Category Archives: Taxes

Holy Sh… Estimated Taxes… WTF… as a Married Couple

Getting married is wonderful for so many reasons. Taxes is not one of them. Besides the horrific marriage fine levied by our tax lords if you happen to want to be an independent woman and continue working post tying the not, there’s also a whole host of tax intricacies which suddenly make TurboTax no longer a viable option and accountants your new BFF.

My husband is an independent contractor.  He usually makes anywhere between $80k and $110k per year, depending on how business is going. As a single person, he was able to take advantage of safe harbors designed to protect self-employed folks from overpaying taxes to avoid fines for coming short on estimated tax payments.

Safe harbors for estimated taxes for single, self-employed folks basically say that you can either pay 90% of your current year’s eventual tax bill OR 100% of your prior year’s tax bill. As a single person, this is pretty easy to figure out — even if it’s hard to guess what 90% of this year’s tax bill will be, you can pay 100% of your prior year’s tax bill and know you’re safe from fines, even if you end up owing more at the end of the year. If business isn’t going quite as well this year, you’ll get a refund, and you’ll give uncle sam a loan for a while, but it won’t be that bad.

Of course, getting married makes this all sorts of more complicated, requiring expensive accounting help to make sense of this mess.

Estimated tax safe harbor for higher income taxpayers. If your 2016 adjusted gross income was more than $150,000 ($75,000 if you are married filing a separate return), you must pay the smaller of 90% of your expected tax for 2017 or 110% of the tax shown on your 2016 return to avoid an estimated tax penalty.

Thank you IRS for an explanation that is not clear at all. It sounds like if your AGI is over $150k as a single OR married person you are considered a higher income taxpayer. This means Mr. HECC would not have been considered a high income taxpayer as a single person, but now that we’re married we’re well over $150k and he can no longer use the safe harbors for his estimated taxes.

Instead, we have to pay 110% of our 2016 taxes (including my taxes) in order to not get penalized this year. Suddenly, my W2 withholdings are no longer an annoyance of over or underpayment to the government, but they can result in substantial penalties.

So – we need an accountant, stat. I consider myself fairly financially literate and the IRS explanation of all of this is the most confusing thing I’ve ever read.

Are any of you married with one partner earning W2 income and the other self employed? How do you manage your estimated tax payments?

Our Marriage Tax Penalty: How It Played Out

There is a lot of misinformation about the marriage tax penalty. While it’s true if one spouse doesn’t work and the other makes any amount of income, the couple will get a “marriage bonus,” once both partners are working and making enough income to live, esp in a high-cost-of-living area, the tax penalty is going to kick in.

The worst marriage penalties are seen when you have kids and lose deductions based on income, but I’m going to share in simple terms why we received a marriage penalty this year – this beautiful first year of our marriage – due tour income.

Federal Taxes Only (State marriage penalty not included below)

Mrs. HECC
Income: $195,000
Single Filer Tax: $47,749.25

Mr. HECC
Income: $105,000
Single Filer Tax:  $22381.75

  • Total Couple “Single” Federal Tax: $70131
  • Married Filing Jointly Tax: $74,217

And, just in case you’re wondering, it is not better to “file separately” as a married couple — this is not the same as filing single (which you can’t do when you’re married.)

Married Filing Separately:

Mrs. HECC

Income: $195,000
Single Filer Tax: $51,958.50

Mr. HECC
Income: $105,000
Single Filer Tax:  $22981.25

Total Married Filing Separately:  $74939.75 

As you can see, if you have somewhat higher incomes, the marriage tax penalty will be quite notifiable.

If we never got married… $70,131 in taxes
Marriage Fine (Filing Jointly)  +$4086
or, Marriage Fine (Filing Separately) +$4808.75

This plays out similarly in state taxes.

Yes, we’re fortunate enough to be high-income earners – but we also cannot afford a house. So there’s that.

 

Marriage Tax Penalty: Is it real? (*Hint… Yes it is)

My boyfriend and I have been dating for over eight years now and we’re seriously discussing marriage. I’m not sold on the whole marriage thing — I don’t believe one needs to be contractually committed to another person to have a lifelong partnership and a family. It seems that with all of my passionate hatred of organized religion and government getting involved in social freedoms I should not be considering getting “actual” married. Sure, a small ceremony would be nice, but the legal side of it frightens me quite a bit — especially since so many people I know who are older are divorced and worse off for it.

