I Learn Something New about Taxes Every Year
My dad loves to encourage me to “learn something new every day,” and that’s certainly a great way to grow. Kyle and I submitted our tax returns last Saturday, and I realized that we learned quite a bit about taxes this year for our personal return. (I additionally learned a lot about grad student taxes, but that was more academic for me.)
This year was our most complicated tax return to prepare to date, and we did the whole thing without even referencing tax software. That’s right – we manually prepared our tax return (Free Fillable Forms all the way)! Of course, we probably couldn’t have tackled this in this most complicated year yet without having built up many years of preparing less complex returns ourselves and with software. We also aren’t sure that we did everything right – but then again, you’re not really sure with tax software or tax preparers, either.
The elements to our returns this year (beyond the typical W-2 income on the 1040 thing) were:
- fellowship income
- three sources of self-employment income (three Schedule Cs and one Schedule SE) – my contract work (one) and my business (two) because my business transitioned from being a sole proprietorship to an LLC midway through the year
- dividend income and capital gains from investments we sold (straight on the 1040 but also a Schedule D and Form 8949)
- student loan interest payments
- an estimated tax payment
- part-year residency in two states, plus earning as a non-resident in another city and living as a non-resident in another state
The biggest reason that I actually like preparing our tax return manually is that I get to learn new things about the tax code, and that new knowledge is often useful in making future decisions to optimize or streamline our money and tax management. Here are the new things we learned while preparing our tax returns this year:
- I don’t have to include my speaking travel reimbursement income in my gross income if the university was reimbursing me for my exact expenses incurred (accountable system). In this case, the 1099-MISC the university sends me will only reflect my fee and not the travel reimbursement. If I’m reimbursed under a non-accountable system (I’ve had one university already in 2016 do this), I need to report the whole income (the 1099-MISC should reflect both the fee and reimbursement) and then take a deduction for my actual costs.
- If I travel for a speaking engagement but don’t have to pay for sleeping accommodations (i.e., it was a day trip), I won’t be able to deduct my travel expenses because I wasn’t “away from my tax home.” So basically if I have any of these kinds of trips – and I did have one in 2015 that involved flights and taxis and meals – I need to make sure I’m being reimbursed under an accountable system so I don’t have to include the reimbursement in my income.
- I can deduct 50% of my actual meal expenses or 50% of a meal per diem that is calculated by each individual city visited. Since I’m sometimes frugal with my meals on these trips, the latter results in a lower tax burden for me.
- The Schedule D can be tackled like most everything else in a tax return – by diligently following instructions.
- DC has a reciprocal tax agreement with every state.
- You won’t be penalized for under-payment if you have withheld or send in through estimated tax payments more than 100% of your tax due in the previous year.
- If you itemize your deductions, you have the choice of deducting either the amount you paid in state income tax or the amount you paid in sales tax. However, you don’t actually have to keep track of how much you paid in sales tax through individual receipts (unless you think it would benefit you) – there is a standard amount that you can deduct for sales tax that is based on where you live and your income. This is another way low-spenders can benefit from IRS estimates over actual amounts of money spent!
I’m really glad that I found out the stuff about the business travel deductions this year so that I can ask for reimbursements from universities in a way that will simplify/minimize my taxes. I’m not sure if I would have learned about that without manually preparing my return. It took the dedication to do a lot of reading and call the IRS helpline but I cleared up my initial misunderstanding (that I had to include all reimbursements in my income and then deduct all of my expenses).
This year was also the first year that I actually went through the Schedule A to figure out if we would benefit from itemizing our deductions. I remember talking with Kyle’s mom about this a couple years ago and she couldn’t believe we didn’t need to itemize since we tithe. But yet again we benefit more from taking the standard deduction. Even with tithing and being able to deduct sales tax in Washington, it doesn’t look like we’ll benefit from itemizing until we buy a house or my income increases a lot (i.e., we give a lot more).
At the end of the day, we owed the IRS an additional $2,681 and the NC DOT an additional $819 for a grand total of $3,500 out of pocket this month. We had way more tax withheld in 2015 than we owed in 2014 due to Kyle’s income jumps, so we didn’t have any penalties associated with this underpayment. Since we had $6,009.78 set aside in our Taxes account from our 2015 income, we paid the $3,500 with no sweat and even gave ourselves a tax refund of $2,509.78. Oh, and we do have another savings goal in place now that we put that tax refund toward – more on that next week!
