Maybe I Can Still Beat the Tax Man?

The frequent commenter that posts anonymously but signs her comments "Rache" is one of my co-workers. Not only does she read about my latest obsessions here, but she also gets the added privilege of hearing about them during the day at work. Usually, when she's had enough, she sends me an article that either supports or refutes my claims and attempts to secure herself a few moments of peace. To be honest, it is not a bad plan at all.

When she finally tired of hearing me moan about having to plunk down some dough with my federal tax return, she sent me this article from MSN. Apparently, I am not the one banging my head against the wall this tax season.

I had thought about most of the ideas brought forward before I read them in this article. Unfortunately, I don't have a "green" car, nor did I install energy efficient windows last year. I didn't pay college tuition, either. For that matter, most of the discussion points from the article are things that you would have had to do back in 2006 to have any effect on your tax return now....except one. And, I can actually take advantage.

This will cause a collective :gasp: from the personal finance blogging community....but, I have not yet contributed to my 2006 IRA. I still have a traditional (deductible) IRA. I don't make the maximum contributions because, quite frankly, I cannot afford to stash an additional $4,000 away - with no real ability to touch the money for another 30 years. I would love to - but, I just cannot afford another $4k for retirement savings. But, what if I were getting a discount on the money invested in the IRA? In essence, that what will happen, if I contribute.

TurboTax estimates that for every dollar of deduction that I have, I will save about 18 cents in taxes. So, for every $1,000 deposited into my IRA, it will really only cost me $820 out of my pocket. Since I need to pay Uncle Sam anyway, the money really is discounted. If I were getting a refund, the same theory might be true, but it would have less of a real effect on my thinking. Crazy, isn't it? Sometimes logic has less to personal finance than "personal" has to do with finance.

Still, where am I going to come up with the $1,500 it will take to alleviate my tax bill? While TECHNICALLY I have the cash to make the contribution, it would be coming from money that is earmarked for something else. I do have about $1,000 worth of Motorola stock that I could deposit (actually, I am not sure if I can contribute stock directly and I must be losing my touch with "The Google," because I have yet to find a concrete answer). I just don't know how to apply the tax issue, and I need to make a phone call to TD Ameritrade, the folks who hold my IRA account. Can I deposit the stock directly? What is the amount that is deductible? The tax basis? The fair market value? Would I be better off to sell the stock and just deposit the proceeds (seems like it makes less sense to pay an extra set of commissions to buy and sell, but it wouldn't be the strangest thing I have ever heard)? Of course, another day in the market like today, and I won't need to worry about it, as the MOT stock is just plummeting, of late.

I need to get this situation squared away soon, and still figure out where the difference between what I own in stock and what I still need to contribute to abate my tax obligation is going to come from. The clock is ticking, though, and with one month to go until the filing date, I have little time to secure additional funding.

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I Owe, I Owe - It's Off to Work I Go!

It was an unhappy weekend here at the Fortress of Solitude. Yesterday was tax preparation day. I'd been putting off this relatively easy task for a month-plus now, mostly because I was sure that my refund was going to be extremely small this year. If I was expecting enough money to fund a summer vacation, I would have been all over this at the beginning of February.

After plugging in all of the information from the W-2 and 1099s, deducting all of the deductions, exempting all of the exemptions, and ciphering until I could cipher no more, it turns out that I owe $222 to my Uncle Sam. This, of course, led me to believe that there must have been some mistake - I NEVER owe. I usually get a smaller-than-everyone-else refund, which I am OK with, because it means that I have had more of my money to do with as I please than those who get huge refunds. But, I don't OWE. In 18 years of filing a 1040 (or equivalent), I have never owed money on April 15. This year, when all of my friends are talking about spending their tax refunds on a vacation to Bermuda, I am going to be squealing as I write a check that will help subsidize their Hawaiian shirt wearing behinds.

How did this happen? Well, I did make more money this year than last (a good problem to have) from my day job. I also worked as an independent contractor this year (more than last), from which there was no money withheld. On top of that, I also owe self-employment tax on that money. Passive income was up, too. Thanks to my ING account, my interest earned was better than 20 times what I earned last year in my feeble Wachovia account. Unfortunately (fortunately, from a tax paying standpoint), my interest paid was also up on my student loans. I have a decreasing outstanding loan amount, but my interest paid increases....UGH!

From a tax standpoint, my problem is that I don't spend nearly enough. My medical expenses, including health insurance premiums, were well below the required threshold for deductibility. If I got sick more often, I would spend more money on healthcare, and I would save on my tax bill. My mortgage is abominably tiny - and therefore, so is the interest I pay on my primary residence. It is so small, that I also do not meet the minimum threshold for itemizing deductions. If I spent more money, to get a bigger house (that I neither need, nor can afford), I could save money on my taxes. I could also contribute more to charity, make a large capital purchase (sales tax savings), or sell stocks at a loss to reduce my tax burden. Unfortunately, I didn't - so, I can't.

One thing that really chaps me is the low income tax credit for retirement savings. This money is designed to encourage those who would otherwise not contribute to a self-funded retirement account to save money. Obviously, this is a win for the government. If they can get more people to save for retirement, there may be less of a burden on the social security system in years to come. Unfortunately, they think that "low income" caps out at $25k/yr for single filers. By just bumping that up to $50k, it would appear that more people would participate (I am thinking of the 20-something colleagues that I know that have no concept of retirement savings), which would alleviate some government burden in the future, and cost relatively little in present day dollars. Of course, the most important benefit would be that I would have my tax bill eased.

Today's patron saint of this blog is Mr. Pink, from 'Reservoir Dogs' who said it best. "It would seem to me that The Travelin' Man belongs to one of the many groups the government @$^%s in the $^% on a regular basis."

And, it hurts. :-(

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