While I don’t at all expect to get divorced ever (hey, we’ve made it almost nine years as bf/gf and if we do get married it will be on our 10 year anniversary – by then I think I’d know what I’m getting into) I still don’t know if marriage is a good idea, financially speaking. The way marriage is set up… and the tax laws around marriage… is that you are rewarded for having one working parent and one stay-at-home parent. If you have two working parents and earn reasonable salaries you actually can have what they call the marriage tax penalty. Before tying the knot, I really want to better understand if that is going to cause a fiscal knot in my future bank account.

After writing this post, I found this awesome breakdown by Financial Samurai which details out the tax benefits or penalties for different types of married couples — it is a must read!

How Marriage and Tax Works

Starting the year you get wed you are officially a married couple in the eyes of the government — even if that happens on the last day of that year. You have a choice now to file married jointly or married separately. If you and your partner both work and make equal salaries, unless you’re low earners like teachers or social workers, you’re going to probably be better off filing separately.

The problem is — married filing separately doesn’t actually mean the same thing as filing as a single person. If you file separately while married you cannot take deductions for tuition fees, student loans, social security benefits tax-free exclusions, credits for the elderly and disabled, earned income credit, hope or lifetime learning education credits, child care credits, etc. And if you decide to file separately and one partner wants to itemize, the other partner needs to itemize their taxes too, even if they have no reason to do so.

But the bigger issue is for higher income earning couples. As you can see below, married filing separately and single filers do not have the same tax brackets. If you are married filing separately, anything over $74.4k will be taxed at 28%, where if you are filing single you have until $89.3k before you are bumped into the 28% tax bracket. If you happen to earn more than $180k per year as a ginle person you’ll still be within the 28% tax bracket, but if you’re married filing separately you’re going to pay 33% for any income over $113.4k.

Of course if one parent works and the other doesn’t the tax table works in that couple’s favor. I.e. say I work and make $200,000 per year and my husband stays at home and makes sure that the kids eat and don’t die — filing jointly we could remain in the 28% tax bracket, whereas if I were filing single and not married my top income would be in the 33% federal bracket.

2014 Tax Brackets (for taxes due April 15, 2015)

Tax rate Single filers Married filing jointly or qualifying widow/widower Married filing separately Head of household
10% Up to $9,075 Up to $18,150 Up to $9,075 Up to $12,950
15% $9,076 to $36,900 $18,151 to $73,800 $9,076 to $36,900 $12,951 to $49,400
25% $36,901 to $89,350 $73,801 to $148,850 $36,901 to $74,425 $49,401 to $127,550
28% $89,351 to $186,350 $148,851 to $226,850 $74,426 to $113,425 $127,551 to $206,600
33% $186,351 to $405,100 $226,851 to $405,100 $113,426 to $202,550 $206,601 to $405,100
35% $405,101 to $406,750 $405,101 to $457,600 $202,551 to $228,800 $405,101 to $432,200
39.6% $406,751 or more $457,601 or more $228,801 or more $432,201 or more


This all seems like marriage isn’t the best idea unless I plan on remaining unemployed and being a gold digger the rest of my life. It’s hard to know what the future holds, but the reality is that marriage might not be the best idea financially speaking. In fact, if I get married it will be likely that my husband and I will each earn around $130k AGI each, or more. If we earn $260k jointly we are in the 33% tax bracket. If we each earn $130k and file separately we are also in the 33% tax bracket for every dollar earned over $113k. BUT if we weren’t married at all and earned $130k all of our income would be in the 28% tax bracket.

Am I missing something here, or is marriage just a big scam to get us to pay the government more of our hard-earned money?

This article seems to make the case that marriage isn’t worth it — unless you plan to have only one working partner or both be very low income earners.

