Taxes: I Just Can't Get Them Right!
Posted on November 06, 2008 by Him and tagged income, investments, retirement, taxes
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.
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moom | Nov 6, 2008
I'm surprised that this blog earns enough for this to be a serious tax issue.
I'm not a big fan of doing stuff just to reduce tax liabilities. Putting money in retirement accounts mostly means you can't get it without paying penalties or going through other hoops till you are 60.
Him | Nov 6, 2008 | Reply to moom
I'm surprised that this blog earns enough for this to be a serious tax issue.
Yeah, we are too.
I don't think that doing things just for the sake of tax liability reduction is a good idea either. However, we haven't saved anything outside of our employee-sponsored retirement plans. By contributing to a solo 401(k),we're reducing our taxes by reducing our taxable income while simultaneously saving for retirement.
RB | Nov 6, 2008
I agree you should not base your spending decisions solely on their tax consequences. But, if you are planning to upgrade any business equipment or if you can prepay a January business expense, it can help. Remember, the point of running a business is to make money, and when you make money you pay taxes. So owing taxes means you are doing something right.
On the Solo 401k, if either of your regular jobs also involves a 401k, that adds a bit of complication to your plan. The contribution limits are cumulative of both plans, so you have to be careful not to contribute more than you are allowed. And you must do all this before December 31.
Remember, you have until April 15th to pay your taxes, so if you wait until January, to start saving you only have to save 1125 per month. You were previously paying huge chunks on debt so that should be possible given your income levels.
Him | Nov 6, 2008 | Reply to RB
A few points of clarification:
We actually have until our tax deadline (April 15, 2009) to contribute to the solo 401(k). If we file for an extension, we'll get until that deadline. We do have to establish the account by December 31.
We're aware of the contribution limits of the solo 401(k). As the employer, I'm allowed to contribute 25% of profits; as an employee, I'm able to contribute up to $15,500 in all enrolled plans. These combined limits will allow us to contribute a large amount.
Elizabeth | Nov 7, 2008
Are you sure you have accounted for every last bit of business mileage and entertainment expenses for the blog business? 58.5 cents/mile after July 1, 2008 baby! And 50% write off on all entertainment expenses. You just have to MENTION your blog during the dinner. Save the receipt. Write off the mileage. Voila.
Him | Nov 7, 2008 | Reply to Elizabeth
You know, we did talk about it at our wedding - I don't suppose we could deduct the cost of that? ;)
Be glad at least the income is there, without the burden of crushing debt. How long sis it take this blog to earn the income you are getting from it?
Sounds like a nice problem to have! After all you're only paying a lot of taxes because you have the income to go along with it. You could be paying a lot less taxes but that'd be mean you wouldn't have nearly the amount of income.
Sarah | Nov 7, 2008
Did you change your withholding to be at the married rate? Switch back to the married but withhold single. That might be screwing the calculator up.
The same thing happened to us when we got married, we were expecting a tax refund of at least 2500 but instead we owed 1400! gotta love the IRS and the marriage penalty LOL
HS
I have to agree about rechecking your "expenses."
You can easily invest in some items if anything needs an upgrade, though you have to decide whether to depreciate or take most of it now.
I would be a little less cavalier about expensing dinner. On the off-chance you do get audited, it's harder to justify dinner as a business expense when the two of you are the business and live together.
But go back and check some things: Whenever one or both of you checked on something frugal and it involved driving or some other expense (long-distance calling, etc) you could deduct that.
The best way for future ref of course is to keep a notebook in the car. Note Jan 1 mileage and then any miles driven that you think you could justify as blog-related. (My mom is a blogger, too, and so when we go to big rummage sales, she clocks the mileage in case she blogs about a great find.) Then on Dec 31st, note ending mileage. If you then divide business miles by overall miles, you can deduct that percent of ALL CAR EXPENSES: gas, tune-ups, oil changes, any fixes to the car at all, in addition to the actual depreciation of the car. Most people go the simpler route of miles driven but if you're looking for the most bang for your buck, I'd keep track of everything and figure out which is more to your advantage.
Also, any communication between you and the photog that was long-distance and on a landline: deductible. Any newspaper subscriptions or frugality-mag subscriptions? Deductible. Attend any PF seminars? Buy any PF books? Deductible. Hopefully you're already including your internet connection. Obviously hosting & domain fees. Any contests you have, the items plus any shipping costs? Deductible.
You can get pretty devious while still staying within the lines of the IRS.
I cannot see where you are making the changes in your networth number. I would like to know how that progress is going.
Thanks.
Taxes can be a headache and a half. It's such a relief reading how focused you are on funding your retirement accounts. I've talked to so many debt-laden couples over the course of a few months and IRAs oftentimes aren't even on their radars! To help for next year consider setting aside on a monthly basis a chunk of blog income received into a "blog tax" account that anticipates 20% more blog income that truly forecasted. Keep your chin up and best of luck!
Raj
GoalSpring
Wow! I'm very impressed that your blog has a fairly serious impact on taxes; you must be doing great. If you don't mind me asking, how exactly are you monetizing this blog? So far I noticed a little bit of Adsense and a little bit from Amazon. Where's all this money coming from (probably a bit too personal of a question for a first time commenter)?
Great blog!
http://www.financialnut.com
Michelle | Nov 15, 2008
It's better to pay taxes. Think of it this way - the government if getting your money and using it when you get a refund. My husband and I always pay taxes rather than get a refund.
Peg | Nov 6, 2008
Sounds like it's time to consider a house or a baby! How's that honeymoon?? :) You guys'll figure it out and try to feel good that your income is such that you have to worry about taxes!
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