Whew! Tax day is almost over. This is the first year that I seriously considered hiring a professional to do our taxes. Our taxes were quite complicated this year and I spent 2-3 hours every weekend since late February to get it done. I decided to keep doing our own taxes because we will be able to plan better next year. Let me complain a bit first and then we’ll see how doing your own taxes can help you plan.
- I had more income sources than ever in 2012 and that means more 1099s than ever.
- The self employment tax (schedule SE) is complicated. I had to carefully go over every line of expenses and classify them. Luckily, I kept track of all the income and expenses on a spreadsheet, so that made it much easier to deal with. Also, I depreciated some equipment over several years and have to keep track of those things.
- Rental reporting is also similar to self employment income. I had to sit down and figure out how to categorize the cost landscaping, roof repair, lease signup fee, and more.
- Capital gains. I sold a bunch of stocks in 2012 and the broker didn’t keep track of the basis for some of them. One mutual fund was reinvested over many years and that made it quite difficult to figure out the cost. The search function couldn’t find these particular reinvesting transactions, so I had to dig through the last 6 years of paper and e-statements. Ugh…
- Peer to peer lending income from Prosper.com also included $41 from a deposit bonus. They categorized this as gift and it took me a while to figure that out. Why don’t they just send a 1099 INT like all the other businesses?
- I had some income from the short term disability insurance when I took a medical leave of absence in 2012. This income is not taxable, but it complicated the tax filing.
Anyway, it was a pain, but I finally got it done a couple of weeks ago. We reviewed it a few times and it’s finally ready to be filed. When I tried to e-file, I found out that the IRS won’t let us do it because the taxable income from the short term disability was $0. So I printed everything out and I’ll go to the post office to send them off on Monday. It’s down to the wire as usual.
I usually wait until the last week to file our taxes because we always owe the IRS and I want to delay as long as possible before sending off a check. At least this year, we only owe about $300 each to the Fed and state. Last year we owed over $3,000 altogether. That was a painful check to send.
While doing our own taxes was quite painful this year, it really helped us plan for next April. This year, we will have a big drop in income because I left my job and I don’t have a W2 anymore. I used H&R Block At Home and I deleted my W2 to see what our taxes might look like in 2013.
Possible 15% bracket
It turns out that we have a good chance to get down to the 15% bracket this year. All the stars will have to align, but I think we can do it.
- Self employment – If I gross around $25,000 from self employment, we would be right around the 15% bracket cut off. To be safe, I should open a SEP IRA and use it to shelter 25% of the self employment income. $25,000 would be great because I made much less than that in 2012 online.
- Mrs. RB40 will have to max out her 401(k) and put them in the traditional plan. She changed to 50/50 Roth/traditional earlier this year, but I’ll have to ask her to change back to 100% traditional.
- Unless we win the lotto, our AGI (adjusted gross income) will be under $100,000. This will enable us to use all of our deferred rental losses to offset our other income. I think we will have around $20,000 to write off and this should push our AGI under $72,500 (the 15% bracket.)
Why try to get into the 15% bracket?
I’m pretty sure this will be our only chance in the next few years to get into the 15% tax bracket. The rental losses accumulated over a few years and once we write it off, we won’t have nearly as much to offset our income in future years. Still, why try so hard to get into the 15% tax bracket?
The biggest reason to get under the 15% tax bracket is the chance to reset our cost basis. If you are in the 10% or 15% tax bracket, then you won’t have to pay tax on your long term capital gain (and qualified dividend).
Let’s look at an example
I have 500 shares of Leggett & Platt (LEG) and the cost basis is around $11,000. The current value of my LEG holding is about $17,000. I can sell the stock and buy it back right away and my new cost basis will be $17,000. The wash sale rule only applies to a loss. This way, I can avoid paying the 15% tax on the $6,000 gain. That’s $900 in my pocket instead of the IRS. Also, who knows what’s going to happen with the capital gain tax rate in the future. People in the highest tax bracket (39.6%) already have to pay 20% capital gain tax. I’m sure it will roll down to the rest of us at some point with the looming federal deficit.
There are a couple of caveats though. I would have to make sure the $6,000 long term capital gain won’t push our AGI above $72,500. If it does, then we’ll be in the 25% bracket. Also, we would have to pay the state tax anyway. I guess that’s all right. At least the state tax is going back into the local economy.
Some good news when you don’t make as much money
I also found a few more tidbits of good news. We will be able to take advantage of the $1,000 dependent credit in 2013. Yes! We also probably should upgrade our hot water heater so we can take advantage of the home energy credit. Lastly, we will be able to contribute to the Roth IRA for the first time in a few years. We made too much money over the last few years to contribute and we won’t have that problem in 2013.
Hopefully, you finished your tax on time. What do you think about resetting the cost basis? I think it’s a great way to stick it to the IRS while we can. The capital gain tax rate is bound to go up and resetting the cost basis is one way to minimize the impact.
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.