Some Other Items to Note

  • BONUS: You can get joint health insurance if one partner has it through work… this isn’t a tax benefit but it is a benefit to being married.
  • PENALTY: The Child Tax Credit provides up to $1000 for every child under 17 in one’s care, but if you file a joint return the credit phases out at $110k income total for both partners. If you file separately you don’t get the credit at all. If you are not married and file single it phases out at $75k (**again a reason why this should be determined based on cost of living because $75k is a large salary in some areas of the country and in others it’s not enough to afford a basic lifestyle.)
  • PENALTY: Miscellaneous deductions can lower taxable income, but they need to add up to more than 2% of AGI to actually matter. If one spouse has these deductions but the other doesn’t, it can be a big headache since both spouses have to itemize if one does. That also can cost more to prepare since it’s no longer standard TurboTax click click and done.
  • BONUS: If you’re married and own a home with your partner, you can take $500k in gains tax free when you sell for your next house. If you’re single you only get to take $250k in gains. That said — most of us won’t have more than $250k gains on a property because we’re buying houses that at most are $1-$1.5M. Aimirite?
  • PENALTY: Obamacare requires an additional 3.8% tax on net investment income when gross income exceeds $200,000 at a single tax payer… BUT $250k as a married couple. So basically if you earn $125k each (totally normal in cities like San Francisco or New York) you are going to pay a lot more on your investment income. Being single and making under $200k is a lot more reasonable.
  • BONUS: If you are married you can give each other as much money as your heart pleases because you basically now are the same person. If you happen to die unexpectedly, god forbid, your partner can get all your monies tax free. This is the one true bonus of marraige left but does it outweigh the extra taxes paid annually as a married couple? (Otherwise I’d think you could just get married later in life once you are ready to take advantage of tax-free cash sharing.)
  • PENALTY: This also provides a strong incentive for your partner to hire an assassin to make you disappear, if you happen to be the keeper of said monies (or maybe I’ve just been watching one too many episodes of law & order)
  • PENALTY: To deduct unreimbursed medical expenses they must be more than 7.5% of your AGI. If one partner has a big surgery that costs a lot and cannot work during the year — and is single or filing separately — he can take that deduction. But if the couple files jointly and the other partner makes a lot more then the deduction is harder to obtain.
  • PENALTY: If you make more money, more of your Social Security is subject to tax. You’re better off filing single vs married to keep more of your SS benefits. Also if you are a couple with two working partners — you’ll end up with more social security in the long run if you remain single!
  • PENALTY: The AMT (Alternate Minimum Tax) exclusion for two unmarried individuals is much lower than that for a married couple, and this can cause upper middle class earners thousands of dollars in extra tax each year.
  • PENALTY: If one partner earns less money in one year than another, if the couple remains single filers one person who earned more money can gift the other up to $13k in appreciated stock, tax free, which she could sell at her capital gains tax rate (which could be 0% if she is not earning anything that year, but filing jointly at that point might actually save the couple more.)
  • PENALTY: A single person can deduct up to $3,000 in capital losses per year. Married couples… can only deduct up to $3k in capital losses (not $6k.)
  • PENALTY: If a couple is unmarried and, say, the woman owns a house in her name and the man gets sick and relies on Medicaid to pay for a nursing home, Medicaid cannot come after the house that the woman owns. However if they are married they can take the house away!
  • PENALTY: The Roth IRA contribution limit for a married couple is lower than it is for two single individuals! If you’re a single person you can invest $5500 per year in a Roth IRA if you earn less than $114k per year (AGI) — BUT — if you’re married, you can only earn $181,000 jointly to invest in a Roth. That’s $47,000 less income you can earn and still be eligible to invest in a post-tax IRA account.
  • PENALTY: Write-offs from rental real estate can be used to offset ordinary income unless your AGI exceeds $150,000. That is — $150k as a single person or married — that amount is the same!

 

 

Update: Tax Benefits only the Rich Enjoy

One of my readers, Jake, posted a thoughtful response to my post 10 Tax Breaks Only the Rich Enjoy noting that my explanations were factually inaccurate. I thought he had some really good points, so I wanted to address each below. I also want to clarify that I do not necessarily have anything against rich individuals who worked their way up to obtain wealth. The problem is that once a family has money they can maintain that money within their family for generations, with many “trust-fund babies” not having to earn their wealth. Also, I have a problem with tax loopholes that are designed to only benefit the wealthy yet that are useless to the middle class.

(Side note: I think that federal and state income tax should be adjusted for cost of living per county. It is obscene that a San Francisco household should have to pay the same effective tax rate to someone in Fresno where cost of living is much lower. $300k in AGI for a married couple is a lot in many regions of the country and in others it is squarely in the middle class. Thus, income tax brackets should be adjusted for cost of living. I’m not sure if this could work, but it would make a lot more sense then the current tax system.)

===========================================

Jake wrote: “Sorry, but most of this applies to the 0.01% of income earners, not the 1%. Additionally, a lot of what you outline is misleading. I’ll address each section.”

While many of these tax breaks are most beneficial for the .01%, the .05% and yes even the 1% get more out of many of these tax breaks than people with middle class incomes. The super, super rich get the best tax breaks of all.

RE: The Rich paying 0% on Capital Gains Tax

Jake: I don’t know how you got 0% capital gains tax. Not only do the rich have to pay capital gains tax, but they pay it at a higher rate because of their income.

The really rich do not pay capital gains tax at a higher rate. How can this be? Most people who aren’t extremely wealthy have to work and work for pay. When we work, we generate income. This income is what defines our capital gains tax rate. The top capital gains rate for the wealthy is 20%. So how are some getting away with not paying any capital gains tax?

