Income tax questions

Good afternoon all.
I just have a couple quick points and questions around income tax.
For the previous 10 years, ive averaged around 45-70k income.
This year I found a new job, that pays 135k + or - a little based on commissions.
When i started crunching numbers for my taxes it blew my mind.
If i file jointly with my wife we are on the hook for 46,000 in taxes
if I file single (if i was still) id pay 31,000 or so in federal income tax.
So doing the math, just because i make more money now, i will end up paying over $18,000 of that to the federal government. How is this possibly right?
What is more frightening, is taking a look at my paystubs, im only having around 850 per check taken out, and 1250 or so on commission draw weeks.
Its certainly not going to add up, and im claiming 0.
What in the world can i do to prevent a massive pay in come tax time .
Besides the obvious (get more deductions, and have more taken out)

EDIT : and the other thing is, people are telling us to file jointly, yet, the total fed tax paid if we do so is considerably less than we would pay together. so why would i want to file jointly? the deductions arent that fantastic
Thanks
Ryan

Well, an obvious answer for paying less taxes is to divert some income into a retirement savings fund: 401K I believe you call them in the US.

Find a tax specialist. They can advise you as to income averaging, tax shelters, and other such items. Don’t ask people on a message board. Their advice is worth what you pay for it.

I’m pretty sure thats how taxes are supposed to work .

You can’t compare filing jointly with filing as a single person, because you’re not allowed to do that anymore. You have to compare filing jointly with “married filing separately”, which is entirely different, and in most cases worse than married filing jointly. So that’s why people are telling you to file jointly.

Beyond that, I can’t help you because I don’t know your specific situation. Be sure you have taken into account all your exemptions and the entire applicable standard deduction or itemized deductions (whichever applies).

It is true that in many cases, couples end up paying more in tax after they get married than the did when they were single. That is the so-called “marriage penalty”. It tends to occur most severely when both spouses earn similar, high, incomes. On the other hand when one spouse earns much more than the other, especially when the other earns very little, there is a marriage bonus: Taxes are less after marriage. I don’t know what your situation is. But in any case, if you’re not real familiar with how taxes work, run it by someone who is.

we already put around 15% of our income in 401k, and i have a separate IRA as well.
doing some more legwork, i need to find out whether it will be more beneficial to itemize or to just do a standard deduction and take 11,400 there.
thanks for the advice so far. I am having a CPA do my taxes this year (bought a 2nd home, marriage, change jobs, geothermal rebate etc) so its a bit above me this year.
thanks

Not sure what you are complaining about. You added $65,000 to $90,000 in income, and have to pay $18,000 in taxes. That’s a marginal rate of about 25% to 20%. What did you think the tax rate was?

Marginal rate for that level of income in Canada (fed and provincial, like your fed and state) is typically 40% or more without deductions like your IRA; and Canadians cannot deduct mortgage interest (but don’t pay capital gains on sale of primary residence). Of course, that tax here would cover government health care too. Unless you are guaranteed that job for life, take the advice and start an IRA.

Plus, typically investing any of that income (outside an IRA) can create deductions - but that’s a whole complex topic that you need to talk to a tax specialist about.

Can you ask your employer to deduct more, or does it make more sense to invest the extra and pay when taxes are due? Plus, if your system is like ours, and you consistently owe serious dollars at tax time, the IRS will start making you calculate and pay installments quarterly or monthly -so get the deductions going. The IRS hate to hear “Sorry, I spent it all, I’m broke” a year later.

You could try playing around with one of the free online services - plug in assorted numbers and scenarios (if they allow you to do this).

If you’re married, it’s almost NEVER a better deal to file as married-filing-separately.

An income of 135,000 and tax bill of 31,000 sounds kind of high.

I pulled up a PDF of the 1040 for 2010 (http://www.irs.gov/pub/irs-pdf/f1040.pdf). There’s a personal exmption 3650 apiece or 7300 dollars total. That lowers your taxable income to 127,700 (this is your Adjusted Gross Income). This assumes no interest, dividends, pre-tax IRA etc.

