W-4, 401k 403b contributions: Tax Questions?

W-4, 401k 403b contributions: Tax Questions?
I have some questions that hopefully somebody can shed some light. 1. On my W-4, do I use my wage basis as my salary minus my 401k / 403b contributions? For example, if I make $27k annually and contributed $5k to my 401k / 403b, do I base my wage as $22k? 2. Lets say my spouse makes $65k annually. On his W-4, he took an additional deduction of $120 after doing the calculations on the back (2 Wage Earner Household). Do I also add a $120 deduction on my W-4? As a side note, it seems that with both of us working, we're only bringing in an additional $300 or so a month compared to him just working by himself. It just doesn't make sense to me. Just because I'm working now, his paycheck's tax deductions doubled. I don't think an extra $300 a month is worth the stress that I go thru. Can someone help make some sense with the tax numbers for me? When our household was only making a gross of $65k annually, his taxes liabilities were lower. I expected it to go up when I started working, but doubling the amount of tax liabilities is just crazy. I mean if I bring in an extra $27k gross, our combined salary should be $92k gross annually. But why is it that our combined net wages per month are only about $300 more than before? Are there some other ways that we can reduce our tax liability? Thanks!


Answers:

rwbsvc:  Go to this link and try to figure your personal scenario http://www.irs.gov/pub/irs-pdf/p919.pdf
2008-03-07 18:35:31
AnnieG:  Use an online w4 calculator - makes the number crunching easier.
2008-03-08 01:19:32
Brian J:  1. Yes. They're looking for taxable income. Use "gross salary minus (whatever pre-tax dollars your employer withholds from you paycheck) = wage basis. 2. (Can't help you on this one.) What my wife and I did was to estimate what our tax bill would be (based on our respective AGIs). Then, we both simply filed our W-4s as "Single" with 2 allowances. For both of us, that was enough to bring us to within a few hundred dollars of our tax liability. Regarding your other comments..... I wouldn't look at it from the viewpoint of "...his paycheck's tax deduction being doubled." The old saying is that "It doesn't matter what you make; it's what you keep." So, if the net amount of what you and he are making is what you need to meet your expenses, then you should work. If financially, you don't need the extra money, then you should decide whether or not you want to work. But, I wouldn't stop working just because I have to pay more taxes. (That's the way -- unfortunately -- our tax system works. The more you make, the higher "percentage" you pay.) Regarding the doubling of your tax liability. The answer is because your $27K moved your up into the next higher tax bracket. Here's what happened: Previously, your joint tax liability was based on just "his" income. At $65K gross income (and a few thousand less than that for his taxable income), you both (married filing jointly) would be in the 15% tax bracket. Then, with you working, and you bringing in $27K per year, that definitely bumped your combined incomes up into the 25% tax bracket. (Not quite the "doubling" that you mentioned but, pretty darn close.) If you look at the 2007 IRS Publication 17 on page 264 (see the source below), you'll see a few tax tables. Take a look at the table for "married filing jointly" (Schedule Y-1) and you'll see how an increase in income affects your tax bracket. (But, also realize that when your husband gets a pay raise, that could also bump him up into that higher tax bracket. And looking at his income right now, he's pretty close to that 15%/25% tax bracket line.) What you might want to consider is to see what your tax liability looks like if you were to both file your taxes "married filing separately." Depending on your unique situations -- and especially when a couples incomes puts them right on the borderline of the tax brackets -- it might make since to file separately. (My wife and I do that.) Now, you might lose some tax deductions that might make it not worth it but, the only way to find out is to do the calculation and see which way benefits your household the most -- "married filing jointly" or "married filing separately." Also, consider the state taxes that you have to file. For example... My wife and I are in Ohio. Ohio has tax brackets structured like the federal tax brackets. So, the more we make (jointly), we get moved into the higher state tax bracket. But, we found that if we filed separately, we both remain in the lower tax bracket. The savings we get from filing separately at the state level more than offsets any hit we have to absorb from filing separately at the federal tax level. Hope all that helps.
2008-03-08 04:40:02
Chosen Answer
Judy:  You don?t put your dollar salary on your W-4, so I?m not sure what you are asking in 1. or 2. On the worksheets where income is asked for, yes use the amount after deducting the 401K contribution. If you are grossing $27, 000, then the extra after taxes is a lot more than $300 per month. Your extra federal income tax on a joint return due to your income would be around 25% or probably a little less than that. Depending on where you live, state and local income taxes could add up to 10% (most places, less) to that. That would still leave around $17.550, or $1462 a month, extra after tax. Sounds like maybe he is having a lot more deducted than he needs to now if so, you?ll get that back as a refund so you can?t count that. But only you and your husband can decide whether the extra money from you working is worth it.
2008-03-08 10:01:38