Well. Let me give you the short story.
A few months after I quit work and we weren't really sure what our long term income was going to look like, Dave was offered the opportunity to work at a high end subdivision representing builders in new construction. Even though it meant working 13 out of 14 days a week, he accepted because he knew it would give us financial security for several years.
In 2016, we passed the 'money conversation' line for the first time ever in our lives. All of a sudden, talking about money felt constrained. Since this topic, the gaping silence, was already on my radar, I examined my sudden reticence. Why didn't I want to talk about money anymore?
For me, it came down to three reasons.
First, money just didn't occupy the same space in my brain. The most notable way this was true is that I stopped watching the price of gas. I don't mean I didn't know how much I paid for a tank of gas. I mean that I previously noted the price of gas at just about every gas station I passed, silently collecting data points about where I should fill up the tank. This habit of obsessive price watching was born in the gas spike ten years ago, when we came dangerously close to my not being able to afford to drive to work and also not being able to afford to not drive to work. The thought that I would just stop paying attention to gas prices was amazing. And yet it happened.
Second, I suddenly felt sheepish. I, too, didn't know what to say when someone would lament some expense when I knew I could write a similar check for myself in that situation without blinking. I, who have complained about getting a "mmm-hmm" for my troubles, could think of nothing except "mmm-hmm." What do you say without sounding hollow? I still don't know.
Third, it wasn't my money. It *is* my money and I know it, but it feels different to talk about income when your name isn't on the check. It's one thing to talk about money earned at your own job; it's different to talk about money earned by someone else at their job, even if you are married to that person.
That's what happened and I didn't talk about it.
So there we were, living the high life of filling up our gas tanks with reckless abandon whenever the need arose. We fully funded a generous emergency fund, which is vital when your income is as volatile as real estate. We put a nice down payment on a good piece of land close by. We decided to have a baby and paid for her pregnancy and birth. Thanks to our primo Obamacare insurance, that was only $9000 out of pocket. (I think Grace's birth cost us $500 back in the halcyon days of 2005). We started to save money to be able to build a house on the new property that would actually accommodate our family, instead of making do in our current, glorious, hallway house.
Then, in my ninth month of pregnancy with Ella, Dave's team leader had a falling out with the owner of the subdivision, and within a week, the team was summarily dismissed from the subdivision. Thus ended our foray in the land of comfortable budgeting. They were allowed to work all the houses that were under active buyer's contracts, which took most of the rest of 2017, but then we started 2018 essentially on our own. It was like starting all over again. We had no lead pipeline. We got paid once in the first five months of the year. We ate our house fund.
I'm not going to lie, 2018 was rough, but we eventually found our equilibrium and got to know our old friend, median income, once again. We have hopes of maybe breaking the conversation line again in the future and being able to save up for a new house. One day, right?
But I titled this post taxes, and I haven't mentioned them yet. Back in the years of my employment, I always felt vaguely guilty about our yearly tax refund because our federal withholding rate was usually $0. I am here to announce I don't feel guilty no more! As soon as the opportunity presented itself, our benefactor, Uncle Sam, took his full share and more. Packed down and flowing over, so to speak. The unearned crumbs I had agonized over have been paid back with interest.
The two years we made big money, we paid an eye-popping amount in taxes. Now, I don't have a philosophical problem with paying taxes--I think everyone should have some skin in the game--and I understand that the tax rates are set without regard to what you made the previous year or what you might make in a subsequent year, but it's hard not to feel like they took a punishing amount of money that we really could make use of in these latter days.
Wouldn't it be nice if your taxes took into account how likely it is that you will see this income amount again soon? Like a rolling weighted average or something. I am just spitballing ideas. I know tax tweaks get unwieldy fast.
So how much did we pay in taxes? It's a little hard to compare a 1099 worker to a W2 employee because the calculations are done so differently from the perspective of the individual. (From the global perspective, it's not so different.) Probably the straightest comparison is the tax rate after subtracting the self employment taxes. It's a far cry from the 2% of old.
2016 AGI after self employment taxes: 16.1%
2017 AGI after self employment taxes: 14.5%
The problem, such as it is, with living in a low property tax state that has no income tax, in an inexpensive house mortgaged at a low interest rate is we almost never accumulate enough allowable expenses to itemize our taxes, even at the old $12,000 amount. In my adult life, I have only itemized one year. That year, we bought two cars, a refrigerator, and a hot water heater, in addition to our normal deductible expenses. Now that the deductible has doubled, I honestly don't ever see us ever itemizing again. The tax rate reflects our income after the standard deduction because there is not much else we can do to lower it. The rate from the top line, including all income and all taxes, were remarkably stable year over year:
2016 Top Line: 20.5%
2017 Top Line: 20.5%
The old top line was around 9%.
The old top line was around 9%.
If we made approximately the same year in and year out, I don't think the tax rate would necessarily be all that out of line, but we don't. It was only two years. I see the money paid in taxes and think about the new (to us) van we need, and the down payment we need to fund a construction loan, and, and, and. It wasn't a lifestyle for us. It was a quick punch of money that left almost as quickly as it came.
I don't want it to seem like I am complaining. Well, I am not complaining too much. We are definitely better off for having two years of fine living. We did have the money to carry on as normal during the five month dry spell, and we saved enough that we could weather another dry spell if necessary. We were enabled to buy a good piece of land before the price of raw land skyrocketed up some more. I suppose I should be pleased we were able to repay our societal debt. I am grateful we were given such a solid platform to start sole proprietor life and that Dave had such a nice cushion while he thoroughly learned the business. We are in much better shape financially than we were before, but in our day to day expenses, we are back to treading water. Baby steps and patience.
So what does the new tax regime look like down here back around the median with five dependents?
2018 AGI after self employment taxes: 0%
2018 Top Line: 1.5%
Looks like we got a tax cut after all.