Tag Archives: 1040

I survived yet another year of self-inflicted tax prep

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The annual exercise in accounting self-abuse that is me doing my own taxes ended three months later than originally scheduled and yet still on time, thanks to the IRS pushing Tax Day back to July 15 to make up for the coronavirus ruining everything.

That delay taught me what I’d needed all along to make this math masochism easier: a dress rehearsal a month and a half before the real deadline. Here, my thanks must go to the Virginia Department of Taxation, which extended the deadline to pay state taxes but only by a month–from May 1 to June 1–and left in place the automatic six-month extension to file state returns.

I didn’t want to send too much or too little money to Richmond, so I needed to get our federal taxes close enough to done for me to plug the relevant figures into our Virginia return and get a reliable estimate. I plowed through TurboTax, as usual needing much more time to calculate my business profit after expenses than for any other part of the return. As much as I miss having itemized deductions make a large amount of our tax bill vanish, getting them right did eat up a lot of hours.

(Side rant: My TurboTax labors also went faster than usual because I finally figured out the freakshow workaround required to import statements from some old American Funds holdings. Without that, I would have had to type in those figures by hand because the PDF download this inept investment firm provided was a giant image without any selectable numbers.)

That work yielded nearly-final figures for the federal return that I could flow into a Virginia return in TurboTax. Then I double-checked that result by redoing the state math in Intuit’s woeful Free Fillable Forms online app, what I actually use to file because I refuse to reward Intuit for its rent-seeking strategy of getting states to retire their own online-filing tools.

In past years, TurboTax and Free Fillable Forms have agreed on what I’d owe Richmond or what Richmond owed us. This year, the stone tablet of spreadsheets said we’d owe $10 more than what TurboTax estimated for our Virginia bill. I ignored that at the end of June but went back through all the numbers again this week without finding any reason for the difference. Which is fine–maybe we paid Virginia a Hamilton we don’t owe, but I’m sure my state could use the help these days.

After going over our federal returns one last time Wednesday night, I had them e-filed before 10 p.m. Wednesday, then had the state returns dispatched an hour later. That left one last tax-prep chore: tweaking the Google Docs freelance expenses spreadsheet template that I shared here two winters ago to make it a little clearer which home-office expenses should be added together.

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Tax-time thoughts, 2019 edition

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It looks like we didn’t get crushed by taxes this year, even if we did owe money to the IRS. That’s nice, since we skipped the one step we were supposed to take to avoid an April 15 financial hit.

2018 Form 1040I knew going into filing season that last year’s tax changes (I prefer not to call them “reform,” as that suggests progress unsupported by the evidence) would slash our deductions. In the bargain, I’d get a 20 percent break on my self-employment income, what the Tax Cuts and Jobs Act of 2017 calls the Qualified Business Income Deduction; our rates would drop somewhat; and we’d lose personal exemptions but gain a child tax credit.

Which ones would outweigh the others? It appears that the rate cuts and the self-employment break made the bigger difference, leaving us paying just over 20 percent on our taxable income compared to the 24 percent we paid on a lower taxable income last year. And that’s even though my spouse did not adjust her tax withholding as recommended.

But without the self-employment deduction–be advised that tax accounting is not exactly one of my core competencies–it looks like we would have paid a higher rate.

(No, I won’t provide raw totals. I also use verbs like “appears” because once again, I filed for an extension: I caught some dumb oversights in last year’s return that should slightly lower our bill, but I won’t finish filing until that amended return clears.)

After spending seven years dealing with a tax code that treats self-employment as something to be fined, it’s nice to get a break for it instead. But I also know that the tax code continues to favor investment income over money made from actual work, I continue to resent how it’s gamed by people with the really good accountants and tax lawyers, and I can’t ignore that the tax savings delivered by this rushed bill are paid for by running up the national debt and having the lower rates expire after 2025.

Sorry, politicians: You’re not going to be able to bribe me this way. You know what sort of new tax regime would get my interest? One that didn’t keep me wondering how much we’d owe until I’d pounded through hours of punching numbers into a tax-prep program.

