Tuesday, March 17, 2015

Tax Post Mortem

I spent the weekend doing our taxes.

Happily this year's edition was much less painful than last year's. In 2013 my desire to keep proper records was thwarted by pregnancy, childbirth, recovery, going back to work, and the mental space all those things require. When I finally sat down in March 2014 to do the taxes, a bona fide disaster awaited me. If I recall correctly, it took three or four weekends of solid work to finally make a coherent data set and complete the taxes.

The reason our taxes can be so onerous is because Dave has been running several micro-businesses over the years. We run these ventures through Schedule C in order to write off his expenses so documentation is the name of the game.

Knowing the weekends of doom that were awaiting me in the Spring of 2014 from the 2013 neglect, I started tax year 2014 with the resolution to keep up with as much documentation during the year as possible. This resolution turned out quite nicely since it took less than a weekend to do both our taxes and my MIL's taxes. Dave also kept up with most of his mileage this year so I did not have to reconstruct a thousand trips with email and Google maps as reference. That was a big sigh of relief. I hope to maintain this system in the future. So far, so good.

Here are results of the 2014 tax reckoning. Based on AGI, our tax rate is -5.45%. If you calculate on gross income and include paid payroll taxes in the figure, our tax rate is 2.28%.  So we weren't a net drain on society this year! That is gratifying, I suppose.

What I find interesting is that our AGI for 2014 is about $900 more than our AGI for 2013, and yet our tax "refund" this year is about $800 higher than last year. Why is this?

I mentioned Dave's business ventures. One of his sources of income is to create projects to display on his blog to advertise the blue big box home improvement store. The way the program works is they send him gift cards and a list of project ideas. He picks one of the ideas, builds the project with materials purchased with the gift cards, writes a blog post about it with links, and then he can pocket as income anything left on the card which he uses for other projects that need done around the house. The big box store reports these gifts cards to the IRS as nonemployee compensation on a 1099. We run this income through Schedule C where we can write off the project expenses and report the balance as profit. All profit is subject to the self-employment tax which is just the payroll taxes in disguise.

This system worked reasonably well for us until, at the very end of 2013, the powers-that-be dumped about $2000 worth of gift cards on us in pre-payment for the 2014 projects. To say I was wrathful is an understatement. I knew at the very moment of opening the mail, we would have to pay taxes on their year end dump because we could not write off expenses which had not yet been incurred. And so it came to be.

This year, it just so happened that my employer decided to discontinue our vacation banks and made us cash them out--at 50 cents on the dollar, but that's neither here nor there--and the extra income we received from that maneuver just about equaled the amount of the gift card dump at the end of the previous year. So the money in our pockets was similar, but the unexpected income this year was run through the standard employee tax model instead of through the self-employment tax model.

Last year for 2013 based on AGI, our tax rate was -3.93% and 2.88% based on gross income and payroll.

Running wages through a standard employment model causes the individual to pay fewer taxes than he would pay as a self-employed person. Isn't that an interesting take on America as the land of independent businessmen?

However after calculating these percentages, it occurred to me that the employee portion of the payroll taxes are not all the taxes paid on my behalf. My employer also pays an identical amount of payroll tax in my name. I decided to calculate the full percentage of all income based taxes for 2013 and 2014. The full tax rates are:


So after all, we earned a smidge more money in 2014 and a smidge more in taxes was contributed on our behalf. I thought that was interesting.

Of course these numbers do not include our true income, noting that our health insurance premiums and retirement contributions come right off the top, and I don't get a handy sheet of paper every year telling me what these items cost. A vexing piece of the tax code is that health insurance paid by the employer is tax free, but health insurance paid by the individual counts towards taxable income. This might have changed with all the Obamacare. I'll have to research it. Once my employment is gone, we will have to figure out these vagaries of law since we will have to buy our own insurance.

Something else of note is the saver's credit. This credit is over and above the tax free contributions allowed into retirement accounts. Basically if you choose to make a deposit into a retirement account, you get a little bit of a credit, but choice is the key component. If you are required by your employer to make the deposit, you do not get the credit. My employer requires a 3% deposit into a retirement account but will match up to 5%. We take full advantage of the match, but only get the savers credit for the 2% difference between the requirement and our actual deposits. It creates an odd paradox where the paternalistic urge to compel employees to save actually takes money out of their pockets. I would be better off if the 3% retirement contribution were not required because I would always take full advantage of a match. That's 100% guaranteed ROI coming right out of the gate. It would be foolish to let that money go. And yet I know that without the requirement, many employees would never save a dime since present needs always seem more pressing than future ones.

Anyway these are just some of the thoughts that occupied my mind as I completed a thousand different forms. I am really curious to go back and see how our percentages shake out for Tax Years 2011 and 2012. Those years we only had my wages and the small profits from Dave's little ventures. Nothing unexpected happened income-wise those years so I do wonder how negative our tax rate got and if it was absolutely negative or just negative in the narrow sense.

But the saddest thing about having done the taxes is that it somehow never made my written 'to do' list. It only took up mental real estate in my head which means, now that it is done, I have nothing to scratch off the list. Sigh.

1 comment:

Joy said...

With all the practice you're getting, you should be doing taxes for other small businesses owners as well.