YNAB You Need A Budget

[jessiebird]

Every time I look at the tax tables I wonder where this marriage "penalty" is.

I never get that either. However, I know a couple that live together who are engaged but who won't get married because the female (a small business owner) said her accountant said it will hurt them tax-wise. I had to ask her how much it would set her back. I mean, if it's $500 a year, is that a good enough reason not to get married? $2,000? $10,000? What's the cutoff?

I can't remember if she told me what the estimated amount was, but I realize that she is a far better businesswoman than me; I would still get married regardless of the money.

[caligulala]

The "marriage penalty" everyone talks about can happen if joint income pushes a couple into the higher tax bracket. So if filing separately each person was in the 15% bracket, but filing jointly they are in the 20% tax bracket, they'll pay higher taxes. But I think that is very rare.

But! For most couples, this is only a consideration if one spouse hasn't been working at all. So stay at home parents returning to the workforce should consider whether their new salary will bump them out of their current tax bracket, forcing them to pay a higher rate on the increase in income. You only pay the higher tax rate on the amount of income that exceeds the cap for the previous tax rate, so it shouldn't be a HUGE difference in the tax paid. But if you include the other costs of returning to work (child care, etc) it could be enough to persuade you that going back to work isn't worth it.

[litterbug]

Thanks for the explanation! But a dual-income couple still has the option of filing separately and avoiding the higher tax rate, right? It would mean that only one would be able to take deductions for dependents, if any, but I'd think that would at least partly offset the increase in income.

Trust me, although I'm fine with paying taxes, I don't want other people to suffer from excessive tax burden (and by "people" I mean individuals, not businesses, because that's a whole other discussion).

[blackdiamond]

litterbug - the tax tables come out to exactly the same when comparing married filing jointly with married filing seperately (at least it did the last time that I checked). The reason that the tables are different is because the individual taxes have to be taxed higher per dollar when filing jointly because the combined income effectively moved the 2nd income way up the tax brackets. For example:

Income 1 is $10,000
Income 2 is $20,000
Combined is $30,000

If the tax brackes for filing jointly are 5% for $0-10,000, 10% for $10,001-20,000 and 15% for 20,001-30,000, the combined total tax would be the following:

10,000 x 0.05 + 10,000 x 0.10 = 10,000 x .15 = $3,000

If you filed seperately the taxes using the same tax brackets would be the following:

10,000 x 0.05 = $500
10,000 x 0.05 + 10,000 x .1 = $1,500
Total = $2,000

This would come out to $1,000 less than filing jointly so the tax tables for filing seperately are modified so that the final tax liability comes out to the same. I believe that the tax % stays the same and the high end of the income level for each bracket goes down.

Make sense?

[C_Anderson]

Ahh, taxes. Ever since getting married, my husband and I are still trying to get our withholdings right so we don't end up with a refund.

2009: We married in June, so were able to file as "married filing jointly". I had donated two cars that year, we were tithing 10% of our net income, and we were both working. Even with the donation of two cars and tithing, we still had to take the standard deduction. I believe that year was the most "normal".

2010: Filed as "married filing jointly". I sustained an on-the-job injury in January, putting me out of work. At first, the school district continued to pay me because they always pay about 1.5 months behind. They had an insurance company that paid a portion of my lost wages. It wasn't the government's "disability" whatever, but my income was not taxable. I hoped to make it back to work, but it never happened. We continued to tithe and contributed to another nonprofit, so our tax liability decreased. In addition to that, part of my husband's income was not taxable It is considered per diem, which is supposed to be like a reimbursement for expenses incurred while traveling on the job. Since we're pretty conservative spenders, we were able to take home $10k tax-free, which we also tithed on. As a result, the husband's withholdings were too high and we received a bigger refund.

2011: Filed as "married filing jointly". We bought a house in June, so suddenly, we could deduct mortgage interest paid. That, in combination with our tithing, on taxable income and non-taxable income allowed us to itemize for the first time. We ended up with a $3500 refund, which is WAY TOO MUCH! At least it jump-started our baby fund, which will come in handy between now and June when we set up the nursery.

2012: Our tax situation will change again, when we add a baby to the family. Everything else should remain about like it was in 2011 (we hope).

Our goal is to come out receiving or owing less than $100 by the end of the year. We keep playing with the IRS's withholding calculator to try to figure out how to adjust the W-4, but the tables must be off. I'm sure having some tax-free income (per diem) skews things, but really. Why is it so hard to get this right? Can't we just go to a fair tax, flat tax, or even just a sales tax??? It would make things so much simpler.

~Christina

[blackdiamond]

I think you're trying too hard to get it perfect. Your times worth something too! I wouldn't get too excited about the changes from adding a kid, I did that this year and I don't think it really made a significant difference for us. Our big refund was the result of my wife cutting back to part time and taking a few months off. Personally, I would rather have a $1,000 refund than have to pay anything. This year's refund was a bit higher than I would like, but I did enjoy budgeting it yesterday when it arrived.

