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.
Man, I thought taxes were messy only in India.
one more thing to learn from this year: don’t go to h&r block! (the exact words my tax preparer said to my fiance this morning). You should to go to someone who really knows the ins and outs of self-emplyoment. Based on my experience with H&R block, it’s not really going to happen there…it almost has a fast-food corporate chain feeling there. Ask around and try and get a good referral for someone, it can (and probably will) make a HUGE difference.
Thanks, I’ll remember that next year! Hopefully by then, I’ll at least be in better investment shape.
H&R block as some good perks, tho yeah it’s fast food. I have had only good experiences with them. Honeslty thought I think it’s all about the guy you get. The guy we got this time didn’t even seem that good at using their software… i wasn’t impressed.
We will go to a ‘real’ tax person eventually, but in this case we needed the fastness of fast food lol.
Well think of a positive, here in Australia i basically pay roughly 48% of my total income in tax (provided we can’t declare any expenses and what not).
I tried to go down the whole ‘buy up business expenses’ by buying laptop/ipod/mobile phone etc. Even then I have to pay half of that back..ie if i buy a laptop worth $4500 then $2,300 is still taxable..
Its a FUBAR system we have in Aust and I’ll happily trade US tax for Aust TAX any day. As typically when i get a $1-5k tax rebate i then loose that to my School fees that we *had* to take out when I was younger..
Ontop of all this, the more money you make the less you get, the less money you make the more you get. Basically the rich take care of the poor and the poor do nothing for the rich.
eg: I pay roughly $160AUD per week to put my son in Child Care 3 days a week. Since my wife and i are in the highest tax bracket we pay approx 90% of the childcare fees.
Yet, if your an unemployed bumb or under our tax bracket, you’re allowed up to 40hrs per week free childcare, in that they basically pay only $25AUD whilest the govt picks up the tab for the rest.
Thats just one of many examples and is why I prefer people who need me to do work for them on the side, pay me via Paypal – basically a offshore bank account lol.
I’m very ignorant when it comes to taxes, but aren’t taxes taken out of 401K type accounts when you do an early withdrawal on them? Or is there an exception with the 1089 form? I also heard that you couldn’t expense equipment as a business expense if you used that equipment for the least bit of personal use. Does anyone have any knowledge of this? I’d love to be able to expense my home computer for contract Flash work I do there, but I don’t think the IRS would smile at all the games loaded on it.
A 1089 might not be the correct name; I can’t find my paperwork, nor did Google yeild anything, but I could of sworn it had a name like that. Yes, early withdrawals are taxed out the yang…however, if I do withdrawals for shcool using this special account, NO, not at all, that’s the awesome part.
I don’t buy that equipment argument, because I used computers at various working jobs for personal use; like sending personal emails, playing LAN games at the end of a long work day, etc. The H&R rep seemed just fine with me using my computer & hardware purchases for work expenses; it corroabarates what my dad does with his business; he buys tons of boats up in Ocean City Maryland, but still uses them to go fishing.
If you use your computer for contract work, yes, it’s an expense. However, what I DON’T know iswhy it gets tricky if you expense it for, say, $1000 and you made $1000 in contract money that year… Dude, if you do game development in Flash, you can expense games too, ya know.
did you list your contract income as a second job income or a s a hobby?
This ex IRS person, they say that a red flag is just raised if expenses = income? My guess is yes. But, IIRC, you are allowed to declare a loss in business income for 3 years in a row max. So, if you consider your contract income as a biz, this would apply, eh? But if you consider your contract income as a hobby, it may not.
D
Jesse, this might be the form you’re refering to:
http://www.msmc.la.edu/INCLUDE/2004Form1098.pdf
After a quick scan of the first 2 pages, that looks like it! …of course, it sounded easier and less restrictive when it was explained to me.
Me and my wife went to H&R Block this year. I have heard mixed things. We went to a lady recommended by my father in law. She was AWESOME. She educated me and my wife while she did our taxes. She even gave great tips on how to handle taxes in the future with my business. (Gave better advice then a crappy business advisor I had to stop using.) She’s been doing it for over 20 years and it showed. It’s good to trust the company (H&R) but better to trust the individuals that MAKE the company have a GOOD name.
Just my 2 cents ;)
Year before last, i couldn’t find a steady, taxable job to save my life.. and living paycheck to paycheck on contract income sucks.. no way could i have paid the quarterly tax amounts and have been able to squeek by at that time..
due to this unfortunate situation i now owe the govt. $3500 in taxes .. yep.. i made around 19k in untaxed income over the summer.. and it all came back to bite me..
i would have owed more.. but i deducted the crap out of things like my home office, driving/mileage, and expenses like buying a new computer, video card, software, etc..
in the long run.. i really got a bad taste in my mouth about doing untaxed contract work.. and i don’t think i’d like to try it again any time soon… either under the table, or tax me.. but i don’t wanna handle my own stuff..
on a better note.. i still haven’t started paying them.. as they allow you to defer the payments until you can work with it..
not sure.. but i think they are going to start making it so even if you declare bankruptcy.. you still have your debt to the govt..
anyway.. glad to hear you are done with yours.. i still have to do mine this year.. time to whip out the old ‘Turbo-Tax’ and get crackin..
later..
////Greg
The difference between HR Block and a CPA is that HR Block uses PAs, who are nothing more than glorified book-keepers. If you get audited, they can’t act as a legal representative on your behalf. A CPA can, and better than that, you don’t need to be present and are less likely to say anything incriminating.