It was an innocent enough Saturday.
No dark clouds or creepy music to foreshadow what was about to happen.
My newlywed husband and I were celebrating almost a year out in the “post-college world” by sitting quietly on our apartment floor, leaning back on my pastor’s hand-me-down couch — a very worn, very 70’s memento of grad school — and organizing all our forms in neat little piles.
We were about to become true citizens of this country — we were doing our taxes.
And, to be honest, it wasn’t as intimidating as we had been led to believe.
There were our W2s to tell us how much we had earned and how many taxes we had paid. Here was the 1040 to tell us how many taxes we owed. We were sure that everything would even out. After all, our employers had been dutifully taking chunks — rather large chunks, we thought — of taxes from our paychecks. Nothing left to do but fill out the form and send it on its way. No worries.
We followed the form step by step. Read an instruction or two. Plugged the numbers into the calculator.
But then something went terribly wrong.
We hit the equals sign. And a number — a horrifyingly large 4-digit number — popped up on the screen.
We stared at the calculator.
It stared right back.
We turned to each other, giving nervous, sheepish little grins. Well, that can’t be right. We’d been paying our taxes every month. Must have screwed up. Time to double-check the math.
Punch, punch, punch. Equals sign. And again, the number popped up.
We were getting antsy. No more leaning back on the couch. We were up, hunched over the forms, checking every number on every line. I could feel the frown lines etching into my forehead. I’m too young for Botox!
Triple-checking the math. Again, the calculator stared back.
It said we owed the IRS four digits. I could almost hear the calculator laughing at us, mocking our ignorance. So you thought you had paid your taxes? Ha, ha, ha. Think again.
But the calculator was right. We owed, and we owed big.
Now, no one wants to go shouting from the rooftops that they can’t afford a new sofa because they just got walloped by the IRS. Certainly not us. But we were shell-shocked.
Did anyone else go through this? Was this some sort of horrible initiation that the “members” don’t tell you about but gloat over once you’ve gone through it too? Was it going to be like this every year?
We put out a few tentative feelers.
Yeah, we kinda got hit hard this year. Weren’t expecting that.
Like a fisherman casting bait, we were hoping — praying — someone might bite and let us in on the secret.
“Oh yeah,” nodded all of our friends. “Us too.”
“I remember that,” laughed one of my husband’s coworkers. “Our first year of marriage, we had to pay X,” and he rattled off a number twice as high as ours.
“No fun,” agreed a coworker friend of mine. “Boy, I remember it really floored us that first year.”
Traitors, I thought. Why didn’t anyone tell us this before?
We gnashed our teeth, sent off our check and took stock. We wanted to make sure this never happened again, so we did a little investigating and learned two important things.
First, recent college graduates, whether married or single, usually pay a higher percentage of their incomes in taxes than do older folks and families.
Why? Well, it comes down to fancy-sounding things called “deductions,” “exemptions” and “credits.” Those are, in a nutshell, things that you do with your money of which the government approves. Since the government approves, it reduces your taxes.
For example, if you take out a mortgage to buy a new house, you can “deduct” the interest from your income. Less income, less taxes. A good thing.
If you have a child, that child is an “exemption” and the IRS lets you subtract a little more money from your income. Less income, less taxes. A good thing.
If you adopt, have certain childcare expenses or have foreign taxes, you can qualify for “credits.” The IRS will subtract those credits from the amount of tax you owe. Less taxes — well, you get the drill.
Here’s the problem. Most recent graduates have done absolutely none of these things. They don’t have houses, don’t have children (or child care expenses), and can’t even afford to visit Europe, much less pay foreign taxes.
Many college grads do qualify for deductions for charitable giving (if they’ve done any) and student loan interest (the tax benefit is small comfort if the loans are big), but those don’t add up to much.
Result? A much higher tax burden on Joe and Jane Just-Got-Outta-College than on your standard house-owning family with kids who tithe to their church.
Okay, I thought. So I have to pay more taxes. That doesn’t sound exactly fair, but I don’t mind “giving unto Ceasar.” After all, that’s biblical. But what about all those taxes they took out of our paychecks? Why didn’t that cover our bill?
That leads to the second thing we learned: the withholding problem.
You may think that some all-knowing accounting guru at your company automatically knows how much to take out of your check and pay to the IRS. You’re wrong.
Employers have several different ways to figure out what taxes to withhold. But those ways do not take into account that you may be a two-income family or that you won’t have deductions.
It’s up to you to double-check your employer.
Repeat. It’s up to you to double-check your employer.
And that’s what my husband and I — to our great chagrin — did not do.
But, luckily, you can. Turns out, there are a couple of different ways to make sure you won’t get hammered in April.
First, read your W4 carefully. Remember your W4? That’s the little form you filled out when you first got your job. It helps your employer know how much tax to take out. You fill in a “1” for yourself and a “1” for your spouse and, on your first job, that’s usually about it. Total = “2.”
But then, on down the page (line H of the W4, to be specific), in little letters, it tells you that if you are married, both work and earn more than $25,000 combined, the W4 won’t work for you. You need to head to the “Two-Earner/Two-Job Worksheet”.
On the “Two Earner,” you can figure out how much additional tax to have your employer withhold so that you’re not left staring at a 4-digit calculator screen.
For example, let’s say Parker earns $45,000 and Riley earns $30,000 and they’re married. If they had entered “2” at the bottom of their W4s, the “Two Earner” reports that Parker should 1) change that “2” to a zero so that the employer will hold out the maximum and then 2) tell the employer to withhold an additional $157 per month. That’s right, $157 — not coke machine change.
You can also get a more accurate figure from the IRS itself. Simply go online to the IRS website and click on the “Withholding Calculator.” It will take you through a number of screens, ask you some questions about your paycheck and then figure out the additional amount, if any, you should have your employer withhold.
As Benjamin Franklin said, the only certain things in this world are death and taxes. Well, for me that first year out of school, they felt like one and the same. But by educating yourself and taking these few simple steps, you can save yourself a lot of heartache next April. And, while taxes may never be your friend — at least they don’t have to be the enemy.
Copyright 2004 Heather Koerner. All rights reserved.