[Turf_Hacker]

I would rather pay a small amount that I've been saving up for throughout the year...

[dpandslemmen]

Ahh, taxes. Ever since getting married, my husband and I are still trying to get our withholdings right so we don't end up with a refund.

2009: We married in June, so were able to file as "married filing jointly". I had donated two cars that year, we were tithing 10% of our net income, and we were both working. Even with the donation of two cars and tithing, we still had to take the standard deduction. I believe that year was the most "normal".

2010: Filed as "married filing jointly". I sustained an on-the-job injury in January, putting me out of work. At first, the school district continued to pay me because they always pay about 1.5 months behind. They had an insurance company that paid a portion of my lost wages. It wasn't the government's "disability" whatever, but my income was not taxable. I hoped to make it back to work, but it never happened. We continued to tithe and contributed to another nonprofit, so our tax liability decreased. In addition to that, part of my husband's income was not taxable It is considered per diem, which is supposed to be like a reimbursement for expenses incurred while traveling on the job. Since we're pretty conservative spenders, we were able to take home $10k tax-free, which we also tithed on. As a result, the husband's withholdings were too high and we received a bigger refund.

2011: Filed as "married filing jointly". We bought a house in June, so suddenly, we could deduct mortgage interest paid. That, in combination with our tithing, on taxable income and non-taxable income allowed us to itemize for the first time. We ended up with a $3500 refund, which is WAY TOO MUCH! At least it jump-started our baby fund, which will come in handy between now and June when we set up the nursery.

2012: Our tax situation will change again, when we add a baby to the family. Everything else should remain about like it was in 2011 (we hope).

Our goal is to come out receiving or owing less than $100 by the end of the year. We keep playing with the IRS's withholding calculator to try to figure out how to adjust the W-4, but the tables must be off. I'm sure having some tax-free income (per diem) skews things, but really. Why is it so hard to get this right? Can't we just go to a fair tax, flat tax, or even just a sales tax??? It would make things so much simpler.

~Christina

I try every year to get a $1,000 refund from the Feds and $500 from the State. This year (2011) thanks for all the adjusting they did to the withholding tables because of the "Make Work Pay Credit" (from 2010) I had to pay in $323 dollars to the Feds and we are receiving back $435.00 from the State. So we changed our Federal withholding rates to take out more. With all of the political stuff they are doing with the withholding rates I try to aim for $1,000 refund, that way I hope to never have to write a physical check to the "Internal Revenue Service". So far I have only had to do it twice.

[C_Anderson]

In WA we don't have a state income tax, so we just have to worry about federal income taxes and local sales taxes. We'd rather try to get the amount withheld as close as possible to the actual amount due--even if that means we owe a (very) small amount in the end. I feel like we can put our money to better use throughout the year vs. letting the government keep it like a zero-interest savings account, only to give back the money that was rightfully ours all along. It's worth a little effort.

It will be nice when someone figures out how to overhaul the tax system in the USA.

[ginwoo]

Getting the withholding right is a big bone of contention between DH and me..I believe in trying to get withholding so that you're within $500 +/-. I would much rather have that money throughout the year to put towards financial goals...

But NO.. DH wants to make sure we withhold to the tune of $5000 (on average) refund... This all started when we had a AMT scare one year and it looked like we were going to have to come up with an additional $4000. But Congress voted the adjustment and we were not impacted. But he feels we need to be ready just in case it happened again. I don't see that as likely since at the time we had a good income but no deductions (other than standard) and I got a HUGE bonus that year on top of my salary (not the norm).

We have since bought a house and I am not getting any kind of bonus like that year again but he refuses to adjust withholding... Drives me crazy!

The only good thing is that we have been using the refunds to do home improvement projects and since we get the lump sum can do a couple of little projects at once.

I still go "AUUUUUUGGGGHHHH" when I think about it.

[jessiebird]

The only good thing is that we have been using the refunds to do home improvement projects and since we get the lump sum can do a couple of little projects at once.

My husband is self-employed and is the primary breadwinner, so we don't see refunds very often (or for very much, even then). I keep hearing about how financially unwise it is to get a big refund, but I also hear from people that they like getting a big check every year. I can imagine.

But I was thinking about my nephew, who got about $3,500 back this year. That's like $300 a month he's paying in extra! That's a lot of money on his income, which is probably about $30,000.

For someone who doesn't manage money well, I can see the appeal of getting a big refund. But for someone who has a budget (or YNAB....) it would be nice to put the same amount aside every month. It would still be there in case of an IRS surprise, or a person could use it for projects after taxes were done and it turned out to be extra.... Or a person could pay down a nice chunk of debt (if they were unfortunate enough to be saddled with any) with that kind of money in the budget every month.

