Tag Archives: income tax

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10 Tax Rules Changes for 2009

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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¢ a mile for 2009…a drop of 3½¢ per mile from the rate in effect for the final six months of 2008. For medical travel and moving its 24¢ per mile. When driving for charity its 14¢ 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 70½ 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.

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How much will my taxes really be this year?

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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?

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Frugal October

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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?

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Estimated Taxes: Sailing in the Safe Harbor

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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…

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Taxes, Taxes, Oy, Oy, Oy.

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It’s time to do my taxes. I am not waiting until April 14 to sign on to TurboTax and try to figure things out. It’s bad enough I waited until April 4.

The big reason I want to finish my taxes “early” (ha!) is so I can figure out what my estimated quarterly tax payment should be for 2008. I realized that since I can’t afford to pay what I’d owe based on my expected yearly income (which may be way off anyway, depending on whether I can keep my current contract gig or not into the rest of the year) so I’m going to do the 110% of my taxes paid for last year.

I will have to be careful this year to “oversave” for taxes based on a 40.6% tax rate (probably the highest I’d have to pay if I indeed make as much as I could make this year) and keep the extra in an un-touchable savings account so I can send it off on April 15, 2009 without much fuss.

I’ll be reporting back on my experience filing my last year’s taxes throughout the day. Wish me luck!

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Estimated Tax Worksheet – could it be any more complicated? (Don’t Answer That)

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Ok, going by the estimated tax worksheet, perhaps I owe a different amount for this quarter.

1. Adjusted gross income you expect in 2008:

(Adjusted gross income. Use your 2007 tax return and instructions as a guide to figuring out the adjusted gross income you expect in 2008. see Expected AGI — Line 1 in chapter 2 of Pub. 505 — “Your expected AGI for 2008 (line 1) is your expected total income minus your expected adjustments to income”)

Let’s just say $66,000 and forget any adjustments I might take.

2. Estimated total of itemized deductions: no idea

3. Subtract Line 2 from Line 1: $66,000

4. Exceptions: Multiply $3,500 by the number of personal exceptions = $0?

5. Subtract line 4 from line 3 = $66,000

6. Tax =
Figure your tax on amount on line 5 by using the 2008 Tax Rate Schedules on page 5. *If you have qualified dividends or a net capital gain, or expect to claim the foreign earned income exclusion or housing exlucsion, see “pub 505” to figure the tax.

  • 10% on income between $0 and $8,025
  • 15% on the income between $8,025 and $32,550; plus $802.50
  • 25% on the income between $32,550 and $78,850; plus $4,481.25 = $12843.755
  • 28% on the income between $78,850 and $164,550; plus $16,056.25
  • 33% on the income between $164,550 and $357,700; plus $40,052.25
  • 35% on the income over $357,700; plus $103,791.75

7. Alternative minimum tax from Form 6251: (this AMT confuses me to no end so for now I’m going to pretend it doesn’t exist and hope it doesn’t effect me.

What is the AMT? The AMT came into being with the Tax Reform Act of 1969. Its purpose was to target a small number of high-income taxpayers who could claim so many deductions they owed little or no income tax. A growing number of middle-income taxpayers are discovering they are subject to the AMT.

8. Add lines 6 & 7. Add to this amount any other taxes you expect to include in the total on Form 1040, line 44, or Form 1040A, line 28 = $12843.755

9. Credits (not not include any income tax withholding on this line): huh?

10. Subtract line 9 from line 8. If zero or less, enter 0 = $12843.755.

11. Self employment tax. Estimate of 2008 net earnings from self employment. (if $102,00 or less, multiply the amount by 15.3% — Caution: If you also have wages subject to
social security tax, see Pub. 505 to figure the amount to enter) = $10,098

12. Other taxes (see instructions below): let’s just say none.

13a. Add lines 10 through 12: $10,098
b. earned income credit (forms 4136, 8801 (line 27) and 8885) – None (you have to earn less than $17k for this.)
c. total 2008 estimated tax. Subtract line 13b from line 13a. If zero or less, enter 0 = $22,941.755

14a. multiply line 13c by 90% (unless you’re a farmer or a fisherman, then it’s 66.5%) = $20,647.58
b. enter the tax shown on your 2007 tax return (110% of that amount if you are not a farmer or a fisherman, and the adjusted gross income shown on that return is $150k or more) = no idea yet
c. required annual payment ot avoid a penalty. Enter the smaller of line 14a or 14b = $20,647.58

15. Income tax withheld and estimated to be withheld during 2008: none.

16a. subtract line 15 from line 14c:
Is the result zero or less?
Yes — stop here. you don’t have to pay anything.
No – go to line 16b…

16b: subtract line 15 from line 13c
is the result less than $1000
yes – stop. no money needed.
no – go to line 17 to figure your required payment

17. if the first payment you are required to make is due april 15, enter 1/4 of line 16a:
$20,647.58 / 4 = $5161.89

(but this doesn’t at all include state taxes. I wonder if there is a separate quarterly estimated tax payment for that.)

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Freelance Life: Estimated Quarterly Taxes

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I may be way off on this… but my calculations amount to an:

Estimated Quarterly Tax: $6,706

Without the help of a CPA, I’m trying to figure out my estimated quarterly tax payment. My calculations, while likely closer to accurate than I’d like to believe, are definitely more than I have in my “for taxes” saving account.

The good news is that for this year at least, I’m allowed to put 90% of my previous year’s taxes into my estimated tax payments each quarter. And last year, since I was working full time and making much less money, my tax payments for the year were not that huge. I think… and please correct me if I’m wrong… that as long as I pay 90% of last year’s taxes (divided by four) then at the very least the government won’t be charging me any penalty fees.

Regardless, I probably should try to just pay 100% of my estimated tax to avoid a really awful April 2009.

That said… I’m trying to understand these calculations, without figuring out my deductions (since any deductions I can take will just mean that I can get a refund. And I’d rather just get a refund than deal with sorting out deductions each quarter. It’s hard enough to do it once a year!)

—-

Tax Guestimates

Assuming I make $5500 a month for the entire year (I’m overestimating given that I’m making about $5000-$5300 now in any given month… some months I make more.)

TOTAL TAXES = $26,821.362 (or 40.6% of $66k yearly income)

FEDERAL
[$8025 at 10%] $0 – $8025 = $802.50
[$24524 at 15%] $8026-$32550 = $3678.50
[$33,449 at 25%] $32,551 – ($78,850) $66,000 = $8,362.25

Total Federal Tax: $12,843.25

STATE

0% $0 – $6828 = $0
[$9357 at 2% ] $6829 – $16186 = $187.14
[$9358 at 4%] $16187 – 25545 = $374.32
[$10,005 at 6%] $25456 – 35461 = $600.30
[$9353 at 8%] $35462 – 44,815 = $748.24
[$21,184 at 9.3%] $44816 – 66,000 = $1970.112

Total State Tax: $3880.112

SELF EMPLOYMENT TAX

[$66,000 at 15.3%] = $10,098

Total Self Employment Tax: $10,098

—

Estimated Quarterly Tax: $6706

—

Eeks!!! $6,706?

I’ve only saved about $4,500 for this quarter’s taxes. Well, I’ll really be saving more like $6,500, but I don’t get paid until the end of the month, so the next $2,000 I’d put away, which would be for my March-April “month” of work ending April 20, will not be paid until the end of the month. So how am I supposed to pay that in advance?

I’m so, so, so confused.

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State Income Taxes: Why California Sucks

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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?