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The marriage penalty rears its
ugly head
Dear Dollar Diva,
My husband and I are both employed. We claim
married with zero exemptions and itemize our deductions, but now
that we're making more money, we end up paying taxes every year.
Should we claim single, zero exemptions?
I can't understand why this is happening. We
have an accountant do our taxes, and I'm starting to wonder if he's
doing the right thing by us.
There are quirks in the IRS code
that can cause a couple to pay more in taxes when they're married
than they would if they were single and earning the same money.
This is the nasty marriage penalty you hear so much about, and it
hurts hard-working couples such as yourself and your husband.
Higher salaries often translate to higher investment
income, and that could also account for a tax hit at year-end. Whatever
the reason, if you don't like getting slapped with a big tax bill
in April, you'll need to have more taxes withheld during the year.
Form W-4
You know that claiming married with zero
allowances (formerly called "exemptions") doesn't work for you.
To figure out how much more you'll need to withhold from your paychecks,
you'll have to complete Form W-4, Employee's
Withholding Allowance Certificate.
Form W-4 is not the IRS's most user-friendly
document. Luckily, there's a very nice Form W-4 Withholding
Allowance Calculator on the IRS Web site that will walk
you through the steps and make the calculations for you.
Once you know how much extra you each need to
withhold, record the amounts on your Form W-4s. If you have any
doubts about the results, have your accountant review the forms
before you give them to your companies' payroll departments.
Hanging on to your money
It sounds like you are DINKs (double income,
no kids) who have developed the art of making a lot of money. Congratulations.
Like all successful DINKs, your mission now is to hang on to that
money. The Diva suggests that you read "The
DINK Mission" for some ideas on reducing taxes and accumulating
wealth.
Taxes have a significant, negative impact on
investment performance. If your tax hit was fueled by a large, taxable
capital gains distribution from your mutual funds, consider putting
future investment dollars in funds
that are tax friendly.
Is your accountant doing right by you?
When in doubt, talk it out. Discuss this important
issue with your accountant. Some folks don't mind taking a tax hit
at year-end, as long as they don't have to pay late payment penalties.
Some folks hate it.
Your accountant can't help you reach your comfort
zone unless you reveal it. If, however, you've asked your accountant
for help and you're not getting what you need, it may be time to
shop around for a new tax professional.
 DOROTHY
ROSEN has a master's degree in finance, with a specialization in
accounting, from the Kellogg Graduate School at Northwestern University
in Evanston, Ill. Rosen has more than 15 years of experience in
the financial arena, serving in Illinois and Florida as a certified
public accountant, financial consultant, expert witness and educator.
She is owner of Dorothy Rosen, CPA, a public accounting firm that
serves individuals and small businesses.
-- Posted: April 5, 2001
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