While I realize the government is running such a deficit that it needs as many of my tax dollars as I can give it, I don’t agree this is best for me, so a lot of my financial planning has to do with tax efficiency.
This comes down to just a few things:
1) Use all the tax advantages I can. This means 403(b)s (in my case, anyway, since I work for a non-profit), Roth IRAs (I qualify), and flexible spending accounts. If I needed it and I could I’d also use a dependent care account. Anything to reduce the tax sting, which is substantial for someone like me with a marginal tax rate of about 30%. It also means claiming mortgage interest and student loan interest if you’re in those positions.
2) Invest in a tax efficient manner. This means not only to use the 403(b)s and Roth IRAs but to invest outside those accounts in ways that make sense for taxes. Index funds (or, actually, in my case, an index fund exchange traded fund) which spin off little to nothing in capital gains helps. Right now, dividend paying stocks or funds are fine in taxable accounts since they get a preferred rate, but that could change soon. Stocks which pay no dividends are even better in taxable accounts. And hold onto your stocks long enough to avoid short term capital gains.
3) Don’t overpay! Despite all the many, many friends of mine who brag about their tax returns, I don’t believe for a second getting a return is financially wise. In the exchange between yourself and the government regarding your income, someone owes someone, and I’d rather I owe them at the end of the year rather than they owe me. Why? Because someone’s giving the other an interest free loan, and I’d rather get the interest free loan and pay it back in the end than give the interest free loan and get the money back later–sometimes much later. This is why I was kicking myself so much over getting a refund recently because I overpaid on April 15.
These three things are the core of my tax strategy. Do you have any other ideas?
Yes, I have historically loved dividends, and in fact, it’s always been a consideration when evaluating a potential stock buy. One of the great things about dividends recently has been the preferred tax treatment that the federal government has given what it considers “qualified ordinary dividends”: a maximum federal tax rate of 15%.
In 2011, unless legislation changes things, that’s all over.
Starting then, qualified ordinary dividends will be taxed as ordinary income.
This doesn’t mean I’m going to stop loving dividends, but I’ll want to buy those dividend paying stocks in sheltered accounts, rather than ordinary brokerage accounts, for some time to come.
A few months back I borrowed money from myself to pay my tax bill for 2009. I did this by reducing (not eliminating!) my 403(b) contributions, increasing my tax withholding, and taking money out of a savings account I try to not touch.
A couple of months later, I’ve almost repaid the whole amount.
In celebration, I just increased my 403(b) contribution back to the previous amount so I can make sure I still do my maximum for 2010. In a week or so I’ll get my tax withholdings back down.
It feels nice to have repaid that to myself.
I love dividends. In fact, one of the things I look for when I buy a stock is whether or not it pays a dividend and how much it is in comparison to the stock price (it’s not the only thing, of course, but I like to see a nice dividend). There’s been even more to like about dividends in the last few years since qualified dividends have gotten a better tax rate than ordinary income on the federal level.
Unfortunately, that special treatment is due to expire in 2011. With record deficits going on in Washington it’s quite possible that it won’t be extended and dividend tax rates might be back to regular income levels.
If that’s the case, while I will still own dividend paying stocks, I will restrict them to my tax sheltered accounts (Roth IRA, regular IRA, and 401(k)/403(b), etc.).
I agree taxes are needed, but I won’t pay more than I have to.
In case you didn’t know, Hawai’i has its own tax day, April 20th, five days after the IRS tax day.
And that day is today.
I’m not saying a lot more today because I have to make sure I get this check in the mail too, just like the one for the feds last week.
Yes, the American Recovery and Reinvestment Act went into effect in 2009 and my personal evaluation of it is that it was just giving me more take home money so I could pay more in the end.
Essentially, borrowing from myself.
The marginal tax rates, however, have really not changed–meaning that instead of owing my usual about $400 at the end of the year, I owe about $900.
So much for that.
In order for me to pay my taxes this year, I considered several possibilities, even selling off some stock. Instead, I’m dipping into savings I don’t like to dip into to pay for these. And after the taxes are paid I’ll be repaying that account $150 a paycheck until it’s replenished.
What a shell game this year’s taxes are, with the end result being I’m borrowing money from myself.
Yes, the American Recovery and Reinvestment Act went into effect in 2009 and my personal evaluation of it is that it was just giving me more take home money so I could pay more in the end.
Essentially, borrowing from myself.
The marginal tax rates, however, have really not changed–meaning that instead of owing my usual about $400 at the end of the year, I owe about $900.
So much for that.
In order for me to pay my taxes this year, I considered several possibilities, even selling off some stock. Instead, I’m dipping into savings I don’t like to dip into to pay for these. And after the taxes are paid I’ll be repaying that account $150 a paycheck until it’s replenished.
What a shell game this year’s taxes are, with the end result being I’m borrowing money from myself to pay back money I originally borrowed from myself.
I spent three hours of my life working on my 2009 taxes.
Granted, my taxes are not the most complicated, although multiple sources of income–two jobs, interest, dividends, and other miscellaneous income–makes them not as simple as I would like.
The verdict: I’ll have to pay the state and the federal government a combined $1321.77 more.
Financially, it’s typically better to be paying at the end of the year than getting a refund–as long as you avoid penalties.
Now to find $1321.77 in my budget…
I’m betting that if I spent four hours getting my taxes done–not gathering papers, but actually sitting down with pencil, paper, and calculator in hand–I’ll be lucky.
I couldn’t find a number as to how many hours it takes the average American to complete their tax returns. I don’t know if it’s all that measurable in hours; if the average number of days from the time tax forms are sent out until the time returns are filed is counted, however, I bet that it’s time measurable in months, not hours.
It’s a local holiday here on Friday, so I’m hoping I can get these things done that day.
Tax time is coming. For those of us in the United States, April 15 is -the- day, and as it approaches, more and more anxiety builds. It’s usually not pleasant, but it’s necessary, because in this country, taxes are seen as a necessary evil.
In Hawai’i, we also pay state income taxes, so our local tax day is April 20–five days later.
Tax day is not anyone’s favorite day, but being prepared for it early will help to alleviate the stress and frustration associated with it. I’ve gathered all my papers but haven’t put much time into it yet.
Where are you with dealing with your taxes this year?
