2007 Federal and State Taxes Review
Part of me enjoys doing taxes, but a larger part of me dreads doing them because I never know if I’m doing them right. I always worry whether I’m putting a number in the wrong place, or worse, not including a number that will then trigger an audit.
I used to do my taxes on paper in college, then when I graduated, I began using H&R Block’s TaxCut online software and then did so for the next few years. This year, though, I wanted to try something different. I found a great deal on TurboTax from Costco (although it only lasted for a brief time) and bought the software. I hear about many more people using this software than any else, so I figured it should be good.
After using TurboTax, I think I like their questionaires more than TaxCut’s, as well as the interface in general. However, I still won’t know if I filled out all the questionaires I needed, but I didn’t have as much trouble this year as I did last year in figuring out if something applied to me. I think I’ll use TurboTax again next year.
Our Tax Results
This year was another record year in earnings, as each year has been since graduating college. Obviously you don’t want to see your income decrease from one year to the next. This is probably the only topic where I won’t give out real numbers, but I’ll say our combined income is low- to mid- 6 figures. The extra income from this site helped, but then again I also have to pay taxes on it.
I was worried at the end of 2007 because I hadn’t been filing quarterly returns to account for taxes owed on my site income. Then again, I had no idea I would make half of all my site’s income for the year in just 2 months. Luckily though, I increased my withholdings by $700 extra per month starting in October and changed to zero allowances (from 2). That means by year end, I gave the gubment about $2100 above my regular tax withholdings. I was just really hoping it would be enough to avoid a penalty!
So after having paid more in federal taxes this year than I made all throughout college combined, we only owe $400 to the IRS. Even better, we get back about $1400 from the state of Maryland, for a net refund of about $1000.. After reviewing the return, the reason we get so much back in state taxes is because of over $30,000 being lopped off our gross income due to federal deductions. Otherwise, I’m sure we would have owed state taxes too.
Also, what’s nice about tax software (at least TurboTax and TaxCut) is that it shows your effective tax rate, or in other words how much of your total income actually went to taxes. Even if we’re somewhere between 25-28% tax rates (I don’t want to give too much of a hint of our income), we don’t actually pay that much once all is said and done thanks to deductions and refunds. Last year, our effective tax rate was about 17%.
This year, our effective tax rate was 11.33%. I’m sure we could get it even lower, but then we’d have to have kids or maybe deduct more business expenses. But then again that means we would be spending money on kids or more money on our businesses, which we aren’t currently doing.
Oh, and you may be wondering what deductions I took for my website. Did I take a home-office deduction? No, because I sit on a chair in our living room while typing up articles. Did I deduct my laptop? No, because I got it for $100 about 3 years ago and I don’t use it solely for blogging. So what did I deduct?
$199 in website hosting and domain registration fees and $30 for a 6-month PO Box contract. A total of $229 for my website costs last year. I’m sure other bloggers have more expenses, and even deduct our happy hour lunches and mileage to drive to those events, but personally I didn’t want to bother with it. Plus I usually paid cash and didn’t have a receipt. In reality, though, my expenses probably would have netted me about $5. Eh, I’ll leave that on the table for someone else.
So in 2008, I’ll start filing quarterly returns, keep taking additional withholdings from my day-job’s paycheck to cover those taxes, and assess whether I need to increase or decrease those withholdings each quarter. Also, I expect to deduct more for Stacie’s side-business this year as we’ve actually been spending some money on it. It’s still not off the ground, but we’re working on it. Also, I might apply for an LLC status for my business, and maybe even Stacie’s.
How are we filing?
For some reason, I can’t e-file my Maryland’s tax return through TurboTax. Perhaps it’s a certain form that they don’t accept electronically as I know they accept e-filing. Thus, I have to mail the paper in and wait a bit longer for our refund, but it’ll save us the money we would pay otherwise to e-file.
As for federal, since I owe $400, why would I want to e-file and give them my money even faster, AND pay for the privelage? Nah, I’ll just mail it in with the check.
What are your tax experiences this year? Were surprised for either good or bad reasons? Fellow bloggers, care to share your own experiences?