Then there’s the standard deduction of 11,400 (assuming you don’t have enough expenses for mortgage, medical etc. to itemize). That brings your taxable income down to 116,300.

Using the “Married Filing Jointly” calculations at http://www.irs.gov/pub/irs-pdf/i1040tt.pdf, this gives a tax of 21,438.

Obviously there’s a lot I don’t know, like your wife’s income, etc. In general, I think married couples filing jointly, where both have income, will pay more in taxes than if you were NOT married and each filed as singles. If the wife doesn’t earn anything, you usually are better off as a married couple (because of 2 exemptions) than if you filed as a single person.

Not to be overly glib, but because that’s how the math works. You make about $60 K more times about a 30% tax rate = $18 K of additional taxes.

It’s actually 28%, not 30% but yeah.

And essentially doubling your income, you were probably paying a LOT less in taxes proportional to your income, than you will be with the raise in salary. It works something like this: you pay nothing on the first x thousands of dollars in taxable income (that’s the 116,300 figure from above), then 15% on the next x1 thousands of dollars of income, then 25% on the next x2 thousands, etc.

So (with totally made up figures and brackets) if you earn 100,000 dollars:
15,000 is tax free.
25,000 is taxed at 15%.
40,000 is taxed at 25%
20,000 is taxed at 28%.
So your tax is 0 + 3,750 + 10,000 + 5,600 or 19,350.
Going from 40,000 in income (tax is 3750 or less than 10% total) to 100,000 winds up in paying 15,600 more in tax. Your tax is now closer to 20% of your income.

Note: I am NOT a tax accountant (though my mother was one).

Oooh - this site has a calculator:
http://www.moneychimp.com/features/tax_brackets.htm

And to answer another question - if you’re legally married, and file as “Single” to pay less in taxes, you’ve committed tax fraud, and the IRS will punish you brutally. As mentioned above, you can file as “Married filing separately”, but that almost never helps.

Seconding the advice to see a professional tax preparer. They do this for a living, know the ins and outs of every tax law there is, and can get you deductions you’ve never even heard of. They can save you thousands of dollars on this years return, as well as give you advice for next year to avoid taking such a big hit.

Just to reiterate - the way the law is written in Canada - and I’m sure the US is similar:

Your employer is REQUIRED to deduct enough tax that you should not owe a big amount at the end of the year. If they ar not deducting enough, they could get in trouble.

Plus, for people who make income from sources that do not deduct (enough) - if you owe a large amount, they will make you calculate and remit taxes either monthly or quarterly depending on the amount. If you thought tax time was fun, wait until every month is tax time. Get your employer deducting correctly.

This is not correct in the US. You fill at a W-4 form, which your employer uses to determine how much to withhold from each pay period. If you fill out the form incorrectly, and the employer withholds too little because of that, then you are in potential trouble for having a large tax bill at the end of the year, not the employer. Since the form depends on information not available to your employer - things like number of dependents, deductible mortgage interest, spouse’s salary etc. - there’s no way for the employer to determine if the information you provided is accurate or not.

In addition to the 0 exemptions on your W4, you can also ask for a certain amount extra to be withheld if you would like. You could always do that yourself, and stick it in a bank account, but you won’t lose much interest these days, and it is often easier for the money to never be in your hands (which is exactly what the government wants! :slight_smile: )

But does the IRS like CRA (Canadian Revenue Agency) come after the taxpayer for more frequent installments if they habitually end the year owing a large amount?

We have a similar form, but without additional information about extra deductions, of course, the employer defaults to the basic “single person no special deductions” which usually means the highest taxes deducted. Like most government forms, it is illegal to misrepresent your circumstances to claim deductions you do not have.You can, if say you worked at 2 jobs, request additional deductions to be taken.