<p>My sister told me the other day that she and her husband’s tax bill for 2010 is approximately $6,000, which is more than she wants to pay. Their income went up and apparently withholding was not adjusted. Are there any ways for them to reduce this bill between now and April 18 (tax day this year)? I suggested making IRA contributions. Can anything else be done now? Thank you.</p>
<p>Doesn’t everyone feel their taxes are more than they want to pay?</p>
<p>As long as they don’t have to pay a penalty, it’s better to pay it all on Apr. 18 than through withholding.</p>
<p>I am not looking for tax dodges. My sister budgets for things; she did not budget for this huge increase in taxes. So, anything that is legal and recommended, like saving for retirement. Thank you.</p>
<p>If your sister is eligible to contribute to a traditional IRA (isn’t covered by a 401k at work, has earned income that isn’t above the phase-out level) then she can do this any time prior to April 18 for the 2010 tax year. The limits are $5,000 if you are age 49 or younger, $6,000 if you are age 50 or older. The contribution will reduce her taxable income.</p>
<p>I think it’s too late to reduce AGI for the 2010 tax year by any other means.</p>
<p>Thank you, vballmom. I have a feeling that both my sister and her husband have 401K plans at work, but I’ll check with her. Fortunately, they have just enough in the bank to pay the IRS.</p>
<p>If you owe it, there’s not much to do about it but pay it.</p>
<p>If the projected tax due is being produced by tax software (Turbotax, etc.) and they’re doing their own taxes, make sure you compare last years return to this years line by line. Sometimes its possible to make an error in entering the numbers. I’ve done that, and wound up overpaying.</p>
<p>I always do a comparison to last year. Even if you have a paid preparer, a comparison to last year’s return doesn’t take long and will pick up and changes that shouldn’t be there.</p>
<p>If you are covered by a 401K at work, does that mean IRA contribution is not a deduction?</p>
<p>OP - You don’t say whether your sister did her own return, or had professional help. If she did her own, she might consider having a professional take a look. It’s important to tell the professional how aggressive you want them to be … because the typical default is “I don’t want the IRS to question ANYTHING in this return.”</p>
<p>Good luck.</p>
<p>You can have a regular IRA if you have a 401k, but there are income limits after which the amount that can be non-taxable phases out. </p>
<p><a href=“http://www.irs.gov/retirement/article/0,,id=202510,00.html[/url]”>http://www.irs.gov/retirement/article/0,,id=202510,00.html</a></p>
<p>Also a note that they may wish to consider adjusting their withholding for next year so they don’t have this surprise again & won’t be hit with a penalty for not pre-paying or withholding enough.</p>
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The maximum deduction of $5000 ($6000 if over 50) will only save them $1400 or so in taxes, but then they won’t have the money to pay the remaining $4600.</p>
<p>So their best bet might be to just pay the taxes, and come up with a better plan for this year, while there is time to plan for it.</p>
<p>Having a pro look it over and comparing it to last year are both good ideas, perhaps there is a deduction or credit they miskeyed or forgot this year. If you are not using a tax program, it is easy to overlook things.</p>
<p>I’m trying to figure out how wages went up, but not withholding.</p>
<p>^^^
There are lots of ways for income to go up without withholding increasing. It can even happen with wages. Many folks make quarterly estimated payments to avoid penalties, especially those with unpredictable income.</p>
<p>It’s funny; assuming there’s no penalty, then I think OP’s sister is actually a winner. The IRS gave her a free loan until 4/15, instead of the opposite. Remember that a refund check is an indication that the IRS won last year’s round - they got the free loan.</p>
<p>Of course, if she’s not a person who budgets, then winning can be a problem.</p>
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<p>Withholding is based on gross wages and allowances, using either a table or a formula. Unless the employee dramatically increases allowances at exactly the same time as the pay increase, I don’t see how it’s possible for withholding not to go up.</p>
<p>^ I’ve see withholding move opposite to wages. DW gets “wages” in two buckets … one which withholds based on the W-4 she filed, and the other based on the employer’s own salary-based withholding table. Withholding goes up or down based on the relative size of the two buckets … which change annually. Weird I know, but it’s been that way for fifteen years.</p>
<p>It depends on how you get the income. If the entire amount was wages and spread evenly out over 52 weeks, then withholding would have gone up. But it could have been capital gains for which no taxes were withheld, it could have been a bonus where they didn’t withhold enough (or anything), it could have happened over a short period of time instead of being spread out.</p>
<p>Even if withholding goes up, it may not be enough. The formulas on the W4 are not all that accurate.</p>
<p>On bonuses, the withholding amount isn’t optional; I believe it’s a flat 25%, mandated by the IRS. It doesn’t sound like the OP is talking about capital gains. NewHope, the withholding tables (or formulas, if that’s what the employer uses) are issued by the IRS; employers don’t have their own tables. The W4 doesn’t give the employer the withholding amount; allowances show the employer which table to use, and income shows which box on the table to use. It’s completely cut-and-dried; there’s no room for employer creativity in this process.</p>
<p>No big deal; I’m not trying to pick a fight with anyone. I’ve been involved with payroll for 15 years and have never heard of WH staying even when gross pay changed. I’m just concerned about the OP’s sister’s employer – hope he/she knows what they’re doing. :(</p>
<p>Well, the OP didn’t really give much detail about her sister’s situation. I’m guessing it is not as cut and dried as straight W2 withholding.</p>
<p>As an example, my W is self-employed, but we don’t do estimated payments for her. Instead, I have adjusted withholding from my W2 job to account for the taxes she will owe. If her income goes up and I don’t make an adjustment, I could wind up with a big tax bill, but it’s less paperwork. </p>
<p>We also have rental income, it is hard to predict every year exactly how much we will make or lose. So I make a guess and set my withholding. Usually I get a pretty big refund, but one of these years my wife will do really well or I won’t have any repair expenses or whatever, and I’ll get a big surprise.</p>
<p>The withholding could also be too low if, with two people working, the combined increase in wages pushed some of the income into a higher tax bracket. No changes in the %withholding in each person’s paycheck, so at the end of the year they end up owing.</p>
<p>This happened to us many years ago. I was working part time, making much less than DH. Filled out my W-4 “married with 2 kids”, but since my income was low the formula led to very low withholding. We had a big tax bill one year until I changed my withholding. I had to go to 0 deductions + $200/pay check to get the withholding close to where it belonged.</p>