What did you learn about the tax code this year in the process of preparing your return? Did you owe tax or get a refund this tax season (or both!)?
photo by 401(K) 2012
Filed under: debt, giving, investing, self-employment, taxes, transitions · Tags: tax refund, tax return
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This year I learned
How to handle IRA rollovers (b/c Vanguard screwed up a dividend check) (it’s very easy, just write the amount on 15a and then write in rollover next to 15b
How to file 8949 (wash sale adjustment, though I did file Schedule D last year)
How to file schedule C, and the importance of cash vs accrual accounting
The max amount that can be contributed to a SIMPLE IRA based off self employment income, and that retroactive contributions can be made through 1/30 of the following year
How to file schedule SE
Not something I learned from 2015’s taxes, but I again filed schedule D because of tax loss harvesting.
I owed $499.
Told ya Schedule D isn’t hard 😉
P.S. Did you get my email a while back about cash accounting for tax credits/deductions school fees?
You definitely learned a lot about self employment this year!
We learned about cash vs. accrual in 2014 if I remember correctly. I guess it’s unusual that we’ve decided to operate on a cash system – but accrual makes no sense to me! (No business training here – only PF.) I’ve had to wait 4 months to be paid by the universities on more than one occasion so I don’t want to count that income before it actually arrives. Which method are you using?
I did see your email – I had no info at that time but I have a bit more now – just responded!
Yeah self employed income is interesting. I also can’t shake the feeling that I did the SIMPLE IRA contribution calculation wrong – even though I checked multiple sources. What’s weird is business income – SIMPLE IRA contribution – deductible part of self employment tax is a negative value. Self employment income + SIMPLE IRA reduced my taxable income? That doesn’t seem right at all! (Of course my tax bill still went up because I still paid SE tax).
I’m using cash accounting. I think it’s easier. And I have a somewhat similar situation in terms of delays. I buy stuff through cashback portals such as Topcashback. When I do so, the cashback sits there for months before finally becoming eligible for payout. If I did accrual accounting then I’d have to count it as when it shows up as “confirmed,” even though it takes months before I can deposit it to my bank account.
Not that this cashback actually amounts to much, but I just don’t want to have to deal with a situation where the cashback shows up on the account in say December, but I’m not scheduled to get paid until February, and then have the portal clawback the cashback (this does happen sometimes, especially if you use coupon codes). Having to go back into the paperwork and say that oh that accrued income was never actually received just sounds really annoying.
And replied!
I’m using a Roth i401(k) so the tax deduction part you mentioned doesn’t apply for me, but I also thought it was pretty weird that you can contribute 100% of earnings up to $18k but you’re still paying SE (and in my case income) tax! It presumes other income sources or savings – which we have – so I guess it’s fine – but it is strange.
I don’t think that’s all that strange. If you read the examples the IRS gives about IRA contributions, it says that it doesn’t matter if a kid earns money, spends it all, and then his parents gift him money that he contributes to an IRA. The only requirement is that the contribution cannot exceed earned income or 5500.
Maybe the above is also strange, but at least it’s consistent.
To me it is consistent but still strange!
This year I learned to give my taxes to someone else, haha! Now that we are an LLC taxed as an SCorp and have some other goodies to deal with (haha), I decided just to have someone else to do it for me.
I think that’s a great lesson! I’m very happy that we figured out how to prepare our return this year, but I don’t know if it will be worth it to us to do it again next year. We might at least use tax software. If I keep going with my business I will want to do an S election and that will add another layer.
This year I learned that states don’t have the same threshold for full-year residency. One of my coworkers got stuck with full-year resident taxes in two different states because of a summer move. If (probably when) we next relocate we’ll definitely be trying to stagger our start and end dates so we don’t get stuck with that burden!
Woah, that is very illogical! For our move out of NC we just had to calculate the fraction of our yearly income that was earned in NC, and then of course WA doesn’t have state income tax (woohoo!). I did think it was weird that our standard deduction in NC was multiplied by the fraction of our yearly income that we earned in NC rather than the fraction of the year that we lived in NC. The latter would have worked out more in our favor because we lived in NC for over half the year yet earned less than half our income in that time. Now you’ve made me wonder which states would grab tax on income a part-year resident earned while living in another state…
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