We Owed $4,300 on Our Taxes for 2015 and I’m Not Mad

Spring is in the air – the flowers are blooming, leaves are coming out on the trees, and there is pollen everywhere!!  One nice thing is that temperatures are increasing down here in southern Georgia, but it won’t be long until things get too hot (think over 90F).

Every year as spring comes around our way, like it or not my mind turns to incomes taxes.  I do find myself stressing about whether we will get a refund from the IRS or owe some money.  Now that tax season has come and gone, (if you have been living under a rock – your tax return was due on April 18th), I can share with you how we fared for the 2015 tax season.

I don’t really like to talk much about taxes here on the blog because I find the subject kinda boring.  But…. taxes really need to be brought up from time to time to ensure you have optimized yourself from a personal finance standpoint.  I certainly did not tax full advantage of tax deductions and various money saving strategies for 2015, and we are paying the price (literally)!

How Did We Do for 2015 Tax Year

I spoiled the surprise already in the post title, but we actually owed $4,300 to the IRS :-(!  When I found out the number, I felt pretty sick to my stomach.  How could we owe so much?  Once I calmed down a bit from the huge sticker shock, the $4,300 started to make sense when I thought more about it.  Here’s a rough breakdown of why we owed so much – I just assume a 38% tax rate to keep things simple:

• Dividends – We had ~$6,100 in dividends for 2015.  About $3,000 were qualified and $3,100 were ordinary.  This means our tax from this should be ($3,100 * 38% + $3,000*15%) = $1,628 taxes
• Small Business – MoneyAhoy.com made about $4,000 after expenses for 2015.  Our tax from this should be ($4,000 * 38%) = $1,520 taxes
• Missing Property Taxes – Our mortgage company somehow screwed up and didn’t charge us for property taxes all of 2015.  As a result, we were not able to deduct ~$2,000 for this.  Our “extra tax” from not getting the deduction here is ($2,000 * 38%) = $760 taxes
• Student Loans – We paid off my wife’s student loans in early 2015.  As such, there was no more deduction for interest on those student loans.  This accounts for ~$400 in deductions in past years.
• Childcare – Thankfully, our childcare bills were much, much lower in 2015 vs. 2014 because my wife is now working part-time and can watch the kids in the afternoon.  As a result, we save ~$17,000 a year here!  The downside is that we don’t get a nice tax bonus deduction in the category.

Why I am Not Complaining That We Owed $4,300 to the IRS

Most folks would be furious if they owed this much money to the IRS.  I was mad for about all of five minutes before I got my head on straight.  Here’s why I am not mad that we owe $4,300 to the IRS:

• We had an extra $10,000 of income in un-taxed income ($6,000 dividends + $4,000 business income).
• We did not pay property taxes on our home ($2,000) – **we will have to catch this back up, so it is more of a deferral.
• We did not have to pay for student loans ($3,000)

I will take an extra $15,000 in my pocket if I have to pay a $4,300 fee any day of the week :-)!

Because we did owe so much, I guess the IRS figures you should make quarterly payments along the way.  We did not do this, largely because I’m lazy and cannot be bother to pay attention to this (so far).  Because we did not do this, there was a small penalty of $42.  This turns about to be just about 1% of the tax owed.  A one-time charge of $42 is no big deal as far as I am concerned, but we probably need to start paying a bit extra each quarter in 2016 just to avoid this kind of fee.  I will look more into how to do this as we are already in the second quarter.  It may be easier to just adjust my W4 from my main employer so they are taking out a bit more each paycheck – I haven’t decided yet. A w4 calculator would make easy work of that.

Tax Deductions That We Missed Out On

As I mentioned, I really dislike thinking too much about taxes.  That bit us in the butt a little bit as we could have saved a couple thousand if we had followed a couple of these tips – WARNING – they are a bit on the complicated side of things:

• Capital Gains Tax Loss Harvesting – You can deduct up to $3,000 each year by selling stocks that are “down” or “losing you money”.  You can even carry forward the losses into an unlimited about of years.  This means an extra ~$1,000 in your pocket each year ($3,000 * 38% = $1,100+).
  • The only trick here is that if you sell the stock for a loss, you cannot buy it back until 31 days later – this is the wash sale rule.  That shouldn’t be a big deal if you are investing in ETFs as you could just flip over to a “similar” ETF for a month, then flip back into your normal one if you’d like.
  • I didn’t go through the trouble of doing this in 2015, and I am now kicking myself for NOT doing this.  It’s basically a free $1,000 that I missed out on :-(.
  • The thing with this is that you are just offsetting the tax you will eventually pay further and further down the road.  You would think this would eventually mean that you would pay a huge tax bill when you actually go to sell the investments (without re-buying them back) down the road.  You would likely be wrong tough! Understand that if you die, you can give the investments to an heir and the total capital gains get completely erased at the time of transfer!  It would be like the heir just bought the stocks that day at whatever price they currently trade at.  Pretty cool if you are planning on handing down those stocks!
  • Also, you get a credit in today’s dollars of 35% (or whatever your tax bracket is), then down the road you pay on the larger capital gains amount, but only at the 15% long-term capital gains rate!  Woohoo!
  • This all just basically boils down to receiving a tax free loan from the IRS that you may never need to pay back!
  • Now that I know more about how this works, I plan to get my capital gains tax loss harvesting on each and every year :-)!
• Solo 401(k) – If you own your own business (and if you don’t, why don’t you startup your own company today!) you can qualify for this cool tax deduction.  If your company does not have any employees (folks working over 1,000 a year), you can create your own self-employment 401(k) for you and your spouse.  Even if you you work full time at a “normal day job” and participate in that company’s 401(k), you can still take some of your side-business income and put it in another separate, solo 401(k).
  • If you work a full-time job for an employer, the most you can contribute to your 401(k) is $18,000.
  • If you work for yourself, the most you are able to contribute to a solo 401(k) is $53,000!  That’s a significant tax savings!!  You can put in $18,000 and then 25% of the total profit for the year up to a combined total of $53,000.
  • If your company also has your spouse working for it, you can double up here for $106,000 in total contributions to a solo-401(k)!
  • It gets a bit complicated if you are working full-time and have your own side-hustle business.  Suffice it to say, you can normally find a way to bump up the total amount of 401(k) contribution from $18,000 total to $53,000 total with a little creative work and understanding in how things work.  This all assumes your company makes a lot of money each year – I’m still working on that :-).

We Owed $4,300 on Our Taxes for 2015 and I’m Not Mad – Final Thoughts

Although we had to pay the IRS a lot of “extra” this year, it’s all for good reason.  We made a lot of extra money in 2015, and we are both really thankful for that.  We could have done more with our tax deductions, but that’s something we will plan on getting right in 2016 and beyond.  How do you fare this tax year?