Thank you for using justanswer. Although you should probably increase your Federal withholdings
, that should NEVER be your "first line of defense". Your first line of defense should always be to lower your taxable income
, not just give our government more of your money as an interest free loan to them.
You stated you gave 20% of your income to your 401K. That's wonderful. You should ALWAYS pay yourself first. You stated your wife gave 2% of her income to her 401K. One of the best ways to lower your taxable income is to take advantage of all of the pre tax programs your employer offers, such as a 401K. Many employers also offer other pre tax programs, such as pre tax health insurance for instance.
Increasing your wife's 401K contribution from 2% to 20% will make a HUGE dfference in her take home pay. I often tell people to take it up in increments. (Maybe increase it to 5%, then in about 6 months increase it to 7%, etc) This helps prevent "shell shock" from having such a huge take home pay difference, and gives you time to adjust your living/spending habits while still lowering your tax liability.
You mentioned that you had a mortgage. If your home mortgage interest, real estate taxes
, state taxes withheld are more than $11,400 (standard deduction
for joint filers for 2009), then I'm assuming that you are filing Form 1040 (Schedules A) Itemized deductions. If you are, then make sure that you keep track of any charitable deductions, since those will also help lower your taxable income. Maybe this would be a good year to clean out your closets and donate your clothing/household items, even old tools to places like a church, salvation army, etc.
If you and your wife have ever talked about having vacation home, or looking for a place to retire, this might be a good time to purchase that retirement or vacation home. This is certainly a buyer's market, and you may write off mortgage interest on 2 homes on your Schedule A itmeized deductions, and real estate taxes from ALL property you own.
A 2nd home doesn't have to be a home in the traditional sense either. It can be an RV, even a house boat, as long as it has a separate kitchen and bathroom facilities.
You mentioned that you had 2 children in college. Your income is too high to take advantage of any education credits
, but hopefully you are aware that you may claim your daughters as exemptions on your tax rerturn up to age 24 as long as they are full time students. (Full time students for IRS purposes are students who attend an accredited college for any part of 5 months)
Some tax pros will suggest that you purchase a home that you can rent out, as the mortgage interest, real estate taxes, depreciation, etc etc will often cause a paper loss. I don't often suggest this unless this was something you might have been interested in anyway, because there's no guarantee that you will show a loss, although that is the most common scenario, especially in the beginning years.If this is something you might be interested in, you might want to look at property where your daughter's go to college. Having them live in the home might be less expensive if they are currently living in the dorm, but you will have rent at least part of the home to paying renters (and you would have to pro rate the expenses based on square footage rented/vs total square footage since you would not be able to deduct any expenses relating your your children livng there unless they are paying rent at the same rate as the others.) However, you have to deal with capital gains when you sell it.
You should probably also talk to a financial advisor. There are numerous vehicles to invest your money in, such as tax free bonds, etc. Although investing in these type of tax free investments will not improve your immediate tax situation, it will allow those investments to grow tax free for the future.
If you do some or all of these steps AND increase your tax withholdings, I think you will see a difference in your tax liability. Again, your best bet, and the place you will see the most dramatic difference is reducing your taxable income by having your wife increase her 401K contributions, and making sure that both of you are taking advantage of all of the pre tax programs (health insurance, 401K, etc) that your employer offers.
I hope that this helps.