When I wrote about paying off our rent house, a few people emailed me about the mortgage deduction benefit that we’d be losing. Luckily, that wasn’t ever an issue. Even with two mortgages, our mortgage interest and other deductions simply never added up to more than the standard deduction (which was $11,900 for a married couple filing jointly last year).
Here’s the breakdown for us. The following are the deductions that can taken and what they added up to for us last year (and I rounded up):
- Medical Bills – $1000 in some copays and medicines (which I am not even sure are deductible)
- State and Local Taxes like sales tax – less than $2000
- Charitable Deductions – $500 (I volunteer time)
- Mortgage Interest – less than $2500
- Losses from Theft – $0 thankfully
- Job Expenses like travel - $1000 and that would really be pushing the definition
- Total = $7000
So in our case, the $11,900 standard deduction was definitely more to our benefit and has been since we got married in 2005. We always run the numbers just to make sure, but for us, the standard deduction is simply the way to go.
When Itemizing Works
Yet, itemizing is still obviously a great choice for some people. One of our close friends, J, files as a single individual. Between her medical bills and her mortgage interest, it was just a smart idea for her to itemize since that total was greater than the $5950 standard deduction that she could have taken. I also know several couples living along the coasts where housing is more expensive so their mortgage interest is astounding comparably. The standard deduction would be a bad idea for them.
So I am by no means saying that the standard deduction is for everybody. I just wanted to remind everyone that mortgage interest is not always tax deductible for everyone. It isn’t automatically a benefit of home ownership or debt.
For us, the biggest decision was whether to pay off debt or invest, so at best, we made a 4.5% return on about $22,000 this past month. At worst, we have to accept the opportunity cost of anything else we would have done with that money instead. In the end, I like the guaranteed return and being down to only one main mortgage again. The feeling of security is worth a bunch to me, but I do have a ton of respect with everyone with a better risk tolerance than me.
Do you take the standard deduction or is itemizing better for you?
Okay, so we didn’t make as much in 2012 as we did in 2011 since Mr. BFS leaped into self-employment too. But we paid about the same amount in taxes anyway thanks to having to pay the self-employment taxes on everything, which is the employer’s part of social security taxes and whatnot. YUCK!
We Knew It Was Coming
Yep, we knew we’d be paying a butt-load in taxes. That’s why we send in very healthy payments for our estimated quarterly taxes (and will continue to do so). But it still hurts to see what you just wave goodbye to every year. Specifically, we made about $100,000 in taxable income in 2012 after expenses and deductions. We ended up owing about $33,000, but we paid in about $35,000 over the year. So we’re getting about $2000 back. And the crowd goes wild (yay…feel the sarcasm).
I guess I should be way more excited that we at least don’t have to pay the IRS any additional cash for 2012, but that slight bit of relief is pretty much extinguished for me since we have to send in our estimated quarterly taxes anyway. Poop.
What We’re Doing Now
Oh well, in happier news, we have just wired out more than $22,000 to pay off the rent house mortgage (just waiting for an official confirmation of some sort before writing that happy post, lol). That combined with more than $8000 going out for estimated quarterly taxes just makes me feel broke. I mean, I think anyone would probably feel a $30,000 hit to their savings accounts, right?
That said, our 2012 refund is going directly into savings – do not pass Go, do not collect $200. We borrowed $3000 from our savings account that we planned to invest in our Roth IRA’s, so this $2000 is being used to pay ourselves back. Whatever extra we make in April will be used to build up that account even more since we do need $11,000 by the end of the year. When we hit that goal, we’ll have to look at our priorities and see how we want to proceed…
If we want to pay less in taxes for 2013, we could open a SEP-IRA (Simplified Employee Pension). We can contribute up to 25% of our total salary or 20% of our adjusted annual income, up to a limit of $51,000 in 2013. So we’d be pretty safe from over-contributing if we keep it around $15,000 to $20,000. And those would be pre-tax contributions like a 401k. So we would not be taxed on the money we pay in, but we would be taxed when we make withdrawals in retirement. We can balance those withdrawals in our golden years with the non-taxed ones from our Roth IRA’s and be set.
BUT, saving an additional $20,000 a year for retirement would probably mean putting any further rent home ideas away for a while…stupid choices. Nothing seems super easy when it comes to money after the basics, lol.
We may just use this year to re-pad all of our accounts. We haven’t been adding to our car account for a while even though both of our cars are mid-life at best – mine is a 2005 Chevy Aveo with 55,000 miles on it but it’s always had issues, and hubby’s is a 2007 Toyota Prius with 102,000 miles on it already. Also, our fun money and vacation accounts have been hearing crickets since mid-2012.
Anyway, our taxes are done, our rent house is paid off, and I will do a proper happy dance as soon as I have that deed in hand, lol.
How were your taxes this year? If you received a refund, where are you putting it?
I’ve been emailed several times in the last few weeks with the same question – “How do you keep your finances organized?” It’s definitely not a huge secret – I love Excel. But my husband and I both work from home now, so there is a bit more to staying organized than there used to be. Here’s how we keep everything straight.
Excel for the Business
We have several Excel spreadsheets to help us track absolutely everything related to our online income. If the tax man ever comes knocking, hopefully he will absolutely adore us. We’ve streamlined since I first started, so it is easier than ever.
We have one sheet that tracks the income that is 100% ours like the deals closed for Budgeting in the Fun Stuff and our commissions from clients. We have another that tracks my client and co-owned blogs’ deals and all of the associated data. Then we have a third sheet for all of our online expenses. Between these three sheets, every deal, expiration date, and online cost is accounted for and searchable thanks to the Excel interface.
Since we do track every penny and try to keep all of the data we possibly can, the record keeping alone takes at least an hour a day (two or three during our busiest times) just for the online business.
Excel for the Day to Day
Since our lives are not completely online, I also keep an Excel spreadsheet for our daily living expenses. Our budget has a column for our targets and then an additional column where I enter what we’ve actually spent. I use a combination of our credit card statements and bank statements to track everything there to make sure we stay on track.
That spreadsheet also has automated calculations set up to assign any extra income each month to the appropriate savings and investments. I manually transfer the extra money based on what it shows.
Credit Card Statements
Even though every expense is tracked in our budget, we also save the monthly credit card statements and highlight the different expenses based on what is tax deductible. I’ve actually heard recently about a Know Your Numbers Game that Visa Prepaid is hosting to entice their users to remember their account and routing numbers so that their tax refunds can be loaded directly. You can Click Here for more info on their Know Your Numbers app. We actually haven’t received a refund in years though.
When we file each year (Mr. BFS literally does our taxes by hand now and then double-checks himself with software), we use those credit card statements and our business spreadsheets to figure out what we can deduct and what categories those deductions would fall into. I highlight the business expenses in yellow to make them easy to find and total. We save the receipts as well for the sake of records, but this highlighting method on the statements is faster for the actual forms.
Overall, by using our spreadsheets and credit card statements, we can track all of our income, all of our expenses, and make plans for our future too.
I am blogging on behalf of Visa Prepaid and received compensation for my time from Visa for sharing my views in this post, but the views expressed here are solely mine, not Visa’s. Discover more at http://www.VisaPrepaid.com or join the Visa Prepaid community at http://www.facebook.com/VisaPrepaid.
***I AM NOT AN EXPERT. THIS IS NOT ADVICE. DO NOT EVEN TAKE IT ANY OF IT AS A SUGGESTION FOR YOUR OWN TAXES OR BUSINESS. THIS IS A PERSONAL EXPERIENCE. IF YOU WANT REAL ANSWERS, SCHEDULE A MEETING WITH A TAX LAWYER OR CPA YOURSELF. DO NOT MAKE ME BAN YOU FOR BEING STUPID. THANK YOU.***
As I have mentioned, Mr. BFS and I really didn’t know how we were going to proceed tax-wise now that we are both working from home. Tons of people have suggested we incorporate and form an LLC but nobody could really tell us where to go from there. So we scheduled a one-on-one meeting with a tax lawyer. Here is what we have figured out for our own situation:
Should We Form an LLC?
Not right now. As it was explained, an LLC offers an extra layer of protection for a business with assets and employees. Personal liability is still personal liability. Since our business is in the services industry, whatever we say or do still falls under personal liability. So the protection of an LLC only makes sense if we want to protect ourselves from an employee’s or outside partner’s personal liability. We don’t have employees or outside partners. Plus, there are extra taxes associated with an LLC after a certain income level is reached in Texas. So an LLC would open us up to even more taxes without having any real benefits for us.
As the nice man explained, if you run someone over with your company car while out for business purposes, you are still personally liable for that accident and hopefully have insurance to help you out since your assets are on the line. If one of your employee’s runs someone over with the company car while on business, they are personally liable AND you could be personally liable and your assets would be up for grabs if you are not incorporated. But if you are incorporated, the employee is personally liable and the business is liable instead of you, so your personal assets would be protected.
As of right now, it is just Mr. BFS and myself, and we are a legal entity of one married couple as seen by the eyes of tax law. Whether a sole proprietorship or an LLC, we are going to be held personally liable for anything bad anyway. Now that we know that, we are looking into our insurance options as it would be very sucky indeed to lose everything over one business mistake. Thankfully, we aren’t in a life or death business though, so most issues that we may have to deal with could be handled in small claims court if necessary.
How Should We Pay Ourselves?
I wanted to know if we needed to legally be declaring that we pay ourselves a salary or do we just draw from our income? The difference boils down to using a W2 versus filing our business profits and expenses on a Schedule C. Since there was no tax advantage to a W2 in our case and we are staying a sole proprietorship, it just makes sense to file everything on a Schedule C after all. So no big change there for us, yay!
How Should We Handle the Paypal 1099-K and other 1099′s?
Paypal is now required to send a 1099-K to anyone that brings in over a certain amount of cash through Paypal…that would be me. That wouldn’t be an issue at all except I also distribute payments out to my ad clients, so I am not actually making what the 1099-K says I am making. Also, some of my clients sent me basic 1099′s for cash that is already taken into account on the 1099-K, so that income was actually double-reported to the IRS. Needless to say, we asked what the heck we should do.
It ends up that it really is no big deal. We should report the 1099-K income, report the 1099 income, show the overlap, state the payment distributions as expenses, list all other expenses, and we will end up showing the net income that needs to be taxed. Apparently, even if the IRS has questions, they will send a “matching letter” before unleashing their fury. We can respond to that letter explaining the whole mess and showing our complete records, and they will take a look, realize we are not trying to falsify anything, and all will be well. The trick is having VERY thorough records, which is not a problem at all for us since that is a huge part of our business anyway.
Should We Mash Together my Blog Income and my Business Income?
Yes. In the IRS’s eyes, it’s fine to report all of my blog income and blog business income on the same Schedule C. Yay, one easy answer.
So, after one 30 minute meeting, it ends up that Mr. BFS and I are already doing what we should be doing as far as taxes go. Woot! This very nice tax lawyer was kind enough not to charge us for his time either. But we did ask him about his rates for doing our taxes for us if we decide not to do them ourselves. With our records being as straight-forward as they are, and the fact that he noticed how “organized” I am (aka, anal as Mr. BFS chimed in), he quoted us $300-$400 a year to handle it all. We are seriously considering taking him up on that offer since that seems more than reasonable considering the 10-20 hours it usually takes us to do them anyway. Yay for the decisions of self employment.
Anything interesting that we forgot to ask?
Sandy at First Gen American has proposed another Coffee Talk. This is when she presents a topic and as many bloggers as possible jump in on the same day to cover it from their unique point of view. This month’s topic asked what our tax return would say about us to an eccentric entrepreneur – would it help us secure our dream job?
My Tax Return is Boring
Here are the only things I can deduce based on our tax return:
- My husband and I work a lot since we show regular income as well as extra income from my online endeavors and my husband’s sports officiating.
- We pay very little interest on our mortgage and do not donate more than $8000 a year – we still take the standard $11,800 deduction since it is higher than everything we could itemize.
- We invest for our future – we show Capital Gains and Losses from our stock portfolio.
- We have no kids or other dependents.
Like I said, we are very boring people on paper.
What I Wish Our Tax Return would Show
If a crazy dude offered me a dream job and wanted to take a look at my tax return, here is what I wish he could figure out:
- I wish the amounts we show for my online business and my husband’s sports officiating could be highlighted with little stars and smiley faces drawn around them to show that those jobs make us happy.
- I wish you had to enter the amount of hours you work.
- I wish he would know about the random things I buy for random people just to make everyone’s day a little better. There just isn’t anywhere to write down random acts of kindness. I usually splurge on these once or twice a month.
- I wish he could see more than one return and know that my husband and I both quit our day jobs and are working completely from home now. His dream job would have to be something absolutely amazing to outrank our current situation.
My tax return just isn’t a good way to judge me as a person or potential employee. It is just financial info on paper but it leaves out the depth of my life. It leaves out our reasons for investing for the future – security and our quest for financial independence. It doesn’t show how content we are in life right now. It never even mentions the highest valued parts of our lives like our support network of family and friends.
For an employer, it only shows how much income we make and a few investments. It doesn’t actually show how hard I am willing to work on something that I enjoy. My 100 plus hour work weeks are never even hinted at. The pure joy at having my own business isn’t mentioned. It doesn’t have a place where I can mark how highly I value my reputation or any other key values I hold dear. There are no spots to indicate personality traits like “helpful”, “reliable”, or “energetic”. There isn’t anywhere to write in references or to point out the people in my life that would vouch for me.
Overall, I hope nobody ever asks to make a decision about me based on my tax return.
How about you? What does your tax return say about you?
The following is a guest post by YFS from yourfinancessimplified.com. If you want relevant, witty and easy to follow financial guidance subscribe to his newsletter by clicking here! If you’d like to guest post frequently at BFS too, just email me at budgetingfunstuff *at* gmail *dot* com!
A certified public accountant, or CPA, is essential for any entity whether it is for large corporations or for individually run businesses. Having the right CPA under you can help save a lot of money and hassles when it comes to filing taxes. The right accountant will not only keep your tax files in order, but they can also provide valuable advice in terms of your accounting system, financial performance, estate planning, and even retirement. CPA’s are a crucial member to any business owner’s team which is why it is of utmost importance to hire a knowledgeable and trustworthy CPA. The question now is, how can you effectively hire the right CPA for you? Below are some tips to employing the right CPA.
Tips in Hiring a CPA
1. Look for Referrals – This is probably the first thing that anyone should do when hiring. Referrals allow you to find professionals who have been tried and tested by people within your circle. Usually the best people to ask are your family, friends, and co-workers, and the advantage of asking referrals from them is that they are usually honest about giving feedback of the people they recommend. Also, people who are close to you would only want to refer the best, so chances are you will find a CPA who has expert credentials. Aside from just asking the people you come across everyday, a great way to scout for referrals is by posting on your preferred social networking site. Post a status that you’re hiring a CPA, and chances are you’ll get some comments that will lead you to a potential applicant.
2. Verify Credentials – As improbable as it may seem, there are actually some people who are working as bookkeepers or accountants who have no formal education or license in accounting. This is why it is essential to perform a background check on the applicant’s credentials. In order to become a CPA, applicants must meet the requirements set by the state in which they practice. They must also have passed the national CPA’s licensure exam and depending on the state, have received some practical work experience before being awarded a license to practice. There are also continuing professional education courses that are conducted annually and where licensed CPA’s are required to attend in order to keep their license.
3. Check the Applicant’s References – It is a given that applicants should pass a resume that includes their qualifications and work experience. It is usually at the last page of the resume where you can find references that state the names and numbers of past employers or prominent people who can vouch for them. Call up these people and inquire about the past performance of the applicant. If all is well, then there is a good chance you have a reliable accountant with you.
4. Use the 60 percent rule – The education of certified public accountants covers a wide range of topics and it is hardly practical for them to specialize in all fields. Look for a CPA that has 60% of his business within the same practice as you. For example, if you are a small business owner, look for a CPA who mostly practiced with other small business owners, and not those that handle individual taxes or large corporate clients. The rationale behind this is that CPAs who specialize in your field will be more knowledgeable of your business needs and will be quick to spot errors or suggest points for improvement.
5. Find out if you’re a good fit – No matter how good an applicant’s credentials are or how impressive their past work experience, it is always important to check your compatibility with one another. Set clear goals for your business and check whether your potential accountant understands these goals and have a clear sense of what they can do in order to achieve those goals. Don’t be in a rush to hire, talk with them over lunch or coffee, this will give you a clear idea whether or not you are on the same page. And of course, enthusiasm and love for the same craft you are in is always a plus.
Aside from the tips posted above, a good interview should always cover essential questions that can help you determine vital points that would be beneficial for a working relationship. Some of the questions include:
● What other services aside from the usual reporting or number crunching can be offered?
● Do you believe we are paying the right amount of tax or should we be paying less or more? Explain your position.
● Do you have a CPA firm you are affiliated with?
● Who are your other clients? We would like to speak with some references.
● What creative business advice can you offer to us?
● Why should I hire you?
● What is your policy on returning phone calls or emails? How often do you expect to report to me?
● Are you available outside of the tax season?
● When is your working hours? Are you available after hours for calls and emails if needed?
● How are your fees calculated? Will there be a charge every time we speak on the phone?
● What can I do to help you with your work and to keep the fees at a minimum?
There are many more questions that you can ask during the interview process that will help you screen for the right applicant. Be sure to be particular about the needs of your business and determine whether the accountant understands just what your business needs. Again, don’t be in a rush to hire someone and be sure to start your search way before the tax season begins. Taking the time to hire the right person will benefit your business in the long run.
Those that are interesting in accounting, but have no formal education, may consider pursing a degree from OLLU online.
Crystal’s Comments: We had a CPA for our taxes for 3 years from 2007-2010, but she kept changing her prices without letting is know beforehand, so we finally decided just to file our taxes ourselves. I keep detailed records anyway, so we were already 75% of the way there. But if we are ever in the market for a CPA again, I think this post is an excellent resource to come back to!
Yes, even though blogging is now officially paying me more than my day job ever did, I will be budgeting in self-employment. Specifically, I really dislike the idea of irregular paychecks.
My Plan’s Beginning
You may have noticed in my weekly savings updates that I have been building up a blogging income account at ING. My hope was to get it to $10,000 by the time I quit my day job so I’d have more than enough padding on months that I don’t bring in enough. I made it to $9200 as of July 15th and it looks like it will definitely be at $10,000 or more before I receive my last day job direct deposit on August 3rd.
I will be paying myself a biweekly paycheck directly from this accout so we never experience a budget crunch at all. In order for this plan to work, I have decided to pay myself $1500 every two weeks.
From that biweekly paycheck of $1500, I will be transferring $400 directly into our tax account. I know that is only looks like about 27% set aside for taxes, but based on my monthly spending for blogging, it will actually come to about 30%-33% of my profits. Plus we already throw an extra $150 a month into the tax account just in case there are any nasty surprises in April (now quarterly), which there hasn’t been since we started doing that 4 years ago. In short, I am 99.9% sure that our taxes are covered with $400 from each of my biweekly contributions.
Of the $1100 left, it looks like we’ll be spending about $125 with me on my husband’s insurance plan. That $125 biweekly should cover my health insurance, dental insurance, vision plan, and a basic life insurance policy. It’s not a fantastic plan – the deductibles aren’t great – but we have enough in our emergency fund to more than cover them.
I will know all of the details for sure in a few weeks. If I’m right based on last year’s info, then I should have about $975 left out of the original $1500 every two weeks. I was taking home $970 every two weeks at my day job, so I’ll have a $5 raise! Woot! Hahaha.
If my the numbers from the past couple of months are any indication, there is a great chance that I will be bringing in more than $1500 every 2 weeks. All of my blog income is transferred into my blogging income account, which I want to keep above $10,000. If I have paid myself all of my paychecks in a month and there is more than $10,000 left, we plan on dividing up the extra similarly to our normal monthly extra. The only difference will be taxes.
In short, this is how we plan to break the extra in the blogging income account down: Taxes (30%), Emergency Fund/Savings account (15%), the Extra Cash for Investments account (25%), the Vacation account (15%), and our two individual Fun Money accounts (7.5% each).
This is all tentative until I have some hard numbers, but you know me, I like plans.
What do you think? Is there a big hole I’m missing?