The old financial records that I do keep

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It’s now two months until tax day, which means that it’s time for some financial paperwork. By that I don’t mean starting my 2018 return–I haven’t even gotten all my 1099s yet–but discarding records from prior years that no longer retain any legal relevance.

This tidying up has sent a raft of old statements and forms into the recycling (with every instance of a Social Security Number torn out for subsequent shredding), and now the file cabinet is no longer packed so tight.

But there are some tax and financial records that I’m keeping even though I no longer have to: the 1040s, W-2s, and checkbooks of my college and post-college years.

Those documents tell a story of a simpler and more painful financial time–an annual income in the low twenties, paychecks with only three figures to the left of the decimal point, ATM withdrawals that rarely exceeded $30, and a checking-account balance that I struggled to keep above $2,000.

(Fortunately, rents around D.C. were a lot cheaper then.)

Being reminded of the cramped state of my finances back then helps me feel better about them today, even after all the lousy things that have happened to the journalism business lately.

But the more important part of this exercise is not cultivating nostalgia but renewing empathy–for anybody who’s living paycheck to paycheck, or who’s just a slow month or a government shutdown away from having their bank balance erode enough to show only three digits to the left of the decimal point.

I survived doing our own taxes (I think)

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Over the last few weeks, I did the one thing I was sure I’d never do after leaving the Post: prepare my own taxes instead of paying a tax professional to do the work.

I’d outsourced my tax prep over the last three years with generally satisfactory results. But this time around my tax guy had raised his rates while my own financial situation had not gotten more complex; I felt like I had finally disciplined my once moronic, then merely slovenly accounting; it seemed wrong to go four years without even looking at a category of software millions of Americans do battle with every spring.

1099s and TurboTaxAnd so I renewed my acquaintance with Intuit’s TurboTax for the first time since 2011–not as a reviewer, but as a paying customer. It went better than I’d feared.

The biggest upgrade from my earlier agonies was effective record-keeping: I’d entered every cash expense last year into a Google spreadsheet on my phone within hours or, at worst, days, then imported business credit-card transactions into the same sheet every quarter. Between that and being able to consult last year’s return for guidance on what should go where, I had the outlines of my Schedule C knocked out in shockingly little time.

That’s a great reason to go to a tax pro in the first place: If you don’t know to do this stuff, you need somebody who can coach you. The results don’t just help at tax time, but throughout the year.

TurboTax’s ability to import tax forms for all of our mutual funds–something I’ve complimented in earlier reviews–was a great time-saver. And seeing each investment firm’s numbers flow into our return meant I got a direct look at the tax hit inflicted by some actively-traded mutual funds versus index funds. Ouch.

I was relieved to see that the stupid date-validation bugs I’d complained about in 2011 were gone–well, in most of the app.

Did I play this unnecessary game of tax-code-optimization as well as I could? I believe I did, but I won’t know for sure until after we actually file. Yes, although the 1040 and our assorted alphabetical schedules are done, I opted to file an extension. I will be dropping a sizable chunk of money into my SEP IRA to chisel down our tax bill, and I’d rather not completely clean out my account in the process.

I also did our Virginia taxes in TurboTax. Then I deleted that return after writing down the total it had calculated and the two numbers I’d need to put down on my state return. Intuit may have convinced a gullible General Assembly to scrap the state’s free iFile site in 2010, but that doesn’t mean I need to reward its successful regulatory capture with my own business when state taxes aren’t that hard and I can always file on paper.

 

 

Tax-time thoughts: now with slightly less incompetent accounting!

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I have survived, I think, another tax season as a self-employed individual, and I’m increasingly convinced that if I keep doing this I will someday know what I’m doing.

Misc. incomeOnce again, my worst enemy was my inattentive and sloppy accounting. I was still forgetting to tag some expenses as business transactions in Mint until last spring, and It took me until mid-September to lock in the habit of logging every cash expense within minutes of it happening. Memo to Google: This would be easier if the Google Drive app could edit spreadsheets offline.

For cash transactions not properly noted at the time, I had to recreate records months after the fact. That involved the tedious, time-consuming routine of cross-referencing my calendar, e-mail and Foursquare check-ins.

