a choice.

After all - why should the IRS earn interest on your tax money when you could be?

[mombottoo]

Greebo has given you some good advice. But, I don't know of any state that will allow you to deduct taxes that you pay to the federal government. Do you qualify for the new home buyer's credit? That should help reduce your debt I would think. Do you donate money to any charities that you can claim on your Schedule A? Did you pay any points when you got your mortgage? Those things are deductible...

As Greebo said, if I were you I would wait until I had my actual W-2s in hand and then figure it out. If you are doing the TurboTax yourself is it possible that you are missing deductions you qualify for? Do a double check...

[beks37]

Make sure to see if you qualify for the homebuyer's credit. I'm not sure if this is your first house or not, but the homebuyer's credit is even for people not buying their first home.

We have owned a house for 5 years and we always have fewer itemized deductions, so we just take the standard deduction. Also, you can add up to $500 for single or $1,000 to the std deduction for property taxes paid.

With your 401K and Flexible spending account, that should take some off your taxable wages. Definitely wait for the W-2 before you jump to any conclusions.

[Preston]

The rule of thumb I have heard for exemptions is 1 exemption is roughly $3,400 off of your taxable income. That means you are having taxes withheld as if you're going to have that 3,400 taken off - but then you aren't for some reason. So if you remove that exemption, that will knock - given your income - about $500 off your future tax bill in 2010.


STOP - don't use those numbers. Your gross pay from your last paycheck and your actual net pay on your W2 are going to be VERY different. So don't panic!


That's a Turbo Tax decision? It suggested the standard deduction? That surprises me - but if you only started paying interest in August it could make sense.

What is your mortgage balance as of 1/1 and what is your interest rate? Use that to figure out how much of a mortgage tax deduction you'll get in 2010.


Not on the federal level, I think. However, your state may allow it.


I think you may end up not owing as much as you think. There was, for me last year, a 6% difference between my base gross income and my W-2 amounts, and I have no clue how they get to the W-2 numbers to be quite frank.


Finally - if you think you will owe more - instead of having the IRS withhold it, take the money you estimate you'll need and each pay, put it in an interest earning account separate from all other accounts. Try ING or Schwab - and set up a payroll deduction to send the money, so you never have a choice.

There is a difference between gross income and taxable income -- because health insurance, fsa, 401k are all pretax. So that would most likely explain the difference. I used the number as gross pay minus all the 401k and benefits and such. I do think I will still owe a big chunk of change. It also doesn't help that there are no local taxes taken out for Cincinnati (which is 2% I believe, but I am worrying about this last) so I will definately owe them.. but I'm taking this one step at a time.

I already came up with the idea of an ING account. I've thought about putting it in the credit union account (3.5% interest) but I'm leaning toward just keeping it out of my reach for this purpose. The wife is out and I will be talking to her about this when she gets home. I've already made her aware that we are going to owe.

And the First time homebuyer thing -- I already filed for it. I was allowed to do an amended return last year to claim the credit. Unfortunately, I was one of the lucky ones who got audited, which takes a long time. And since my wife and I filed separately for that year once they were done auditing me they audited her. It's taking about 3 months per audit and we're about two months into hers.

Oddly enough, the estimated time I figure I will receive the FTHB tax credit will be around April 15. I should have just waited.. but I didn't expect all this BS about it.

[Greebo]

Hmm. Sounds like you're in a "sucks to be you" situation wrt 2009 taxes then. Sorry dude.

How about the 2010 forecasting using a full year of interest - how is that looking?

[Telephus44]

The best way to avoid owing is to estimate your tax liability and then figuring out what your withholding should be. Just going with $65000, married filing joint for 2009:

65,000 - 11,400 standard deduction = 53,600 taxable income

Taxes owed - $7205

So if you're paid weekly, you should have about $140 per week taken out between both paychecks. Obviously if you know you have other tax considerations (401K will also reduce taxable income, you may have other things to consider too) you can figure out a number much closer to your situation.


Just look at the tax tables and stuff for 2010, and figure out what your liability is, and check to make sure your withholdings are in line. You can also have more taken out as an additional dollar amount - my withholdings are Married-2 plus an additional $185. It comes out much better than guessing if Married-Zero takes out enough, too much, not enough.



And yes, I use old versions of Tax Cut to play around with our taxes too to estimate things. We have a son in daycare, and our combined income is 116,000, so we're right at the cusp of getting or not getting certain tax breaks. So I use Tax Cut to play with different tax scenarios and see what works out best.

[Preston]

The best way to avoid owing is to estimate your tax liability and then figuring out what your withholding should be. Just going with $65000, married filing joint for 2009:

65,000 - 11,400 standard deduction = 53,600 taxable income

Taxes owed - $7205
t.

But isn't there personal exemptions that would lower the taxable income even further? I was under the impression there is. $3600/person or $7200 for both of us.

You have a much higher income, so you may not be eligible. I don't know... but that would lower it even further.

[NikoSan999]

I am undoubtedly in the minority on this however...I understand you are wanting to save some money doing this yourself BUT you could end up costing yourself by doing it yourself. Sometimes the less expensive can end up costing you.

Oldest daughter bought a first time in Tn in 2008. If I'm not mistaken ( I could be but don't think so ) the money was determined at tax time to be income and was taxed on it. I belive the first year was $7500. Like a credit card written off it was taxable income.

I'd suck up the tax preparer this time around and let them do it. No penalty, no interest. Then afterward, study it and see how they did it. I, myself, wouldn't chance it to save a little bit only to have it end costing more in the end.

Just me.

[dcompton]

I think I agree with NikoSan. Of all the people in the world you do not want On Your Case, the IRS tops the list, hands down. If you're already being audited by them for last year (if that's right - I read through the posts quickly), you have already attracted their attention. Personally, I would want to be sure it was perfect this year.