Tag Archives: tax

Fun with Tax Loss Harvesting When the Stock Market Goes South

What’s a girl to do when her short term and long term “gains” are actually bright red losses?

Sell! Sell! Sell!

Now, before you berate me for selling when the market is down, let me explain, I am not selling to get out of the market.

My Vanguard shares were down significantly enough that I wanted to take action. Investing in index funds, I don’t have a strong opinion on one or the other. I had a dividend appreciation fund and a small-cap fund that today were mutually down about $500. That’s a $500 loss I can take against any gains made this year. I could wait for it to go down even more (it probably will) or, I could just pull out the money now and plop it straight into another “different” investment to reap the potential gains (or further losses) of being in the stock market this year.

I pulled out a good $23k from these two investments, and moved them into my Vanguard Healthcare fund which I’m slowly but surely plugging away at the $50k minimum for the Admiral version (I love me a good low-fee admiral fund.) So now my healthcare fund is at about $34k and I’ll have $500 in losses to write off come tax time next year. Not so shabby.

Note I’m not a tax professional and I don’t actually know what I’m doing, so get some real advice before you take any of mine. ūüôā

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!

 

 

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.

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…

Should I Hire an Accountant To Do My Tax Returns?

Read the Her Every Cent Counts Taxes Series

Since tax season is right around the corner, I’m trying to figure out if I should hire an accountant to prepare my tax returns, which one to hire, and how much it should cost me. I’ve pretty much decided I need to hire someone to handle my taxes for me this year, as I’m going to be taxed heavily as an independent contractor and need help finding all the deductions I can take.

Then again, it looks like hiring a tax accountant will cost me $350 – $450. Ouch. That’s a lot of money. I’m sure the work they do is worth that, but it feels like I should be able to do all the work myself. An online tax software would cost me $100, so even if I missed out on $300 in deductions I’d still end up breaking even. And how much money in deductions am I really going to get? I can’t take a housing deduction, I’ve never lived in a space big enough to qualify for that. My “business” expenses are minimal – maybe I could deduct hosting costs for my promotional website, and mileage for the route to and from the office. Other than that, I don’t know what I can deduct.

The complicated parts of my return are going to be from my various investment incomes. God, that’s going to be a nightmare. I’m not sure how to handle Prosper (luckily I only have 10 investments out… but it sounds like the earnings on each one will have to be taxed), and then there’s Sharebuilder and those pesky dividends that count as income even though they’re long gone now, and my Vanguard dividends (most are in my Roth but I also have a small regular brokerage account through them, which is supposed to be my grad school or house money), and then there’s my CD from bank of america and various other places I’ve earned income throughout the year. Yea, that’s where it gets complicated.

But I worry that because it does get complicated a tax accountant will have to take longer than his minimum 2 hours to complete my returns. They’ll end up costing more like $500 or something, which is a pretty big chunk of my income considering so much of it’s going to taxes (15% self employment tax on top of everything else, yuck.)

I’ve reached out to 3 local CPAs, and found that their rates range from about $300 for a return (the cheapest) to $400/$500. I wonder if the more expensive ones will save me more money, or if it ultimately doesn’t matter because any extra money they’d save would be eaten up in their fees.

Here are my 3 options thus far:

  • CPA #1 My fees for income tax preparation fees are at $175 per hour. Most returns I prepare are in the $400 to $600 range. The tax preparation fee is all inclusive as it includes meetings and follow up questions and other assistance you may need. Also, I don’t charge any additional fees for questions during the year. Of course, if you need assistance that involves significant time, it will involve additional fees, and I will let you know this in advance.

  • CPA #2 I charge $160 per hour plus out-of-pocket costs and there is a two hour minimum for tax preparation. 2-hours covers a basic return for an itemizer typical family. I can get you an appointment. (I followed up and inquired what out-of-pocket costs would be…) Tax software license access fee, copies & supplies, postage & misc. runs around $65 per individual tax return.

  • CPA #3 I’d be happy to help you with your 2008 taxes. It would cost around 300 for a schedule C. That includes preparation & the initial meeting. We should meet before the year end to maximize deductions.