The super rich do not need to generate income. If an investor is in the 10% and 15% tax bracket for income, then s/he pays 0% in capital gains tax. This means that if someone has enough money to sustain them via investment growth and dividends, s/he never has to earn income and can stay in the lowest income tax bracket, thus withdrawing any dividends and gains on investments at a 0% capital gains tax rate.

Thus, my point is that capital gains tax rate should be the same for everyone, not based on income levels, so that way no one can cheat the system.

RE: Mitt Romney paid just 15% federal income taxes despite making way more money than someone in the top brackets

Jake: Yes, Mitt Romney paid 15% in federal income taxes, but most Americans making 50-75k paid 7.8%. Someone that makes 100-200 paid 12.1%. The kicker? The bottom 50% of income earners paid 0% in income taxes. It puts Romney’s 15% in context. These are facts.

This isn’t about the bottom 50%. Yes, in our society people who make money pay tax to support services for people who are unable to make enough money to live, true. But the actual problem here is not about the bottom 50%. It’s the fact that the middle class is disappearing due to loopholes like this only available to the super rich. If you make $100,000 a year (single filer) you will pay 21.18% of all of your income to federal tax. If you make $200k, you’ll pay 24.93% of your income to federal tax. At $300k a year, that’s 27.62% to federal taxes. But if you’re super rich and in one of these jobs where the loopholes are available, you can pay much less while earning much more.

RE: Home deduction tax benefit is much better for the rich than the middle class

Jake: “Yes, the rich enjoy the home interest deduction along with 67% of America. The rest of Americans can also deduct the full amount, while the PEASE limitation reduces the amount that the rich can deduct.”

True. However, the way taxes work, the wealthy are getting a much bigger benefit to purchase property over the middle class. If the wealthy haven’t taken advantage of the former loopholes, basic math tells us that the deduction for the rich is going to be greater than that for the middle class. “One of the unfortunate and largely unintended effects of structuring tax benefits as deductions or exclusions is that they tend to provide much bigger tax benefits to those in the highest tax brackets. For a wealthy taxpayer in the highest tax bracket—now 39.6 percent—a $10,000 itemized deduction, such as one for mortgage interest, results in $3,960 in tax savings. For a taxpayer in the 15 percent bracket, however, that same deduction is worth only $1,500.” (source) Yes, the PEASE limitation is helping this a bit, but the mortgage interest deduction still percentage-wise much greater benefits the wealthy over the average middle class person.

RE: Giving to charity to preserve family wealth

Jake: “This just doesn’t make sense. How can you knock giving to charity?”

Answer: Because “giving to charity” is not always actually giving to charity. For example, the Walton family, heirs and heiresses to the Walmart fortune, are using this loophole very smartly to preserve their wealth over generations. With a fortune worth $115.7B, the family is set for at least a few generations, and tax laws help them ensure this.

How is this possible? The Waltons and many other super rich families use a charitable trust that allows the donor to pass money on to heirs after an extended period of time without having to pay estate tax! If a donor locks up assets in charity  trusts (CLATs) for a long period of time an amount set by the donor is giving away each year but whatever is left goes to a beneficiary TAX FREE. Just one of the charitable trusts would result in $2.2B for Walton heirs, without owing any tax on it. (source). While most people won’t have to pay estate tax anyway (your estate needs to be worth more than $1M before estate taxes begin to be levied), it is the super rich that the estate tax is designed for – to ensure that people aren’t just living off their family’s wealth and never paying a cent to support the government or working a day in their lives.

RE: Deduction for private jets

Jake: ‘Not many 1%’ers own private jets. That’s for corporate CEOs, professional atheletes and entertainers….many of the 0.01%”

True. This is probably relevant only to the top elite only. Nonetheless, it’s still a tax break the super rich enjoy.

RE: Fake-Out Agricultural Tax Credits

Jake: Anyone who owns a home can do this (67% of America), not just the 1%

Each state has its own rules on how individuals who own property can take tax credits for agricultural use. The point is not whether anyone who owns a home can take these credits, but how the credits are much more valuable for people who own expensive homes and properties. Another example of this – in NJ, fake farmers are costing the state millions of dollars. The Farmland Assessment Act of 1964, intended to preserve agriculture in NJ, is being used by millionaires, developers and anyone with at least five acres of land to slash their farmland tax bills by 98% — all they need to do is produce $500 in goods per year to qualify for tax breaks. For instance, one person used a cow to eat the home’s front lawn for a few months and then sold the animal, enabling the individual to take the tax break on their five acres.  Even Bruce Springsteen takes this tax credit. While he pays $138k a year in taxes on his own home, he owns an additional 200 acres which he has a farmer come and grow a few tomatoes so he doesn’t have to pay a lot of tax on this land (only $4639 per year.) (source)

Thus this tax loophole doesn’t benefit 67% of America who own property, but only the super wealthy who own more than five acres of property (rules vary per state but generally this is designed to help the super rich fake farmers only.)

