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  • The Return of the Marriage Penalty?

    Over at Wisebread, Xin Lu brought up the topic of the dreaded marriage penalty. Okay, so maybe it’s not dreaded in every household, but it is in mine. Marc and I both make pretty good money, which makes us the type of couple that the marriage penalty tends to hurt the most.

    I’d heard about the marriage penalty for years, of course, and learned how it works when I took a course on income tax in law school. As you already know, there are different categories of tax filers, the most common being single and married filing jointly.

    Logically, you’d think that two people who get married and have a combined income of $50,000 would pay the same amount of taxes as one person who earns $50,000. But the marriage penalty doesn’t work that way. We got hit hard by the marriage penalty when we were first married and ended up owing $2,000 in taxes because of it – keep in mind that if we had remained single, we would have received refunds! This was because the standard deduction for married couples, which we were taking at the time, was not double the standard deduction for singles. Our joint income also probably pushed us into a higher tax bracket than we would have been in if we were single, but I can’t remember for sure.

    President Bush’s tax cuts saved us thousands of dollars by closing the gap between the tax brackets for single people versus married couples. In other words, a single person making $50,000 and a married couple with joint income of $50,000 would be in the same tax bracket, whereas in the past, the married couple might have been in a higher tax bracket.

    The Wisebread article has me more than a little concerned, since Xin Lu reports that President Obama likely favors the return of the marriage penalty. It’s not exactly a shocker, since he seems really big on the re-distribution of wealth. His plan may be limited to the very wealthy (which does not include us), but these proposals are always subject to change and I am wary. I just hope enough senators and representatives are opposed to taxing married people differently from single people and able extend at least this portion of President Bush’s tax cuts – otherwise my plans for our financial future may take a big hit.

    The debate about progressive taxes is one thing – should people who make more money have to pay more in taxes? I’m not sure.

    But I am sure that married people shouldn’t have to pay more taxes just because they’re married. It’s an antiquated tax from back when America was more homogenous, with almost all families consisting of a spouse who took care of the home all day and a spouse who worked outside and brought in the family’s income.

    These days, of course, most families seem to have two spouses who work, and why should families where the husband and wife make the same amount of money have to pay more taxes than families where the husband and wife make disparate amounts? Or why should a couple who isn’t married but lives together pay less taxes than a couple who gets married?

    What do you think of the marriage penalty?

    Tax rebates going out early

    Update: Don’t Mess With Taxes has a different revised schedule, with direct deposit rebates being completed on May 12.

    Thanks to Living Almost Large for letting me know that I can expect to get my tax rebate early. According to this MSN article, direct deposit rebates will start going out on Monday (four days earlier than the original schedule). What’s more, all direct deposit rebates are expected to be completed by next Friday, May 2 (the day they were supposed to start).

    Tax rebates being sent by mail will start going out on May 9, a week earlier than originally scheduled. But the completion date for mailed rebates remains the same (July 11).

    3 Signs You May be a Victim of Tax-Related Fraud

    The following is a guest post from ID theft expert Brian Lapidus, chief operating officer of Kroll’s Fraud Solutions.


    1. You are unable to file your return electronically, because a prior return included your SSN.

    Take Action:

    Submit your return by paper and include proof of SSN ownership (i.e., a registered letter from the Social Security Administration).

    2. You have received a W2 or 1099 form from a company with whom you have never been employed nor had a financial relationship.

    Take action:

    Contact the company in question by phone, with a follow-up letter, to request a corrected W2 or 1099, maintaining call notes and copies of all related documentation. If receipt of document was not due to an error by reporting company, file a police report.

    Maintain records until you receive a notice from the IRS.

    3. You received a notice from the IRS advising you of unclaimed wages or income.

    Take action:

    Contact the assigned IRS agent listed on the notification. He/she will work with you to ensure that you are not held liable for any fraud-related or errant wages/earnings.

    If you do not notify the IRS of a dispute, the IRS will assume the reporting is accurate. As a result, the wages/income will be processed and the IRS will send you a bill. Continued failure to notify the IRS can result in wage garnishment or tax levies.

    Follow all instructions and provide all information or documentation to the assigned IRS agent, as requested.

    Human accountant vs. Tax prep software

    Judging from comments I’ve gotten when I’ve mentioned my accountant, I’m not the only one who wonders whether paying a substantial fee to have another human prepare my tax returns is worth it, especially in this day and age of tax prep software. Gina over at Lifehacker wondered the same thing. Only this year she used both to do a side by side comparison.

    It turns out that TurboTax came up with a smaller total of tax owed, but her accountant caught a mistake by one of her employers that TurboTax didn’t (apparently it didn’t affect the amount owed, though). And she doesn’t know yet why TurboTax reached a different result.

    The best thing about Gina’s report, at least for me, was this sentence:

    There are always questions inside TurboTax that you respond to with just a tinge of doubt, and just a few of those can mount into a larger sense of uncertainty.

    It’s precisely this feeling that causes me to pay between $500 and $1000 to have my tax returns prepared for me. (Did that number make you cringe? Me too. I haven’t received my bill for this year yet, and I’m praying it’s on the lower end of that range.)

    So I guess whether you should hire a human accountant comes down, at least to some degree, to your risk tolerance. Mine is fairly low – primarily because of the potential consequences (all of my hair would probably turn white if I received an audit notice and I wasn’t sure I’d done everything right). So I’ll stick with an accountant for the foreseeable future.

    What about you? Do you think it’s worth paying an accountant?

    Calculating my non-cash charitable contributions – and trying something new in 2008

    I am nearly done with the tax organizer that our accountant sent us. There are only two things left to do, and I am waiting to hear back from our accountant before I do one of them. I’m dreading the other thing, however – namely, calculating our non-cash charitable contributions.

    I’ve written before about how I log every item donated before it goes into a bag and out the door. Unfortunately, knowing what I donated and putting a dollar value on it are not the same thing. And over the course of a year, we donate hundreds, if not thousands, of items. I have a long list of shirts, pants, books, kitchen goods, and other items that we donated throughout the year. Now I have to give everything a fair market value, and add it all up. Ugh!

    An anonymous comment on last year’s post recommended DeductionTraQ, a free service for tracking donations. It apparently uses eBay sales prices to determine FMV. I’m going to give it a try for 2008 – I’m hoping it will be a gift to my future self (i.e., the self who will be in exactly the same position one year from today).

    In the meantime, I have no choice but to go through all the receipts and lists and draw up a list for our accountant (some of it is done, otherwise I would try DeductionTraQ right now). The good news is, we donated more than ever this year, so we’ll be getting a nice deduction when it’s all done.