If any of you are 1099 out there, or have been in the past, do you use an accountant to do your taxes? How much income merits hiring a tax accountant to deal with your returns?

10 Tax Rules Changes for 2009


2009 is right around the corner. Even though you’ll be spending the first few months of ’09 figuring out your 2008 taxes, make sure you know what’s going on for taxes in 2009.
[via:: diazconsulting]

1. Roth IRAs: Income caps for high-income earners rise in 2009. If your Adjusted Gross Income is in the six digits, this effects you. The pay in limit for Roths increases for singles from $105,000 to $120,000, and for couples from $166,000 to $176,000.

2. Estate tax leaps to $3.5 million, up from $2 million in 2008.

3. Annual gift tax exclusion will rise to $13k per donee, up from $1,000.

4. The standard mileage rate for business driving is 55¬Ę a mile for 2009…a drop of 3¬Ĺ¬Ę per mile from the rate in effect for the final six months of 2008. For medical travel and moving its 24¬Ę per mile. When driving for charity its 14¬Ę a mile.

5. Standard deductions rise in 2009. Married couples can claim $11,400. If one spouse is 65 or older, $12,500. If both are, $13,600. Single taxpayers get $5,700. Those 65 and older can take $7,100. Household heads get $8,350 plus $1,400 once they reach age 65. Taxpayers who are legally blind are allowed to add $1,100 to these amounts. Also, married tax filers who do not itemize can augment their standard deduction by up to $1,000 of property taxes paid. Singles filers can add in up to $500 of taxes paid.

6. If you are 70¬Ĺ or older you can skip minimum required payouts from retirement plans and IRAs for 2009 without a penalty.

7. In 2009 the maximum 401(k) contribution increases to $16,500, up by $1,000.Individuals born before 1960 can contribute an extra $5,500, for a total of $22,000.

8. Contribution payin limit for defined contribution plans such as SEP IRA accounts and Keogh plans increases to $49,000.

9. Personal exemptions are $3,650 for each filer and their dependents.

10. Annual caps on deductible contribution payins to health savings accounts rise in 2009. The maximums increase to $5,950 for account holders with family coverage and as much as $3,000 for single coverage.

What isn’t changing…

Contribution limits for IRAs and Roth IRAs. They’re still $5,000 a year, plus $1,000 more for anyone born before 1959.

How much will my taxes really be this year?

It’s my first year as a 1099 worker. I’m still unclear on what my tax rate is, and how much I will owe in taxes this year. I just hope that I’ve saved enough.

It looks like my overall earnings this year will be $60k.

That puts me in the 25% federal tax bracket.
So I owe the feds $15,000.

Then state taxes are 9.3%
I owe the state $5580.

Self employment tax is 15.3%
I owe an additional $9180

Totaling $29,760 in taxes for 2008.

Then I have minimal “income” from dividends, interest and such, which I will owe tax on.

I assume that means I will owe $30,000 in taxes, or 50% of my income.

That seems rather high, am I doing my math wrong?

Frugal October

My goal this year is to save 50 percent of my income for “taxes” (as a self-employed person I have to pay my own taxes; I do not get any money taken out of my paycheck throughout the year.) While I am unclear what my actual tax rate will be, I doubt it will be the full 50%, thus I will have additional saved funds to put towards larger purchases or saving accounts.

I’m a little behind on my target, which is scary because if my tax rate ends up being 50% after my 15% self employment tax, then I would be screwed. Well, I think I have enough time to catch up, but that means my trip back east is going to have to be frugal, and I’m not going to be able to take any days off of work (I’ll be working remotely from the east coast.)

I try to put $3000 into my Roth IRA right after I pay my taxes, if I have the money available, which leaves $2000 to put in throughout the year before I hit my limit.

However, I’m wondering now if I should be funding a Roth IRA at all. Besides the poor performance of the stock market, the Roth IRA may no longer be the “smart” choice for me. I make about $60k, give or take, before taxes. I think my tax rate right now is high enough where doing a Roth is kind of dumb. Sure, I get to take my money out tax-free when I retire, but if my taxes right now are higher than what I will pay when I retire, then this is a dumb move. Not sure how to figure this out, though. Do any of you know?

