Federal Taxes Due Seems High

[taxprepny99]

 Hello, my spouse and I are filing jointly for 2023 tax return. We have a combined AGI $222,000 with a standard deduction of $27,700. $194,000 is taxable and $33,000 tentative tax and total payments from our end are $30,900 from our summary page leaving a difference of $2,100. Our W4 filing status is Married "0". TurboTax software is stating, we owe $2,100 in federal taxes. I understand that more money equals more taxes but why is this the case if we both filed a "0" on our W4? I was thinking of applying the capital gain loss carryover from 2022 tax year. Any thoughts or reasons into why this is high and ways I can reduce the taxes owed? Thank you!

[Vanessa A · Accepted solution]

When your incomes are combined, it can put you into a higher tax bracket than just one of your incomes alone.  So, say out of the $222,000 you earn $80,000, and your spouse earns $142,000.  The person with the income of $80,000 is in the 12% bracket when saying they are married on their W4.  In reality, when they combine their income with their spouses income they are actually in the 24% bracket.  So, all of your income is undertaxed by about 10%.  The other person making $142,000 is undertaxed on a portion of their income by about 2%.  This leaves both of you paying too little in taxes.

Now when you apply the capital gains loss carryover, this will lower your taxable income by no more than $3,000 (maximum amount capital gains can offset your other income) which will lower your tax due. You do need to take it year over year, you cannot choose to not enter it on your form and then use it next year. So, yes, you should enter your capital losses.

However, it will not solve the problem for 2024.  For 2024, if you want to avoid having to owe at the end of the year again, it would be a good idea to complete a new W4 form for the one you that makes the most for or even for both of you.  You can choose to have an additional amount withheld from your wages as well.  There are a few ways to decide how much to have withheld or how to change your form.  In TurboTax, there is a W4 estimator, you can find this under Other Tax Situations>>Other Tax Forms>>Form W-4 and estimated Taxes. You can use the TurboTax W4 estimator outside of your tax return.  You can also take the amount you owe extra this year and divide it by however many pay periods  you have and have that much extra withheld without considering your capital loss carryover if it will not be the same next year. Also, choosing the status on your W4 as married filing separately will increase the amount they withhold.   If either of you plan to get a raise, you would want to take that into consideration as well. 

You can also do a "dummy return" and see if you owe less when you file separately. Depending on your situation and any credits you are taking, this may or may not reduce your taxes due. 

Capital Losses

Why do I Owe Taxes

Ways to Lower Your Tax Bill

Married Filing Jointly versus Married Filing Separately

[taxprepny99]

Thank you @Vanessa A for detailed response, we appreciate you! My earnings last year was 99k and my spouse makes 112k. The other 11k was from investment income (capital gain/dividend income) . We will play with the W4 estimator tool to find out about extra withholdings to apply.  Last filing in 2022, we realized by filing MFS we received a tax refund of a few thousand when we compared to MFJ. I belive the difference was a raise in pay and investment income being higher. Do you think it may be best to itemize our deductions? We do not have children, but I did attend graduate school for any tax credits that maybe advantageous for us. Thank you for your help and guidance! 

[Vanessa A]

You may find the same benefits this year with filing separately.  With your income level and since you do not have kids, this may produce the best results for a while.  If you were to have kids, this may change. 

If you file jointly, depending on if you have a mortgage with  interest, and have made a lot of charitable contributions it MAY help with your return, but I would guess itemizing will not help as your MFJ standard deduction is $27,700.

Your state and local tax deduction is capped at $10,000.  

If you paid mortgage interest of $10,000, then you would be at $20,000 between the two, which is $7,000 less than your standard deduction. 

Medical expenses would only be deductible for the amount you paid over $16,500 as only expenses over 7.5% of your AGI are deductible.  

If you file separately and one of you itemize, then both of you must itemize.  So it would not create a better situation filing separate if you both itemize as you would still have the same expenses, just split between the returns and you would still each need to have more than the MFS standard deduction of $13,850. 

Your income is above the limit for the Lifetime Learning Credit.  The limit is $180,000 for education credits so you would not be able to claim an education credit for your grad school expenses.  If you are paying student loans, you would be able to take a deduction for your Student Loan Interest paid, that is capped at $2,500 but only reduces your income so it would not reduce your tax by $2,500, more like a few hundred.  So, if you filed separately based on your joint income, you would not be losing much as far as credits.  

Standard versus Itemized Deduction