When it comes to taxes, I often give this seemingly contradictory advice to married couples. It might save you from headaches and arguments down the road.

Meet Alex and Jennifer, a hypothetical high-income couple in New York City. Each earns about $150,000, making their combined income $300,000. Following a friend’s advice after getting married last October, they promptly updated their W-4 forms at work to reflect their new “Married” status. A few weeks later, they were pleasantly surprised to see an increase in their paychecks. Marriage seemed to be paying off!

A Pleasant Surprise Turns Into a Shock

The following year, they used TurboTax to file their joint tax return and were thrilled to get a $6,528 refund. Being married seemed great for their taxes!

Fast-forward to the next tax season. Alex eagerly entered their W-2 information into TurboTax, expecting more good news. Instead, he was shocked to see they owed $12,287! He double-checked the numbers, but the result didn’t change. They had to pay the IRS! Alex interrupted Jennifer’s abs of steel workout to show her the results. She was incredulous. How could they go from a $6,000 refund to owing $12,000? Believing there was a mistake, they sought help from a local tax professional.

The Tax Professional’s Explanation

The tax professional confirmed the unfortunate news: they owed $12,287. What went wrong? It wasn’t a calculation error but a failure to seek professional guidance during a major life change. Alex and Jennifer fell victim to the confusing tax laws by incorrectly changing their tax withholdings at work.

Here’s what happened:

  1. Single vs. Married Tax Rates: A single person earning $150,000 has a tax rate of about 20%. A married couple earning the same amount collectively has a rate of about 15%.
  2. Tax Withholdings: During the year they got married, Alex and Jennifer each paid about 24% in federal taxes while still single. Their joint tax rate was slightly over 20%, resulting in a refund due to over-withholding.
  3. W-4 Changes: By changing their W-4s to “Married Jointly,” their combined withholdings dropped to about 14%, while their actual tax rate was higher. If their effective tax rate was 21%, they were underpaid by 7%. For a $300,000 income, this underpayment amounts to $21,000—a significant shortfall leading to a hefty tax bill and potential marital strain.

The Solution

To avoid such surprises, I strongly recommend that newlywed working couples leave their W-4 settings as either “Single” or “Married Filing Separately.” Be “Single” at work but “Married” at home. This approach helps ensure adequate tax withholding and maintains marital harmony.

Why Professional Help Matters

Major life changes like marriage, divorce, relocating, or winning the lottery require professional tax guidance. A tax professional can help you navigate these changes and optimize your tax situation, avoiding unpleasant surprises and ensuring you stay on top of your financial game.

By following this advice, high-income earners in NYC can enjoy the benefits of marriage without the stress of unexpected tax bills.

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