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The Tax Man Cometh

March is here and that means everyone’s favorite time of year is right around the corner – Easter tax time!

Let’s face it, April 15th is either the most loved or most hated day of the year, depending on whether or not you’re getting a tax refund from the good old IRS. Personally I don’t care that much about the refund vs payment debate, I figure the government is getting their share either way. I hate it because of the extra work involved in pulling all your records together and trying to decipher some of the convoluted instructions for completing some of the forms. It’s a huge time suck and also usually serves to highlight what an infant I am when it comes to money. Here’s another blogger who hates the U.S. tax code with 9 things you can do to get ready for tax season. A bit late, but better than never.

This year actually had me hating it even more than usual, although I’ve since changed my opinion. The reason I was hating on tax day so much this year is because I owe the IRS a HUGE chunk of cash, thanks to my fair bit of success in running my own business this year. I didn’t mind the huge expense so much, in fact I had kind of anticipated it (well maybe not quite as much as it turned out to be) and thankfully have enough money put aside to pay for it. No, the reason I was hating it is because my underpayment was more than $1000 I now have to file quarterly estimated taxes for 2010.

Sigh…little did I know that under U.S. tax law the income tax is a “pay as you go” tax. This means that the government wants their share of your income as soon as you make it. If you underpay substantially they hit you with penalties and force you to file quarterly the following year (unless you’re willing to pay more penalties) in an effort to get your tax dollars out of you more quickly.

So, I was hating the idea of having to do taxes 4 times a year rather that the usual once, but then I realized that this is a perfect opportunity to take a deeper look at my tax situation, find ways to reduce my taxes and keep myself more organized throughout the year. I don’t know about all of you, but I am pitiful when it comes to keeping track of my income and expenses in regards to taxes. Of course this meant that every year I would be scrambling to find all the documents and receipts I needed to prepare my taxes. A healthy shot of organization is going to be very helpful, especially as my self employed business income and expenses grow.

Thus far I’ve taken the following steps to reduce the tax bite for 2010:

  1. My wife is pregnant which means we will have an extra deduction for 2010. Not really planned, but it will help.
  2. She will also be off work for 3 months and when she returns it will be on a part time basis. Mixed blessing as it also cuts into our cash flow, but we feel it’s best that one of us is always home with the baby. I know daycare is deductible, but we’d rather not have the expense to begin with and both of us firmly believe that the parents should be home with the baby.
  3. I’ve increased my 401k with holding substantially. I’m still not at the full possible amount of $16,500, but getting there is one of my goals for 2010. Every dollar that goes into my 401k is a dollar I won’t be taxed on (yet). Because my wife isn’t a U.S. citizen we’re still trying to figure out how much she should be contributing to her 403b or if it’s even necessary aside from the current tax benefits.
  4. I’ve committed myself to plowing 40-50% of gross earnings back into my business. As with the 401k I’m not quite there yet for January and February, mostly because of expenses for the baby. Added to that is the current need to pay off my remaining credit card balance. This is another goal I will have completed before the end of 2010 which will free up about $700 a month for more useful things than increasing Capital One’s profits. The upside here is that re-investing the earnings from the business will not only lower my tax bill, but should also drive more growth for the business, definitely win-win.

Obviously I haven’t had the dubious pleasure of doing my first estimated quarterly tax return, but it’s right around the corner. Both Golf (my wife) and I will receive our last paycheck for the first quarter on March 19th at which time I can start to work out what the first quarters payment will be. Oh, one other nice thing about paying quarterly is that I feel there’s a very good chance that I will actually get a refund next year instead of paying in as I normally do. As long as the refund is under $1000 I won’t feel too bad about giving the U.S. treasury an interest free loan, considering the current economic state of affairs in the U.S. they could probably use it. You can read a better explanation of why a tax refund is a horrible thing here.

Funny how as you grow up you learn to like the very thing you once hated and even begin to see the benefits of it. Kind of like learning to love broccoli and liver isn’t it?

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