Estimated Taxes: Sailing in the Safe Harbor

This (2008) is my first year working as a full-time freelancer. Last year my taxes were so complicated due to partial W2-ing and some freelancing that I probably missed a few deductions I was entitled to.

Next year, I’m hiring an accountant in April to do my taxes.

But – I really don’t want to spend an extra $300 now for a tax counseling session. I feel like there’s enough information online and in books to prep me for everything I need to know. The problem is I’m already, uhm, four months behind (how did it get to be April already???)

The good news is that I’ve discovered one benefit to being a freelancer and having to pay taxes. No, it’s not that pesky little 15.3% self-employment tax that salaried folk don’t have to pay.

It’s the safe harbor estimated tax “benefit.”

As a freelancer, you have to pay estimated tax payments four times a year (there are a few exceptions for people making not that much money, etc, but I’m referring to freelancers that make a living wage).

In 2008, the estimated tax payments are due:

April 15, 2008
June 15, 2008
Sept 15, 2008
Jan 15, 2009

According to numerous articles I’ve read on the ‘net, when it comes to estimating your taxes you have a choice. You either have to pay 100% of last year’s tax that you paid (110% if you make over $150k) or 90% of your estimated 2008 earnings.

If you’re earning more this year then you were last year, unless you can’t control your spending and keep your tax payments safely in a high-interest savings account, there’s no reason that you should chose to pay based on your estimated earnings for the upcoming year.

Why’s that?

You want to have control of your money for as long as possible. You can either turn it over to Uncle Sam and let him make money off of it throughout the year, or you can keep it in your high-interest savings bank account like ING Direct (don’t invest it in stocks, please, you don’t need to lose it all before you owe it), gain a little interest as the year progresses, and pay up in the end.

As long as you carefully save for tax season, the huge chunk of money you have to turn over to the government won’t come as such a shock.

So that’s my plan this year. Last year my total tax (found on line 63 of your federal return) was $4,300, which breaks down to $1075 per quarter.

I know that my 2008 taxes will be much higher than $4,300 (or will they – it depends on how long I keep my contract job. Maybe I’ll end up making much less the second half of the year anyway). Either way, the IRS doesn’t care as long as you take the “safe harbor” route of estimated tax payments.

Plus, that means I don’t have to worry about figuring out my deductions now, for better or worse.

I would like to figure out how to get a home office deduction. Maybe it means I have to move to a place that has a separate room that I can call my office. My rent, which is currently $1050 a month for a studio, is going up in July. I don’t know how much, but probably enough to have me out and about looking at other apartment options. I’ve lived here for two years and really don’t want to move – but if the price of this place and another place that’s more or less better suited for taxing a home office deduction cost about the same, I probably should move.

But I’ll deal with that in a few months…

State Income Taxes: Why California Sucks

When I headed west and moved to California a little over two years ago, I was fresh out of college and not at all worried about taxes. All I wanted was to move away from Chicago’s bitter cold and into the Cali sun. At that point in my life I figured I’d be lucky to ever make $20k a year, and being in such a low income bracket, the income tax amount from state to state didn’t make much difference.

Actually, at the time I didn’t even realize that there was a difference per state in terms of income tax levels. I just thought that everyone in any state paid the same amount for state and federal taxes, just that the state taxes went to the state you lived in and federal went to Bush and his war.

Apparently – that’s not correct at all. (Duh, me.) Each state has its own state income tax. Just my luck, California is the worst for income tax rates at my level of earnings.

Even New York and my home state of New Jersey would be cheaper when it comes to state taxes (although they’re both ranked highly in the list of “expensive income taxes.”)

For a yearly income of $50k – $60k (which is about what I expect to bring in over 2008)…

My state income tax rate & fee,
assuming an annual income of $55k:

California — 9.3% or $5115
New York — 6.85% or $3767.50
New Jersey — 5.525% or $3038.75

I’m surprised at how expensive it is to live in Maine. 8.5% for anyone making $17k or more. Yikes. Who really wants to live in Maine anyway?