Very basic tax question

Before getting into my taxes too much I wanted to start out with the very basics.

Off mine and my wifes W2s I took our combined taxable incomes. Then I looked up a 2009 tax table for married filing jointly. It gives me what our tax should be.

Does this tax amount include ONLY federal tax, or is it federal tax + FICA (SS & medicare)?
In other words if the tax table shows I owe $25K this year and I want to compare it to what was withheld, do I compare it to FED tax witheld, or FED tax + SS + medicare withheld?

I’m a little confused by your question, but I think what you are asking is if you can include FICA & Medicare tax withheld as counting toward your taxes owed, correct?

If so, the answer is no. Federal tax withheld will count (and any overpayment will be your refund). Your W-2s should have separate boxes, box 2 will have federal tax withheld, boxes 4 and 6 will have medicare and social security withholdings. Only box 2 (added from all w-2s and 1099s) should go onto line 38 on the federal 1040 (if that is the form you are using).

ETA: But your taxes owed will not necessarily be based on your combined total income. It will be based on adjusted gross income, which is sometimes a lower tax rate than just adding both gross incomes together.

Wow. That really sucks for me then.
The tax table says we owe ~$25K.
The added up box 2s = ~$15K.
We both claim -0-. How can our withholdings be so far off?

That sounds wrong to me (and I am not a tax specialist by any means, so don’t take my opinion as proof of anything). Have you figured your taxes per the forms or have you just looked at the raw numbers?

I do my taxes by hand, then using TaxAct (by hand first to get a general idea and to make sure the numbers match up) and TaxAct found some credits I didn’t know about this year…of course my paranoia sent me to to make sure before I actually filed, but it was right. Maybe you could run your taxes through TaxAct just to make sure. It’s very fast and free, and you don’t have to use it to file, so you don’t really have anything to lose.

Don’t forget that you subtract your deductions (either standard or itemized) and your personal exemptions from your income before looking up your income in the tax table.

The FICA and Medicare are taken from your paycheck, never to be seen again. There is FED withholding and State or Local withholdings, if any also taken out. I beleive that the FED taxable amount does not include the FICA or medicare withholdings. That lowers tthe taxable income right there. There are also personable exemptions for you and your spouse, as well as any children you may have. If you itemize, State and local income taxes or sales taxes, any property taxes, investment losses may be written off to lower this amount. You actually need to go through the return to figure out the tax owed and cannot just look at the gross figures. Thank your congressman.

Did you and your wife have only one job each or was the income split up over several jobs? Working several concurrent lower paying jobs will leave you under-withheld compared to one job that pays the same.

As others have pointed out though, you need to run the whole return including deductions, etc.

Yes, once I run all the deductions throught it (mortgage interest, equity loan interest, property taxes, one kid, daycare expenses, new windows) I can whittle the amount down to owing $1400. But I don’t know why I had to start $10,000 in the hole when we both claim -0-.

You didn’t really start in the hole at all since the taxes are based on income after all deductions.

It sounds like what you did was looked at the gross income, no deductions and the taxes that would apply if that were your taxable income with no credits/deductions/etc. (which it wasn’t) so in essence you were looking at the wrong taxes owed amount.

So now it looks like you have overpaid by $1000 or so which sounds more on target.

  1. Did you include your personal exemptions ($3650 each, I believe)?

  2. You didn’t really “start $10,000 in the hole.” Besides personal exemptions, there’s a standard deduction of $11,400, such that even if you didn’t have mortgage interest, property taxes, etc, you can deduct another $11,400 from your income.

  3. Are you sure you have all your deductions accounted for? State & local tax, for example, is missing from your list.

  4. Even so, a married couple where each makes near half the total household income can fall into a gap in the progressive tax, because each spouse has tax witheld at a lower tax rate than the actual rate of their combined income.

Wrong. Just wrong.

He itemizes; quite frankly, I’m confused as to why this question even came up – why would anyone even bother calculating the tax before subtracting deductions? Nonetheless, it’s a fact of life that dual-income couples are under-withheld; it’s just the way the tax rates work. When I filled out my W-4 in such a situation, I always requested that an extra $10 be taken out of every paycheck, just for this reason.

Exactly: Looking up your tax in the table before subtracting deductions and exemptions produces a scary, but meaningless, number.

TurboTax at least gives you a running tally of what you owe, which goes down a lot when you fill in the deductions part.

Perhaps he is confused by the separate boxes on the W2 for wages and FICA wages. They diverge once you hit the annual FICA limit, but it sounds like he never has gotten to that point.

This is not really true. The problem is that there’s a whole second page of calculations for married couples where both work. Most people don’t do that. They take one allowance for themselves, one for the spouse and call it good at M-2. If they go to the second page (or even follow the optional advice on the first page), what they’ll usually find out is that M-1 is most appropriate for them.

But asking for an extra $10 is probably a simpler solution than wading through the convoluted second page of the W-4.

As for the OP, and to emphasize points already made: You are not taxed on gross income or even adjusted gross income. You’re tax on (surprise!) taxable income. Taxable income is AFTER adjustments, itemized/standard deductions and personal exemptions, which means that most married couples don’t pay any tax on the first $20,000 in wages.

How old are you and your wife, how long have you been married, and how long have you been filing taxes?

If your total tax liability is $40,000, it means your taxable income is about $185,000. One way you can substantially under-withhold is to have two incomes which individually are not in a high bracket but collectively push you into a much higher marginal tax rate.

Tax on 90,000 of taxable income for married filing jointly is about $15,000, so the break-even withholding would be about $1250/month. If a couple each made $90,000 of taxable income, though, their total tax bill would be almost $39,000 on $180,000 of taxable income because their combined income puts them into a much higher marginal rate. In such a case each individual should have had closer to $1625 taken out each month; not $1250.

Your numbers are so far from reality I do not know what happened.

They may also diverge if there’s flex-spending money
or 401(k) withheld. I just looked at mine, and as far as I can tell the health-care spending money is not subject to FICA or income tax, and the 401(k) money is not subject to income tax (but is subject to FICA).

To the OP, you should definitely try plugging your numbers into one of the online tax filing tools. Even if you can’t file for free, I believe the online access itself is free for data entry (then you pay if you want to e-file or print or something).