Follow up: Raise and Taxes

Posted on September 13, 2006 by Him and tagged income, taxes

Last week I wrote about my awesome raises that I was fortunate enough to receive this year, and how I hadn't adjusted my withholding accordingly.

This weekend, I played around with the IRS Withholding calculator, and plugged in the numbers that I had now. According to the calculator, I would owe Uncle Sam $1,721 at the end of this year. Ouch. That's even worse than last year's taxes owed.

I played around with the calculator for a bit, and I decided that raising my contribution to my SIMPLE IRA would not lower my income enough to really make a huge dent in the amount that I would owe. I followed the directions that the calculator page gave to me - decreased allowances to "0" and withheld $130 in addition - and hopefully I won't owe or be refunded more than $25.

This won't set us back financially, although we were going to put the extra money towards the credit cards. Maybe next raise.

Are there any other alternatives to lowering that tax bill?

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Sarah | Sep 13, 2006

Buy a house and/or increase donations to charity. I know... you probably don't want to add on any more debt while saving for a wedding and paying down your cc's, but something you should start seriously thinking about. The tax savings from the interest equal about 2 months of rent intially. My first 2 years as a home-owner I got back $1700 and $3200 from the IRS (before I owned I'd get a small refund). Sounds like I need to do some playing around with the IRS withholding calculator myself.

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Sean | Sep 13, 2006

Yes, that's it exactly. I always love this brilliant idea - buy a home and pay $10,000 in interest to the bank to avoid paying $2,000 to the IRS.

While you're at it, talk to your employer, see if you can convince 'em to pay you less - that'll almost certainly lower that tax burden as well... ;)

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fantasticalice | Sep 14, 2006

I just heard that if you rent you can use that like property taxes, do you know if this is true.

I just got a raise myself (finally) and just played with the withholding calculator after reading this statement.... boy, now I know what to have withheld extra so I don't pay in as much! Thanks for the reminder/tip!

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