Thursday, February 25, 2016

Tax Temptations

It's getting to be our favorite time of year again. Tax Time! Well, maybe you are already finished, but I haven't gathered the courage yet. I actually like doing taxes except the mileage. Calculating mileage kills me every year.

This year will be a little different because it will be the first time that we report significant income under Schedule C instead of nominal amounts. I expect that our tax amounts will not be very different from last year because Dave's real estate income pretty much matched the missing portion from the third of the year I did not have a job. Our refund is likely to be much lower since we will have to pay in the Social Security taxes, AKA self-employment taxes, that were not withheld for us. I am fairly confident we will not have to write a check, but if we do, the money has been duly set aside to do it. I also expect to meet the threshold to have to do quarterly payments during this tax year and into the foreseeable future. Joy.

I have often wondered about how sole proprietors get into tax trouble. It seems like a fairly straightforward affair to avoid it. You find a percentage of your gross income that should cover your tax bill and then set that money aside every time you get paid, whether through record keeping or through moving it to a separate account where you don't even have to think about it until tax time. Right now, I am pulling 15% out of every commission check and putting it into a designated tax account. This estimate might be a touch high, but I don't want to have to write a check out of our personal cash flow. As we get a better understanding of how our income will work, I can always adjust this percentage.

We knew when we launched into this real estate career that the financial year would be a cycle of feast and famine. The key to surviving is to plan ahead and save enough during the feasting time of the year (spring and summer) in order to weather the famine time of the year (fall and winter). This is the major reason it took me so long to submit my resignation. We wanted to make sure our surplus was in good order because we expected our first famine to be significant since Dave was not well-established in the business yet. And so it has turned out to be.

A couple of weeks ago at the beginning of February, the first commission check since September was deposited into our account. It was a great relief to finally see new money, and yet the amount left after taxes only covered a little over half of one month's expenses. Our surplus was gone. We now had to dip into accounts which hurt my feelings to withdraw from.

As I duly calculated the amount I should transfer into the tax account, a wild thought popped into my mind. What if I just made a note of the money due to the tax account and kept all the money for our use now? Then, when the cashflow was better later on, I would transfer that amount into the proper account.

I actually considered this course for several hours. Danger! There be dragons!

I was shocked that I would consider something so reckless. I was presuming the money would come later and I could set the accounts right. What if it didn't? I realized how easy it is for the lure of cash in the hand now to override common sense.

I am a person who feels pretty confident in my understanding of money and how taxes work. I, who calculates the likely percentage of taxes due and subtracts it from even the promise of a commission before determining a budget, was tempted to conveniently ignore all that for the extra padding of an amount of money under $400. Madness.

I understand how easy it can be for someone to unwittingly slip into tax trouble. It is always easier to think the money for taxes will come around later while you need the money for bills now. The abyss of seeing the end of the money can panic a person into rash decisions, especially if he isn't sure when the income will begin its upswing or if record keeping isn't a strong point.

Luckily for us, the end of the famine is in sight. By the beginning of April, our cashflow logjam should be freed, we will begin replenishing our stores, and hopefully next year's famine won't be quite so deep. But either way, I'll keep transferring money into the tax account because it's the smart thing to do.

No comments: