The Tax Man Cometh

Benjamin Franklin once said that “in this world nothing can be said to be certain, except death and taxes.”  True dat, Mr. Franklin.  True dat.  Now that tax season is upon us, I thought it would be interesting to write about our taxes, specifically how we try to SAVE money.  Since I’m still in the process of preparing our taxes for the year 2016, I’ll go over some aspects of our 2015 returns.  Disclosure time.  I am not a tax professional.  What follows is mainly for informational purposes.

 

Self-Preparation

Preparing your own taxes is a good way to learn the tax code.  While you won’t become a tax expert, you can learn about the various deductions and credits available that can help lower your tax bill.  This can be especially important for individuals or households with high incomes.  The best way to learn about taxes is to prepare your return by hand, or at least do a practice run.  If you don’t have the time or energy to do this, tax preparation software such as TurboTax does a good job of walking you through the deductions and credits you qualify for.

 

Deductions and Credits

Do you know what the difference is between a tax deduction and a tax credit?  Which one is better?  What about an above the line deduction versus below the line?

  • Tax credits reduce your taxes dollar for dollar.  This makes them more favorable than deductions, which reduce your tax liability based on your marginal tax rate.
  • Above the line deductions reduce your adjusted gross income (AGI) on line 37 (the line).  Your AGI can have a tremendous effect on your tax liability.  It affects how you can use tax credits or exemptions.  Also, some deductions can “phase out” depending on your AGI, while others disappear completely.
  • Below the line deductions include the Standard Deductions, Itemized Deductions on Schedule A, and Personal Exemptions.  Below the line deductions reduce your taxable income, however the actual tax benefit is subject to your AGI.  For this reason, “above the line” deductions are more advantageous than “below the line” deductions.
Taxes and above the line deductions

Above the line deductions are great!

 

2015 Taxes

Based on our 2015 returns, our effective tax rates were about 28% federal and 7% state (California).  Given that our total income put is in the top tax brackets (39.5% federal and 12.3% state), I think we did a decent job of limiting our tax liability.  How did we do it?  My wife is a W-2 employee while I am a physician partner in a group, which for tax purposes makes me self-employed.  This opens up a lot of tax reduction strategies and possibilities.  For instance, I can deduct certain expenses such as medical license renewal fees and continuing medical education.  This reduces my net self-employment income and thus my tax liability.  I can also contribute much more to my 401k, which in turn reduces our AGI and taxable income.  Below are some of the deductions that we were able to take advantage of.

 

2015 Deductions – $103,814 Total

Above The Line Deductions – $64,743

Our above the line deductions included contributions to my self-employed retirement plan (line 28) as well as the deductible part of self-employment tax (line 27).  For 2015, I maxed out my 401k plan to the tune of $53k, which was fully deductible.  The remaining $11,743 was 50% of the self-employment taxes that I paid.  I did not contribute money to an HSA in 2015, so I am looking forward to this deduction for 2016.  We were phased out of IRA and student loan deductions.

Itemized Deductions – $39,071

Since our state income taxes put us above the standard deduction threshold for married filing jointly, we itemize our deductions.  Our big-ticket items were our state income taxes, mortgage interest, and real estate taxes.  We did not make any charitable contributions that year, and we also didn’t incur any medical or dental expenses.

 

2015 Exemptions and Tax Credits – $0

Our adjusted gross income completely phased us out of any personal exemptions.  We were also phased out of any eligible tax credits.  First world problems, I guess.

 

2016 Taxes and Beyond

Our 2016 return should be pretty similar to the previous year, although our total income will probably be lower.  I worked a lot in 2015, felt a bit burned out, and cut back on some of my hours.  Another difference is that I was able to contribute $3,350 to my HSA, which is an additional above the line deduction.  It will be interesting to see how our taxes turn out this year compared with last.

Going forward, I would like to eventually make charitable contributions.  First, it’s always good to give back if you have the means to do so.  Second, we can itemize and deduct these contributions for potentially more tax savings.  With the exception of the child and dependent care credit, our household income will probably keep us phased out of all of the remaining tax credits and deductions.

 

Readers, do you prepare your own taxes?  Do you itemize or take the standard deduction?  Which deductions and credits are you able to take advantage of?  Share below!

 

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8 comments

  • Thankfully Texas doesn’t have a state income tax. Phew. I can’t imagine how much more complicated it would be to file. We do prepare our on taxes with TurboTax and it’s pretty easy. I’m a little nervous about 2016 taxes since my income shot up quite a bit and we bought a house. Gulp. I hope we can at least not owe the tax man this year. We might need to adjust our withholdings just in case. I know some people prefer to owe money because it means you aren’t loaning the government money, but I do like receiving my money in a lump sum all at once.

  • We definitely prepare our own taxes. I actually prepare my sister in laws and father in laws as well. I am huge nerd as I geek out around tax season. I should probably look into doing this on the side but I honestly don’t know where I would squeeze out anymore time 🙂

  • We’ve been using TurboTax for years and have only been audited once (our fault and not a fun experience). I suppose our taxes are a little complicated with having kids, mortgage, stock option sales, RSU, the dreaded AMT, etc., but we haven’t felt the need to hire an accountant yet. We will likely switch to the standard deduction in a few years when our house is paid off and our kids are on their own.

    I’m envious of your massive 401k contribution!

    • Wow sounds a bit complicated. We got hit by the AMT in 2015 as well. We’ll see what happens this time around. I love my 401k and the fact that I’m considered self-employed. It really helps with some of the deductions and reducing our taxable income. Thanks for stopping by!

  • I wish I trusted us to do our taxes, but I don’t. I would nag the DH incessantly if he did them. I used to get the short form back (you know, the 1040A days of our youth!) with corrections. In my opinion, my accountant is worth the $400 we pay annually. We also see him pretty much for free whenever we have a question. And, we live in a very high tax-rate state, so it is even more annoying!

    • Thanks for stopping by! Our tax situation is straight-forward enough for me to do them, but we’ll see how that goes given more time and investments. $400 per year is pretty good for an accountant, especially since he’s available for questions without any extra charge.

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