RE: Rental Property Tax Benefits

Jake: Anyone with a rental property can do this type of exchange, not just 1 percenters.

Again, you’re spot on Jake. Anyone can take advantage of the tax loophole which enables them to purchase rental property and do a like kind exchange to trade it for property worth the same or more without paying taxes. Now, only the rich can afford to do this enough for it to make a big difference. For example, as someone with $300,000 networth, I invest in real estate via REITs. When I sell a REIT I must pay capital gains tax on this REIT, even if I want to purchase another REIT. I cannot just trade this without paying any tax. Also, I could own rental property and do a like kind exchange, but with $300,000 total in networth I’m not going to be able to purchase enough property for this to really help. Since wealthy real estate investors can do this over and over again (there is no limit for how many times they can trade property without paying tax and taking deductions for depreciation of their owned properties on sale) in the long run they will only pay capital gains rates on the property sold last.

But if you’re really rich, you never have to sell this property when you’re alive! You can pass this on to your children tax free. The basis which your children will pay tax on upon sale of the asset is determined not by how much you paid for the property in the first place, but instead how much it was worth on the day you die. Assuming you were a very smart investor and used like-kind trades throughout your life, you could have significantly grown your real estate value over time, enjoyed depreciation deductions, and then pass on the property tax free to heirs who can sell it for the amount it’s worth on the day of your passing. Most people cannot afford to keep so much of their networth locked up in investment property, but the super rich can.

So, Jake, as you see, much of my points have to do with how these tax benefits mostly help the super rich. This may not be the 1% but at 1% you start to experience some of these benefits. Once you have a certain amount of money in your family, though, you can maintain it for many, many generations through these loopholes.

 

10 Tax Breaks That Only The Rich Enjoy

Ahh, what’s that smell? American Greed?

We 99%ers love to call out the 1%. Some get to the 1% with hard work and luck, but many are placed there due to being born into privilege and likely a sizable inheritance. Others weasel their way into wealth. Few can get there in a way that wouldn’t make some “kooobaya-type god”scream mercy. Regardless of how the 1% made it to the top of the fiscal food chain, they can enjoy a whole host of benefits staying there — private jets, beautiful women, more beautiful women, houses, yachts, and — last but not least — some really tricky tax breaks so they can just keep accumulating more and more wealth!

Here are 10 tax breaks that only the super rich enjoy. Read ’em and weep.

