6 tax lessons for millenials

Darla Mercado for Crain's writes: I spent a good part of 2013 and early 2014 writing about higher taxes that were just around the corner for their clients due to the American Taxpayer Relief Act of 2012.

But I never anticipated I'd be writing Uncle Sam a four-figure check. Ouch.

The exact amount my husband and I owed for federal taxes was $4,175. That's decent-vacation-in-Europe money. Or new-pair-of-fancy-roadbikes money. The best alternative? We could've just left that money where it was originally: sitting in our emergency fund savings account.

Here's a quick recap on the new laws: Single filers with taxable income over $400,000 and married-filing-jointly filers with taxable income over $450,000 will be subject to a top marginal income tax rate of 39.6 percent, plus a top marginal tax rate of 20 percent on long-term capital gains.

Starting at the $250,000 (single) and $300,000 (married, filing jointly) levels, there's also a phaseout of personal exemptions and itemized deductions. Don't forget the 3.8 percent surtax on net investment income, plus the 0.9 percent Medicare tax on wages, which apply at $200,000 income level for single filers and $250,000 for married filing jointly.

My husband and I do “well enough.” We're far enough from the $250,000 income threshold that we don't have to worry just yet about the additional levies on wages. We do earn enough, however, that we're close to the higher end of the 25 percent tax bracket.

But we did undergo a couple of major changes from the 2012 tax year to the 2013 tax year. The biggest one being that my husband was between jobs in 2012 and doing some independent contractor work on the side, then he became a W-2 employee for the full year of 2013. The end result? A huge bump in combined income for the two of us, raising us from five figures to the low six figures.

There are valuable life lessons to be learned here, for my husband and myself, as well as for moderately successful Gen X and Gen Y or Millennial clients who will one day hit those higher income levels.

1. Double-check W-4 forms. This is particularly important for households with two wage earners. Sometimes it's better to pay a little more in extra income taxes throughout the year, rather than having to write out one big check come April 15. A big mistake for some taxpayers is filling out the W-4 form — the form in which an employee calculates how much taxes an employer should withhold — in such a manner that the employee receives only the standard deduction and taxes are withheld in the 10% bracket. Sure enough, my husband and I have this on our to-do list, as we both withheld our taxes in the 10% bracket, underpaying on taxes through 2013. Updating a W-4 is a relatively simple fix that can save a bundle.

“What I recommend as a good fix in maybe 80% to 90% of situations is that one spouse should claim zero and married, while the other claims zero and single,” said Jerry Love, a certified public accountant and personal financial specialist.

When your combined family income hits the $100,000 threshold, it's time to have a talk about Form W-4, updating it to ensure that they're withholding enough money in payroll taxes, Mr. Love said. “Once you get over $100,000, you can end up in the 25% bracket very quickly,” he added. [snip].  The article continues @ Crain's, Click Here.