Importing the credit-card purchases that Mint had recorded automatically was the same as ever, which is not good: Intuit’s site still provides no way to limit a transaction search to a date range short of hand-editing a Web address. Intuit, this is idiotic. Try spending some of the money you sink into astroturfed lobbying into adding this most basic of features.

Last year also saw client income (Sulia and WordAds) arrive via PayPal deposits, a first for me. I liked the invoice-free convenience of those payments, but I made two rookie accounting mistakes. The big one was not identifying all of the subsequent PayPal transfers to my bank as freelance income; the little one was using some of a freelancing-inflated PayPal balance to reimburse my share of an Airbnb apartment rented for Mobile World Congress instead of first moving the sum of those freelance payments to my bank, then covering the lodging expense with a separate withdrawal from my bank.

The fact that I realized most of these errors in late March by itself represented my single biggest accounting failure–I spent too much of 2013 in a financial fog, which is stupid. So after cleaning up last year’s records, I set aside a couple of hours last weekend to do the same for those from the first quarter of this year. Like I said: I do learn, just not quickly.

Unsolicited tax-reform advice

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Once again, my tax season ended in a fog of confusion and rage: I don’t know the math that determined my bill or the economic or political logic behind it.

But this time, the experience cost extra. With a more complex tax situation (the suggested math for the 1040ES approaches sadistic levels of inscrutability), I gave in and paid a tax pro to crunch the numbers for us. In the context of today’s tax code, that was money well spent, sparing me hours of poring over forms and the lingering anxiety over missing some hidden deduction or credit.

But today’s tax code is bullshit. It’s a national embarrassment–a self-inflicted wound that oozes a little more financial pus every year.

Its eye-glazing complexity wastes the time of most Americans while inviting the more entrepreneurial among us to find ways to game the system–then lobby Washington for more such opportunities.

I’ve been writing this same rant every spring for six years now–see the 2011, 2010, 2009, 2008 and 2007 versions–and nothing changes, despite vague promises of reform like those I got from Obama administration representatives last spring.

So I might as well throw out some suggestions to fix this mess.

1. Tax capital gains and dividends at the same rates as wages. Historical records suggest that giving investors this break doesn’t actually yield higher economic growth over time. Yet it works too well at encouraging accounting alchemy like the “carried interest” scam. Rewarding one form of economic activity also sets a lousy precedent: Why not lower taxes for doctors who save lives, among other estimable occupations? (For that matter, why not jack up the rates for hacks who tear down the work of others?)

In the bargain, ending this market-distorting exercise would be an immensely simpler tax-fairness recipe than concocting special rules for the rich like the Alternative Minimum Tax or the proposed “Buffett Rule.” Before anybody says “double taxation,” a) remember that most people are already taxed twice, in the form of income tax levied on wages already deducted for Social Security and Medicare; b) good luck passing a bill taking that logic to its conclusion of zero taxes on billionaire investors.

2. Don’t use a tax credit when an upfront tax will do. If you want to compel behavior through the tax code, do it obviously–not through a rule that many of us only encounter every March or April. If we want people to use less gas, hike the gas tax instead of trying to bribe motorists with gimmicky credits for hybrid vehicles. If we think making a quick buck through day trading is bad, impose a tiny financial transactions tax instead of screwing around with qualified and unqualified capital-gains tax rates.

(If you think that a tax credit doesn’t inflate other taxes, the deficit or both, I can’t help you. Go away.)

3. One tax vehicle per task. What is the point of having multiple tax-sheltered retirement and education-savings accounts? Even the Bush administration, for all of its numerous faults, tried to fix this. If we want to reward a socially-desirable activity, pick one credit or refund that works for most people and stop worrying about edge cases. Life is not always fair; in other news, the government will confiscate some of your money every year and spend it on things you hate.

Note that I haven’t written a word about specific tax rates. That’s higher-level math than I care to get into, and I’ve done enough spitballing here already. But I will stipulate that progressive taxation is a good idea (a truly flat tax would either shaft the poor or bankrupt the government), and that I’m willing to trade lower rates for a small national sales tax.

I’m also willing to pay a little more. I can afford that. I don’t know that I can afford spending the rest of my life worrying about losing the tax game.