  1. Income Tax, Smincome Tax
    The rich don’t need your stinkin’ income. CEOs can come out and say they’re going to take a $1 salary and the masses think that they’re being just so damn humble and giving. Not so. While us lowly folk have to work and get paid salary to do things like eat and have a roof over our heads and pay for our kids piano lessons, the rich can take their heaping savings and put it into investments that compound over time. Good thing these folks are not actually earning any income because that means they can enjoy 0% tax rates on all of their capital gains. The best us lowly folk can do is attempt to put together an investment plan that eventually provides us with enough dividends and capital gains to also take out our money tax free, even if we never have an army of beautiful girls/men and/or private jets (source)
  2. Taxes Are for Losers (AKA Poor People)
    Some rich folk work in fields like investment banking, private equity management, or real estate partnerships. Not only do they get paid a lot off the bat for these roles in terms of total compensation, their pay is not in the form of that same lowly income you and I see deposited into our bank accounts every few weeks. These modern-day royals get to be paid in a “carried interest” which is – somehow – usually taxed as a capital gain instead of ordinary income. That means these richies are paying 20% taxes to the federal government on all of their earnings. Even Mitt Romney managed to pay 15% taxes for his great service to our country as head of Bain Capital (yea, aren’t you glad he didn’t become our president?) (source)
  3. Home is Where the Cash Is
    The government wants to encourage home ownership because this means the country is more stable, generally speaking. Thus, big brother provides tax incentives for home owners of all wealth levels (as long as you can afford a house.) However, the best writeoffs go to the super rich. The mortgage interest deduction lets taxpayers who itemize deduct the interest they pay on their home mortgages. The way the program is set up, the more expensive the home and the higher the homeowner’s tax bracket, the bigger that subsidy is. (source)”Less than one-third of taxpayers are able to take advantage of the deduction—it is restricted to those who itemize their deductions, a group that skews toward the upper end of the income distribution. Also, the benefit is tied to the marginal tax rate of the taxpayer and so has higher value to those with higher income. For households making above $200,000 a year, the average benefit is $1,784 a year in tax savings. For households earning $65,000 a year, the deduction generally yields less than $200 in tax savings.”  (source)
  4. That Foggy Definition of Charity the Rich Love
    Oh, what wonder, a 1%-er is donating something to charity. That’s great, if genuinely done to help an organization, but often the reason for donation is not exactly out of good will. It’s horrible to say but many charities are corporate scams. Seriously. Let’s take a look at Walmart. The Waltons, owners of Walmart, are using “Jackie O” trusts to both give money to charity AND pass on money to future generations without paying estate taxes. Oh, and did I mention they’re doing this all through their own charity, The Walton Family Foundation? This is perhaps more disturbing than the other tax loopholes because wealth dynasties are why inequality is cemented into American culture. (source)What’s more, “generally, you can deduct the fair market value of property you donate to charity if you’ve owned it for more than one year and the property is used to further the charity’s tax-exempt function. Thus, the appreciation in value is untaxed forever. The tax law limits the annual deduction for gifts of appreciated property to 30 percent of AGI, but that still provides a gaping tax loophole.” (source)
  5. Beam Me Up and Around and Around Scotty
    Geez, private jets are just so damn expensive. But how else are the rich supposed to get from point A to point B? Not with the underlings, by god. There is a special subsidy for corporate jets which cost taxpayers $3 billion a year. Yes, a common tax trick and CEO perk is to pay for private jets under the guise of security (because what if a poor average flight attendant accidentally spilled coffee on their Prada suit during a turbulent flight???) If a benefit is classified as for security purposes the CEO will pay a reduced tax bill or no tax at all on the bene. (source)
  6. Mooooooooooooooooooooooooooooo. Mooo. Mooooney
    I feel like we should just let this tax write off slide for the sheer fact of it being so ridiculous. JK. This will make you want to go tip some cows. In states like New Jersey, Florida, Texas, Iowa, Colorado, Alabama and more, farmers can take a tax deduction for their service feeding our great nation. That is, even farmers that aren’t farmers at all. According to an article in The Nation, that’s what Michael Dell did with his second home—a suburban ranch in Austin. Because he hunted there periodically and maintained a “well-managed deer herd,” he was able to reduce the property’s 2005 market value from $71.4 million to an agricultural value of $290,000. That saved Dell—but cost Texas—$1.2 million. Florida has a well-known “rent a cow” program (I kid you not.) What is this cow business? To qualify for the tax writeoff, Florida requires a couple of cows or a herd of goats, which don’t have to be on the property all the time. So you have wealthy people paying next to nothing on property tax because they own lots of acres and can afford to rent a few cows.  (source)
  7. John Edwards and Newt Gingrich Walked into a Bar (and didn’t pay any tax)
    This one is a doosey and surprise surprise it involves politicians again. Slime of the earth. Payroll taxes are supposed to be paid on income from work, with social security payroll tax paid on the first $113k in earnings (as of 2013) and medicare payroll tax paid on all earnings. Except S corporations, which are made up of a partnership of self-employed type folks, don’t need to qualify all their earnings as payroll, and thus it doesn’t need to be taxed. This one gets a bit complicated to explain, so just check out this writeup to get the full picture of how dishonest richies can get away with legal tax loopholes that only benefit the 1% (source)

