Why do we owe so much in taxes?

My wife and I made a combined 98K this year. we both have claimed "zero" on the witholding on our W-4s with our employers. When I did the free Turbo-Tax, it said we will have to owe $3200! I was shocked to say the least... At the moment, we don't own a house, we rent, and we don't have any children. the only deductions I used were $200 for charity, and $300 for moving expenses, as well as the state income taxes we have paid for the year, approx. $4500. according to the state taxes, we're going to have to owe an additional $1000 for that too! I just don't believe it, I think we have to be missing something here. As of our last paychecks for the year, we have paid a combined $9500 in federal taxes for the entire year of 2007. Any tax professionals or people with experience who can chime in with advice or help? thanks! I forgot to mention that we currently don't have any IRAs or 401ks. (I know, I know, we're currenty saving cash and paying down debt, next year we will own a house and start retirement savings) If age matters, I'm 27 and my wife is 23. What I don't understand is when I entered 11K for mortgage interest deductions(200K house at 5.75 rate), 5K for state income taxes, it still said we would owe $1700 on our taxes. It just doesn't make any sense to me!

Public Comments

1. You may have made a wrong entry in TurboTax. Recommend you download a 1040EZ form and the Tax Publication from the IRS and do it by hand. Given you have a simple return, it should be easy to cross-check TurboTax. www.irs.gov
2. $98,000 -10,700 -6800 = 80,500 of taxable income. Federal tax table 12,979. Your withholding was $9500. According to the 2008 withholding calculator, if you each made $49,000, you should withhold an extra $200 a month towards taxes even if you elect 0. The W-4 is notorious for underwithholding once your salaries get above $50,000.
3. Your contributions and state income taxes don't total enough for you to itemize, so you won't be deducting those, you'll take the standard deduction of $10,700 on a joint return. So your taxable income will be around $80,500, and your federal income tax around $12,979, so the Turbo Tax calculation is unfortunately right. The tax tables don't tend to take out enough for couples where there incomes are in the same general range but total to a high amount, and you got caught in that. It would be a good idea for each of you to have extra taken out of each check even above claiming zero - you can do that on your W-4.
4. Based on the info you gave, your approximate taxable income is $80,500. (this is your earned income minus the standard deduction for MFJ and 2 personal exemptions). The tax due on the income is $12,979 (taken from the IRS tax table) so if you only paid in $9500, then you do owe the difference.
5. The $9500 that you have paid is less than 10% of $98K. With an income of nearly $100,000, you should be in at least the 25% bracket. If all of your income is from work: My guess is that your employers withheld too little. Intuitively, with "0" claimed on the W-4 and an average income of $49,000, more than $4750 per person should have been withheld. I have not checked the math. If you have substantial income from other sources (such as investments): Withholdings normally cover only taxes on income from work. If you have more than a few thousand dollars of other income, you must either (a) list an "additional" dollar amount to be withheld on your W-4, or (b) make estimated tax payments (see Form 1040-ES). Get started now on doing 2008 correctly [either (a) list an "additional" dollar amount to be withheld on your W-4, or (b) make estimated tax payments (see Form 1040-ES)], so that you do not owe a penalty in 2009.
6. You mention you claimed zero, but you did not list the filing status you claimed. If you both listed MFJ on your W-4, your payroll withholdings would each be computed using a $10,700 standard deduction. Of course, on your 1040 your family gets 1 standard deduction, not 2. That could be the source of about $2,500 of your shortfall. Additionally, if both of you make about the same your gross would put you in the 15% bracket for withholdings. However, when your incomes are combined your family is in the 25% bracket. For 2008, you should do (or have done by a professional) a tax projection using your total family circumstances. You can then adjust your withholdings and if necessary, make estimated tax payments.
7. As you can see, claiming zero allowances on your W-4 did not result in sufficient taxes being withheld. This is because your combined incomes put you in a higher tax bracket than your separate incomes. Your combined incomes are taxed at 25% on approxmately the last $17,000 of income, but your withholding was almost all at the 15% bracket because it was split into two paychecks. If you do not participate in a retirement plan at work, then you may contribute to a traditional IRA and take a deduction, which will reduce your taxes by 25% of your contribution (maximum contribution is $4,000). If you do participate in a retirement plan, then there are phaseouts and you may not have a deduction available to you. You may establish an IRA and contribute for 2007 up to April 15 of 2008. Since you have no children, you may try to file separate returns and see if that results in lower taxes for you. It may pay you to have your taxes done professionally to see how IRA contributions and filing separately may benefit you.