Earlier this year I posted about our tax situation from 2007, and what we would be looking forward to in 2008. Since Her and I just got married, we needed to do the usual adjustments for our lives, including the exciting tax situation! Here’s what’s been going on.
I grossly UNDERESTIMATED how much money Her and I would bring in from all income sources: Her’s job, my job, and blog income. When I ran the numbers last February I must have been under the influence of something really good because I was really optimistic about a refund. Plugging the numbers again reveals that we’re going to OWE ~$4,500!!!1!1!1!!
After finding out how much we are going to owe, I went into super action mode to see what we could do to reduce our tax burden. They are as follows:
- IRA – We’re at the point in our lives where we’re making too much money to take the deduction for contributing to a Traditional IRA. No luck there.
- Adjust withholding – To cover our tax burden, we would have to increase our withholding by $450 per pay period. Since it is close to the holidays and we’ve already made travel plans, this doesn’t seem too feasible. Plus, what about the presents?!?
- Spend money – A large part of our tax burden is due to the increase of blog income this year. We haven’t put too much money back into the business, but we could easily change that….
- Increase 401(k)/SIMPLE IRA contribution – yeah we could do this as well, but we’d have to contribute $18,000 to erase the tax burden. Again, the travel, the presents, the humanity!
- Open a SEP IRA and contribute to it – Again, we would have to contribute a LOT of money to substantially reduce our tax burden. The maximum amount that we’re allowed by law to contribute is not nearly what we’d need to offset our taxes.
- Open a Solo 401(k) and contribute to it – Once again, we’re going to have to contribute MUCHO DINERO to lower our owed tax. The solo 401(k) has a substantially higher contribution limit which would allow us to put in what we would need to make a dent in the tax burden.
- Gift tax – we’re going to see a tax guy to confirm whatever plan we have, and to PUT THIS TOPIC TO REST.
So what action are we going to take? We’re going try and reduce our taxable business income. We’re going to open a solo 401(k) with Fidelity and will contribute a good amount of business cash there. We are also going to put some money into our business and expanding. The expenses incurred with that will further reduce our taxable business profit. After all this is said and done, we will owe ~$500.
Looking ahead to 2009, we’re going to once again try and not owe or have a refund. We’re going to change our withholding to cover our expected 2009 salaries. For this, we’re going to assume that we have no other income. The taxes on our business income will be paid from those funds quarterly. We’ll contribute a small amount into the solo 401(k) to reduce our taxable income to be eligible to contribute to Roth IRAs, which we will max out.
To make sure that our 2008 and 2009 plans were indeed feasible, we decided to see a tax guy. First things first: WE WILL NOT OWE ANYTHING FOR THE GENEROUS GIFT GIVEN TO US. Second, we had a good chat with our tax guy and he did confirm that our plan was sound and that we were taking advantage of all of the tax benefits available to us.
Since we’ve returned from our honeymoon, I’ve spent many hours looking up tax topics and figuring everything out. I hope that the knowledge I gained will help us to make better tax decisions in the future.