How can we make our income, exemptions, and withholding work together to break even next year for tax season?

Question

Tax Q's galore! This yr, we owe $1242 to Fed and $384 to State. We filed jointly (married). He makes $35K and has 2 allowances on his w4 with NO additional w/holding. I make $14K and I have zero allowances on my w4 with NO additional w/holding. We are having our 1st baby in June. We have no other dependents.

What changes would you suggest we do to our w4's so that next year we can expect to "break even." We want our monthly net income to remain as high as possible because it is difficult to predict just how much this baby will cost us. We got pregnant with the conscience decision that we could afford the baby...but now, things suddenly changed when we got our tax return information!

Could my husband keep his W4 the same, and could I take the total fed and state that we owe, divide those amounts by the remaining months in '07, and claim those amounts as additional w/holding for state and fed on my W4 ? Also, can we expect a definite $1000 child tax credit (Fed)? Thanx!

We thought that my husband could claim himself indep, and me as a dependent, since I claimed NO exemptions on my W4. Was this wrong? Either way, we filed jointly, so wouldn't it be the same if he claims one for himself as an indep, and if I claim one for myself as an indep? 2+0=1+1! Same difference, right?

I take back the "my husband claimed me as a dependent." Actually, on his W4, he claimed a 1 for himself and a 1 for his spouse (lines A and C). We should be right on target. I plan adjust my additional withholding. It should work out for us in the long run (we hopefully won't owe anything come next April 15th and our net monthly income won't be effected too much.)

Answer 1

The best advise would be to sit down with a tax accountant that may also be certified as a financial planner. I am not completely sure about the tax credit, it is usually based on income, but from memory, it doesn't appear to me that you would be above the phase out limit. You would want to look at Publication 972 http://www.irs.gov/pub/irs-pdf/p972.pdf at this website. If this web link doesn't work, go to www.irs.gov and search child tax credit, it should appear near the top of the search list.

Use the booklet that you have when you fill out you 1040. There is a lot of helpful information in the packet and information of where to research it. If you need a booklet from last year go to www.irs.gov and search for the forms.

There is a huge tax difference when children are included on tax returns. You cannot be considered a dependent because in the eyes of the IRS you are an equal with your husband. If you think that the amount is very different from last year and your situation has not change, have your tax return reviewed. You may find a mistake or an election/deduction that you didn't make. You have three years from April 15th to file and amendment.

You will get an additional exemption equal to the personal exemption you or your husband take toward the income. That is up front on page 1 of the 1040. If you will need daycare or other services for your child, depending upon income, you can claim those as a deduction also. You will need to collect all the information and sit down with the paperwork to completely go through the information to be sure.

The various tax return websites have a lot of information that can help you as well as the IRS website.

If you have more questions, go ahead and email me. I may be able to find some search links for you or documents that can help.

Answer 2

For federal, you should be OK once the baby comes, without changing your W-2's. You'll get an exemption for him or her, and the $1000 child tax credit, and that will let you about break even if nothing else changes much. Since you get it for the whole year, and the baby will be here this year, you should be OK.

Depending on where you live, the baby might help on state taxes too - some places he/she will help, some not. If you divide the amount you owe by the number of paychecks in a year and have that much taken out of each one, then you'd be safe there too, but you might not have to do anything to break even for state also.

Congratulations on the baby, and good luck. And yes, babies are espensive.... but worth every cent of it.

Answer 3

Sit down together with a Form W-4 package -- you can get it from the IRS website -- and complete the worksheets on page 2. This will tell you the total number of exemptions that you can claim between you as well as any additional withholding amount necessary.

Answer 4

Simple.

Have A CPA or tax practitioner prepare a Federal and State tax projection for you for 2007.

Whatever the tax liability is for Federal and State, submit that to your employer
and have them withhold based on the number of paychecks you will be receiving.