The most glorious errors are typically what we learn most from. I learned a lot from doing my taxes myself this year rather than passing them off to someone else to “handle”. I’m rounding numbers, so they aren’t 100% exact for the purpose of this article (naturally, they were on my taxes, hehe!).
I used H&R Block this year because her majesty had a good experience with them last year, and since we’re now married, filing jointly sometimes will give you benefits. Keyword, sometimes. Look at the fine print; it is not always beneficial to file jointly, do not assume it is. All in all, I learned a lot, and I felt it was good money spent not just on having someone doing my taxes, but on learning and piece of mind.
I made roughly $10,000 in 2004 on contract work, up (from what I can remember) 95% of 2003. I managed to expense roughly $4000. Therefore, I had to pay taxes on roughly $6000. Suck. I should spent a lot of that (not all) on business related expenses, whether it be an additional laptop (since my mother took my other one for school), and all the wireless & accessories that typically make those purchases 150% more than they usually are, additional conferences, software, or office related supplies. The majority of my expenses were supplies (new computer, hardware), while the 2nd was advertising – in this case, personal branding. I could of spent more on supplies, but my advertising was about capped.
As a result of our total income exceeding a certain amount, we could only expense a max of $4000 each on school. Therefore, anything above and beyond that… was taxable by the government, meaning it counted towards our income, raising our tax bracket, and thus being taxable income. We both spent almost twice that (differs between each of us). That’s almost $6000 that I’m using to better myself AND being taxed on. The majority of my free time was spent doing contract to cover the cost of school. I understand Uncle Sam needing to tax my contract income if it’s not a business related expense, but taxing my school costs? F’ing ridicolous. I should of put the majority of that money in a new Georgia based mutual fund (think it’s called a 1089?), made specifically for storing money used only for school. You can write checks against it for school supplies, and not be taxed on any of it. Since it’s a 401k, the government can’t touch it either, state or federal; except for a fee for setting it up, hehe (this info based on my research 3 years ago with Edward Jones). Additionally, I might of found a way to market it as a business expense, similiar to how companies force employees to take education for their job requirements, and thus the income spent wouldn’t be taxable. However, the fact that I was a full-time employee for the majority of last year, it’d be a serious stretch for the IRS to believe I needed a BA in Leadership & Management to continue to meet my job requirements as a programmer.
So, seriously hard lessons learned about what part of your income is taxable, and what you can do about it. It was not a negative experience, per se, but a hard lesson in how lack of initiative in investing can bite you at tax time. Overall it was a positive learning experience. I plan on filing quaterly, and demanding W2’s (1099’s failing that) from all future employers/contract employers rather than taking what they give me. I already save all business related receipts.
I know how to use 6k better than my government does… they’re spending $17 mil now up in New Jersey just to prove how ill-equipped our medical infrastructure is in its ability to respond to a biological terrorist attack. You think? Spending 6k investing in my business and/or myself for school (in a non-taxable MF) I believe is better for my country in the long run, since I hope to someday start my own business, and thus pour more money into the economy and create new jobs.
To recap the lessons I learned:
- look at fine print when filing jointly with spouse; sometimes worth it, sometimes not. Case in point, exceeding income gave us both a cap on our how much we could expense towards school
- If in business for yourself, expense as much as possible back into your business. Not 100%, though, if you are a full-time employee elsewhere. I was told this makes it more “complicated” with the IRS by an ex-IRS employee.
- if spending income on education, put into a state ordained 401k mutual fund, at least in Georgia, so you can not only gain interest on the money, use for it school expenses, and not be taxed on any of it
- 1099 work orders suck… if an employer can treat you as a temporary employee and do a W2, do it. They’ll automatically take taxes out and everything else dealing with that; you just get paid with taxes already taken out and have the W2 form sent to you end of year… end of story. Easy, no hassle.
I think our tax laws need to be modified; by being successful + getting married and filing together, I was put into a higher tax bracket, and thus penalized on income I used for school. That’s not right.