Filing my taxes has always been stressful, but it's an acceptable stress because I have always received a net refund when my state and federal taxes are combined.
Last year's filing was a near bacchanalia, and the refund allowed us to open Roth IRAs and feel like responsible adults who were planning for the future. Filing our 2007 taxes convinced me that I was a tax pro and that multiple hours of unpleasantness were worth the fine reward.
The start of 2008 brought about some changes in our tax situation, though. We changed our filing statuses from single to married and started claiming 1 instead of 0 exemptions, and the federal taxes that were withheld from our paychecks went down--way down. I made token research attempts with the payroll person at my company but quickly moved on. We liked our inflated paychecks--why would we do anything that would reduce them? We trusted that our companies were deducting the correct amounts and focussed on more challenging efforts, such as creating our budget.
Because we had such a positive experience last year, I was actually looking forward to filing this year. We haven't received all of our tax forms yet, but we have our W-2s and can accurately estimate the amounts on our remaining forms, so we started filling in numbers in our online tax software. And that's when the piper (or, more accurately, Uncle Sam) came a-knocking.
I entered my numbers, and we were ahead in both state and federal--nice. Then I entered B's numbers, and the situation changed drastically, to the tune of many thousands of dollars that we owed.
"What's going on?" I exclaimed as a nervous feeling grew in my stomach. "This isn't at all like last year!"
B said to calm down and try entering our numbers for mortgage interest. They and our charitable contributions helped reduce the amount, but we still owed--a lot.
Just for kicks, I tried deleting my numbers to see what the refund would be like if we just used B's numbers. Sure enough, with his numbers alone, we'd have a refund.
Clearly our companies calculated correctly for our individual deductions, but apparently our combined situations call for higher payments. B suggested that we both file individually as single, but I pointed out that tax fraud is not an acceptable way to solve problems like this.
B wondered if we had fallen victim to the dreaded AMT (alternative minimum tax), so we started resesarching. We didn't find any research to indicate that we fell into the AMT bucket, but every tax calculator told us that we hadn't paid enough taxes for our combined incomes. It was only our mortgage interest that had saved us from owing what would have been an astronomic tax bill.
Still disbelieving that we could possibly owe more than we had paid, we ran our 2007 numbers against our 2008 numbers and realized that we paid significantly less in taxes between the two years, even though our income went up. A few more calculations confirmed our worst fears--the amount that our tax software was telling us was accurate. We owe Uncle Sam, and not in a trivial way, either.
The time of living on the high hog is over, boys and girls. The year of 2008 will henceforth be known as the Year of Decadence, and 2009 shall be the year of prudence, smart living, and claiming 0 on our W-4s.
I'm not giving up my balsalmic vinegar or my fancy cheese, though.
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