Monday, January 30, 2006

Reasons to stay single (on your W-4, at least)

I married my husband David right after I left college, when I was still figuring out how things worked with paychecks and taxes. Within months of getting married, we each started new jobs (for David, an Australian, his job was the first he had in the U.S.). With the new jobs came new W-4s. Because I was now married, I checked that box on my forms. So did he.

That, we later learned, was a very expensive mistake, thanks to the IRS's antiquated assumptions about family finances.

By checking married, I lowered the amount of withholding my employer pulled out of my paychecks. So did David. Because we were both new to our jobs and pay levels, neither of us realized our take-home pay was suspiciously large.

It turns out that if you check married, the withholding calculations assume you are married and the only income earner in your household. But David and I not only work, we each earn nearly identical salaries. If one of our salaries were supporting both of us, we'd be in a much lower tax bracket than we are with both salaries -- and the married withholding was done with that assumption, that the household had only one wage earner. Oops. At the end of the year, in place of our customary refund, we had a $3,000 tax bill. Much panic ensued. Crawling out of that financial hole (which we only did thanks to David's willingness to survive on ramen noodles for six months to pay off the IRS) was deeply stressful and unhappy.

I haven't filled out a W-4 in years. I just looked at the newer ones, and see there's a box for "married, but withhold at single rate." Immediately after our oops, David and I refiled our W-4s to switch to single-rate withholding. Now we're back to getting refunds. It makes tax time much happier.

(I realize there's a school of financial thought that says you should try to minimize tax refunds, since you're essentially loaning money to the government for free that could instead be invested and earning you interest. However, David and I have little fiscal discipline, and with higher take-home pay, we'd be investing in more sushi dinners and books. We're better off foregoing that interest and using the IRS to force us to save a bit more from each paycheck to get back as a tax-time lump sum.)