I almost always do our taxes twice. I do a preliminary run through as soon as we have all (or most) of our paperwork. And later I’ll sit down with TurboTax and do a complete return. I like to know what’s coming up. This week, partly in preparation for yesterday’s Coffee Talk post, I did the first run through of our 2011 return.

Last year, we owed around $1,100. This year, C only received half as much in unemployment compensation, and we would receive the education credit. I was expecting to owe around $500. Imagine my surprise when my numbers came out with us getting about $3,100 back.

The $4,200 swing between the two years threw me off. I quickly opened up our 2010 tax return file and started comparing the numbers to the 2011 return. What had I done wrong?

The first thing I realized was that if we had been able to claim an education credit last year, (which we would have been able to do if it weren’t for really bad timing), we actually wouldn’t have owed anything. Huh. I should have noticed that. (Not that it would have changed things. There are weird tax rules around what you get to claim education credit wise when you start school in January, and our timing getting him registered for class and then paying for it was just off.)

As it was, this year we got a straight $2,500 directly off our tax burden due to him being in school. Okay, that accounts for part of the shift, but what about the rest?

I double checked our adjusted gross income.

2010 was a transition year for me. I changed jobs at my company halfway through the year. The new job came with a 33% raise. C also worked for the Census in 2010 and received UE benefits for the whole year. (We did not pay taxes in the UE benefits.)

2011, C only had UE for half the year (still no taxes paid on it), but I had my new job the whole year. Combined with our interest income, capital losses, and the deduction for student loan interest, our 2011 adjusted gross income was only a couple thousand less than our 2010 adjusted gross income.

That seems right. But a ~$2k reduction in income does not result in owing $1,700 less in taxes.

I went back through all of our deductions. I did everything right, and it was all roughly comparable to 2010, except for the education credit. What was happening? Taxes certainly haven’t been lowered that much.

And then I noticed it. In 2011, I had about $2,200 more in taxes withheld from my paycheck than we had withheld in 2010. Well, that certainly accounts for the difference in the tax return.

But why was the withholding so much more?

When C lost his job, we made the decision to keep the withholdings on my paycheck the same. We did this because we knew we weren’t going to have taxes taken out of UE. (At the time, we certainly did not expect him to be out of work 2.5+ years later.)

When I got my promotion, that 33% raise changed my tax bracket. It was still a huge raise for me, so I didn’t really realize they were taking a greater percentage of federal taxes out than they had been before.

So there we have it, little changes I didn’t think much about added up to a big tax return.

Now, I’m not complaining about getting the money back. It’s a nice little windfall. I think my plans for it include paying for a trip to Austin to visit E (former roommie, a trip that was already kind of planned for anyway), an extra $1k toward my student loans, and saving the rest in our house fund to help pay for new windows this summer.

At the same time, I would really like to have that money in my regular paycheck. We are good at staying in our budget, so I am not worried about frittering it away on silly stuff (which is what I would have done with extra money in my early 20s- so tax returns were good things). I’d like to have it in my budget and my savings account so that I have a more honest picture of our financial situation.

 

I looked at my W-4 (tax withholdings) this morning. I claim married, but I was also only claiming 1 exemption. Considering we plan for C to be in school through May 2013 at the very least, with the possibility of him going to grad school after, and that he won’t be earning any income this year at all, I figured it was safe to up my exemptions to 2.

 

Oh, and as a side note, this year our tax return showed tangible evidence of our debt paydown. For the first time since taking out my graduate student loans, I was not able to take the full student loan interest deduction. I fell short by about $400.