The Tax Man cometh and he wants his pound of flesh
And boy, does he ever. Due to what appears to be an accounting mistake on one of our paychecks, Kim and I owe an astronomical amount to the Federal and State governments this year. Consider our emergency fund completely blown at this point. We're going to follow up with the payroll people to figure out why the amount of money withheld for taxes went down over 2007 when we actually were making more money. Looking at 2006 vs 2007, our net taxable income increased by 22% (yay!). However, the taxes withheld actually went down by 4%. The difference was so impactful that we actually owe a penalty to the IRS for under-withholding. Apparently there is a rule that if you make above a certain amount of money as a family AND you fail to withhold at least 90% of your year end tax bill, there is a extra penalty. Our penalty is all of about $50, but the concept is pretty obnoxious.
Next year we will be looking into ways to minimize our tax exposure. Along those lines, check out these details from No Credit Needed, who points out that a dual income family can put aside $3208.33 into retirement accounts each month. The 401(k) portion of this definitely helps reduce taxable income.