[sm1178]

Hello,

This question is for anyone out there who can help me, specifically for Atlanta Tax Expert since you were kind enough to help me last year through this forum.

My status changed from F1 to H1B in 2005 and 2006 is the first year that I will file as a resident alien. My employer deducts federal taxes, social security and medicare tax from my paycheck and I have also started investing in the company 403(b) plan in November 2006. My W2 shows that my wages= 49583.24, federal income tax witheld= 6763.70, socal security wages (also medicare wages)= 49999.92, social security witheld=3100.08, medicare tax witheld=725.04.

I also received interest from my bank (interest income $291.64). While using an online software it said that the federal tax I owed was $150. The federal tax I owed for my salary was $75. This changed to $150 when I put in the interest income ($292) . I am surprised that putting in the interest income (which I thought should not be taxable at this amount) increased my federal tax owed by $75. I'm not sure if I am doing something wrong. How can $292 in interest income have a tax of $75 on it?

I live in Texas so I have no state taxes.

Please advise.

Thanks

[Mobea]

It was just enough to push you into a slightly higher tax bracket.

[sm1178]

Thanks for answering my question, Mobea. Is there anything I can do about this? Should I be using a different way to do my taxes?

[Mobea]

Do you itemize? Do you use a Schedule A? Deduct for mortgage interest, taxes you pay on your house and much more? Actually, I consider a perfect tax return where the refund/amount due is under $300. That's almost as close as you can get to not giving Uncle Sam an interest free loan.

[ScottGem]

What I think you are missing here is that your tax liability wasn't increased by double. Only the amount owed. A similar thing happened to me. When I first did my return I was getting back about $50 from the Feds. But I was missing a 1099 from one of my banks. When I added the almost $300 in interest income, I went from a $50 refund to owing about $40.

Remember the Feds withheld $6763 from your pay. So if you had to pay $75 that means your total tax liability was $6838. If the amount due increased to $150, then your total tax is now $6913. For $75 to be due for the $292 in interest means you are at the 25% bracket. So any income you have is going to be taxed at that rate. Since nothing was withheld from the interest income, this has a direct relation to your tax liability.

The question of what you can do about is to find additional deductions. If you can reduce your taxable income using tax deductions and tax credits you can then reduce your tax liability.

To make sure this doesn't happen in the future, try reducing your W4 exemptions. This will increase your withholding. Personally, I keep my W4 exemptions high because I don't like the idea of loaning Uncle Sam money interest free (which is what whitholding is). I'd rather pay on 4/15 and have use of the money during the year, then get a big refund.

[sm1178]

Thanks for the answers, Mobea & Scott Gem. Really appreicate it. I did try to do my taxes by itemizing them, but it doesn't help in my case. I have no home loans, mortgages etc or any other way to decrease the amount I owe. I do have charitable contribution to Goodwill in the last year, but itemizing to include the charitable contribution also does not help. I guess I will just have to cough up the amount I owe.. I thought all this while that my employer was deducting the right amount and at the and end I wouldn't owe anything, if not get a refund.

:(

[ScottGem]

If you had no income outside your salary, it might have been enough. But its unlikely that you will get the witholding exact. As long as the amount you pay or the refund is a small amount it was done right.

[sm1178]

Thanks ScottGem. I guess I will pay up... thanks again for answering my questions. Appreciate it.

[Mobea]

Please keep in mind, that you might end up in the same situation next year. As Scottgem, said you can increase what you employer withholds from your wages, or you can take the money out of the bank and invest it in something that would bring you a return on your investement higher than what your bank pays you. @ Bank pays you 5.% interest. You invest in a stock/fund that gives you 8% return. You pay the tax on the dividend, same as you would the interest maybe even a little more, because you make more money on your investment, but you still come out 1-2% ahead after taxes than if you just left the money in the bank. Let your money make you money. Remember that phrase... Let your money make money. Just like your money made you money by sitting in the bank, by investing it, it will make you even more.

[sm1178]

Thanks for the tip, Mobea. I'm looking into investing the money. Hope it's a different situation next year :)

Thanks again for all your help. Appreciate it. :)

[AtlantaTaxExpert]

All issues answered in my absence! :-(

[sm1178]

Thanks for getting back to me on that, Atlanta Tax expert. Would you have advised any differently?

[AtlantaTaxExpert]

No, not really!