    • Newt Gingrich: In 2010, Gingrich Holdings, Inc and Gingrich Productions paid Newt Gingrich$444,327 in wage income while declaring $2.4 million as profits of the S corp. This allowed Speaker Gingrich to avoid $69,000 in Medicare payroll taxes. [Wall Street Journal Market Watch, 1/23/2012]
    • John Edwards: Senator Edwards earned $26.9 million from his work as a trial lawyer in 1995. He paid himself a salary of $360,000 each year for four years and took the rest as distributions from his S corp. This saved Senator Edwards an estimated $600,000 in payroll taxes. [New York Times, 7/10/2004]
  8. Selling a House and Paying Taxes?  Yea, Right.
    Even average American homeowners can take $250,000 of their home price increase tax free ($500,000 for married homeowners) which is a pretty good deal after years of fixing broken air conditioning systems and having termite genocide parties. But the real tax benefit for housing is only available to the super rich (surprise!) A 1031 Exchange, also called a like-kind exchange, enables real estate investors to trade the equity in one property to another property of equal or more value without having to pay taxes (yes, you heard me right.) The taxes will need to be paid eventually, but the investor, in the meantime, gets to reallocate their portfolio and you can still take a depreciation tax write-off on your properties that are being exchanged. There’s no limit to how many times you can do a 1031 exchange. Since the rich are doing this with their real estate investment property (you can’t do this with personal property, sorry 99%), when they do sell it eventually they’ll sell at the capital gains rate. (source)
  9. Tax Breaks (i.e. Itemization) Seriously Favors the Rich
    There are many different tax deductions available to take. But, of course, in order to take a deduction, you must itemize your taxes. While itemizing makes financial sense for high-income Americans, it does not for low ones. This means that deductions are mostly utilized by the rich. Only about one-third of Americans itemize their deductions, and they are mostly the well off. In 2010, only 29.3% of those making between $30,000 and $50,000 itemized, but 96.8% of those making $250,000-plus did. (source)
  10. One Home is Just Not Enough
    Speaking of itemized deductions, owners of two homes get to write the mortgage of their second one off as well, as long as they itemize. It turns out this tax benefit isn’t for folks who own tiny little vacation bungalows by the shore or middle-class lakeside cabins. Nope, the main benefactors are the super wealthy. Just to rub salt in the wound of us reg’ies, rich folk can DEDUCT THE INTEREST PAID ON THEIR LUXURY YACHTS (fyi that clink-clanking you hear is the sound of me kicking all the buckets in the world.) As long as these boats are equipped with sleeping quarters, a kitchen and a toliet they can deduct the mortgage debt on these “homes.” (source)

 

How to Estimate Your Tax Rate in Retirement

As I’ve been running calculations on whether or not it makes sense to do a Roth Conversion, I came back to the question — what will my effective tax rate be in retirement?

That’s a question a lot of us considering a Roth Conversion should ask, but it’s not one that is easy to answer. What’s important, though, is that the numbers you plug into your calculations are reasonable. After all, expecting a 40% income tax in retirement each year can greatly skew your calculations if in actuality you’ll see a 20% effective tax rate.

This Forbes article by Erik Carter was really eye-opening: Why Your Taxes in Retirement May Be Less Than You Think

Article Highlights 

  • You are probably overestimating what you will have to pay in taxes at retirement
  • Withdrawls from Roth accounts are tax-free at 59.5
  • Social Security is taxed at ordinary income rates but only part of it is taxable
  • Long-term capital gains are taxed at lower rates than income tax (*at least according to current tax law)
  • Your income will probably be lower and put you in a lower tax bracket (i.e. experts recommend 80% of your pre-retirement income, but you may need less)
  • When you are older than 65, you get different deductions than younger people. For instance, you have a $1550 higher standard deduction than us young folk
  • A lot of 401k contributions withdrawn yearly will be taxed at lower rates, especially if you plan on taking out less than $36k per year (note, that’s no where near 80% of my current salary, but I could live on it in another state if I owned a house free and clear)
  • Tax rates could be higher when you retire but that’s unlikely (*not impossible)
  • Lots of people retire in states that don’t have income tax like Texas, Florida and Nevada. (*check out this handy-dandy state income tax calculator and weep… unless you live in a state with low income tax.)
  • Move where all the old people live and you’ll be fine.

My CPA and I… 2011 Taxes, Almost Done

After years of fairly simple taxes finalized in less than an hour online, this year I went to a CPA hoping that he’d provide me more in value than an H&R Block, given his rates were $220 an hour. Selecting a CPA was a daunting process and admittedly one I ran out of time to do effectively — all I knew is in order to properly submit my 83(b) election form with this years taxes, I needed to paper file, which took Turbotax out of the running.

Going to a CPA, I learned, isn’t a lot different from doing your own taxes online. I sat there with him for a full two hours reviewing my paperwork (which admittedly wasn’t as organized as it could have been) — but what took the most amount of time was him trying to understand my gains and loss statement for my Sharebuilder account, which — I thought for a CPA — should have been easy. He also was confused by my tiny Lending Club and Prosper interest, not knowing where to put it.

I expected to owe taxes this year, and really had no idea if it would be $3,000 or $10k, so I was prepared for the worst. In the end, the relatively good news is, I seem to only owe $3500 or so, plus the $500-$600 to the CPA. I can also sleep at night knowing a CPA filled out my tax forms versus my guessing on a few confusing parts of TurboTax. It’s a little bit of a bummer that I am paying $600 or so to file taxes, versus $100 online, but this also ensures my forms will be mailed in that have to be sent with a paper return.