I don't think much of the concept of "you're giving the IRS an interest-free loan" when you get a big refund because, let's be honest, interest rates on savings account stink right now; for many people, over-withholding is like a nifty forced-savings plan that works for them. But it's not the only way to handle money, especially if it amounts to hundreds of dollars every month that could be put to better use, provided the person knows not to squander that money.

I wish we had the problem of getting a refund. Not gonna happen in my world!

[Turf_Hacker]

The only good thing is that we have been using the refunds to do home improvement projects and since we get the lump sum can do a couple of little projects at once.

My husband is self-employed and is the primary breadwinner, so we don't see refunds very often (or for very much, even then). I keep hearing about how financially unwise it is to get a big refund, but I also hear from people that they like getting a big check every year. I can imagine.

But I was thinking about my nephew, who got about $3,500 back this year. That's like $300 a month he's paying in extra! That's a lot of money on his income, which is probably about $30,000.

For someone who doesn't manage money well, I can see the appeal of getting a big refund. But for someone who has a budget (or YNAB....) it would be nice to put the same amount aside every month. It would still be there in case of an IRS surprise, or a person could use it for projects after taxes were done and it turned out to be extra.... Or a person could pay down a nice chunk of debt (if they were unfortunate enough to be saddled with any) with that kind of money in the budget every month.

I don't think much of the concept of "you're giving the IRS an interest-free loan" when you get a big refund because, let's be honest, interest rates on savings account stink right now; for many people, over-withholding is like a nifty forced-savings plan that works for them. But it's not the only way to handle money, especially if it amounts to hundreds of dollars every month that could be put to better use, provided the person knows not to squander that money.

I wish we had the problem of getting a refund. Not gonna happen in my world!

For somebody that doesn't manage their money well month-to-month, they're not very likely to wisely manage this sudden lump sum every year. Speaking from personal experience (before I started budgeting), I can say that these lump sum amounts are usually squandered.

While interest rates do stink, a small amount of interest is better than none. It also keeps you out of the position of not getting your money in a timely manner due to IRS delays. The same can apply even more with states. How many times has California (not picking on California, they're not the only state to do this!!) announced intentional delays in sending out income tax refunds due to budget shortfalls? I would rather hold onto the money and send it in when the time comes than to wait for the tax agency to get around to sending me my money...

[Kroneg]

Some of us get big refunds whether we like it or not. Not bragging here, but in my specific case our Fed refund was $2600. Almost all of that was due to the Child Tax Credit and Earned Income Credit - my withholding is currently running about $26/month (about $300/year). I could change my withholdings some more to get that $500 over the year, but you can fiddle with your withholdings all you want - the IRS will not pre-pay you those Credits. It's just a byproduct of our screwy tax laws.

That said, I rather like the big chunk-o-cash every February. Even if I could get the $2600 ahead of time, at 1% interest (what you can get in Savings accounts - at best), that's $26 I'm missing out on. However, by NOT having that money in the budget, I save way more than $26 by not spending it. Essentially what would happen is I'd see $200/month extra income - some/most of it would go to fund rainy-day or other savings categories, but I'm certain a chunk of it would be to "discretionary" spending. By simply not having it, I save money that would get blown on stuff I don't really need.

To Turf_Hacker's point - yeah, if you're not a good saver, you're probably not a good spender either. So many times I've seen folks get a huge refund, then go buy an ATV or big-screen TV, then wonder why they can't make the car payment. Oh well - that's not a problem for YNABers.

[ginwoo]

[/quote]
While interest rates do stink, a small amount of interest is better than none. It also keeps you out of the position of not getting your money in a timely manner due to IRS delays. The same can apply even more with states. How many times has California (not picking on California, they're not the only state to do this!!) announced intentional delays in sending out income tax refunds due to budget shortfalls? I would rather hold onto the money and send it in when the time comes than to wait for the tax agency to get around to sending me my money...[/quote]

Amen to that! Maybe I'll get DH on the YNAB bandwagon (so close!) and we can stop this ridiculous practice.. Thanks to TurboTax, I was able to see what our average tax was for the last 5 years and which included some up and down years income wise and I have a pretty good idea of what we should be withholding... DH is looking for a new job so when he gets it will be the perfect opening for renegotiating withholdings...

[WairereRose]

We don't have the option to adjust withholdings here, we use different tax codes for different employers which is supposed to adjust the amount of tax paid to the right amount and it's generally pretty close. For me the current situation is that I am running a business (supporting it as it gets off the ground) and the losses it makes are deducted from my taxable income so that ultimately until the business hits a profit situation (hopefully next year) I will get a refund of taxes paid due to the gross income being reduced by the loss.

For people with only earnings from an employer the taxes are generally pretty much spot on and no adjustment is required, but sometimes there is a small refund of a couple of hundred. There are little tax booths in the malls where they will do a quick calculation and see if you get anything like that back, and they charge about $50 for the service - unless you get nothing back and then it's free.