This week, I also re-discovered the inefficiencies of the IRS and just how behind the times they are when it comes to technology. It’s amazing they let anyone e-file taxes to begin with.

In any case, I’m almost done with this filing. I need to figure out if a stock gain was recorded properly on my taxes last year, or if I need to count it in this year’s taxes. I’m on a life mission to get much more organized around taxes and everything else. It’s only going to get more complicated from hereon out.

Taxes Due, Headed to a CPA

Every year so far I’ve managed my taxes via TurboTax. I’m not sure if my taxes were done right, but they were simple enough where I was pretty confident in my ability to answer questions on a software used by tens of thousands of people.

This year, however, I’ve decided last minute to have a CPA do my taxes. There are a few items I’m nervous about and want to make sure to get right. That said, I’m also extremely nervous about selecting a CPA — because they could easily be wrong too. Most CPAs that are good are booked solid until after the 15th right now, which leaves me a little concerned over the CPA I found that seemed to have a few (or maybe more) available appointments. However, in my neck of the woods where everyone is rich, I’ve found the minimums to do one’s taxes are $1500 or $850 (two real quotes I got), so the one person who quoted me $220 an hour with assistants costing $90 an hour, minimum 2 hours, seemed reasonable. Still a lot more expensive than TurboTax — which I’ll probably fill out anyway just to keep my records electronic (I wonder if I can save it without submitting) — and I doubt it will “save” me any money in the actual tax return, but at least I’ll feel like it’s done right.

I’m concerned about 5 particular items:

  • 83b filing. You have to file that along with your taxes the year you make the election, and there’s no way on TurboTax to attach documents. I could fill out the paper form myself, but that would be putting a lot of confidence in my math abilities that i don’t have. I am also starting to be paranoid about the IRS never receiving my original “within 30 days” election (even though I sent it within 30 days) and want to make sure I get this right, just in case anything should happen later which would result in my being majorly screwed. I sent it certified mail with a return receipt but given I never mail anything anymore, I apparently did that incorrectly and never got the receipt, so I’m extremely concerned.
  • Stock losses. I took a sizable amount of losses this year on a few big losses that were not going anywhere, so I could reinvest the funds left in them into more profitable companies such as Apple, as well as diversify internationally. I “lost” (not paper loss) more than $3000 this year (probably more like $6000), and I want to make sure this is filled out correctly and that any additional losses over the $3k are noted to be carried over to next year.
  • IRA conversion. Last year I opened a traditional IRA with post-tax money because I thought I would end up making too much to qualify for a Roth IRA. I think that may be true. Regardless, if you make more than something like $6k you cannot use pre-tax money for an IRA. Which is stupid because if you don’t have a 401k then you have no way to set aside pre-tax money (unless you’re a real sole proprietor, in which case you can set up a solo 401k.) In any case, I want to make sure the IRS understands that this was post-tax money, so when I later do a Roth Conversion (ideally on a year I stay home to be a mother and have very low income taxes) I’ll be able to only pay tax on the interest on the account with a $5k basis.
  • $20k of freelance income I forgot about — is there anything I can do to reduce the amount of taxes I have to pay on this? Probably not, but worth asking.
  • General investment taxes — my taxable account dividends, P2P lending accounts, etc. It would just be nice to hear someone who does this for a living discuss if I’m doing anything wrong here.

Otherwise, my tax returns are simple enough to do via TurboTax. Other than the carried over stock losses, I assume next year they will be even more simple as I’m back in a full time job (hopefully for the remainder of this year) and not earning freelance income because I’m so busy with this FT job.

Have you ever used a CPA for your taxes? Do you feel it was worth it? How much did you end up paying?

Tax Freedom Day: You are Now Free to Earn Income

Congrats! You have now paid the government your taxes for the year, and are now able to earn income.

What??? Didn’t you spend the last three months earning income this year?

Well, yes and no. Today is National Tax Freedom Day. On average, it takes us 102 days to pay for the taxes we owe the government, and it’s coming three years later this year than last.

For some states, actual tax freedom day comes much later. In Connecticut, their Tax Freedom Day falls on May 2 – nearly halfway into the year! California, where I live, won’t reach Tax Freedom Day until April 16 this year. Those in Mississippi get to celebrate Tax Freedom Day the earliest – March 26, followed by Tennessee, South Carolina, Louisiana and South Dakota.

Want to know when Tax Freedom Day is where you live? Check out the official map below…