Are you done with your taxes? If not, we’re in the same boat. I finally received the K-1 forms from RealtyShares earlier this week. Real estate crowdfunding generates great passive income, but their tax documents come in so late. Anyway, I’m trying to wrap it all up and get the taxes filed by Saturday. It’s actually due Tuesday April 17th, but I should get it out a couple of days early. Why Tuesday? That’s because Monday is Emancipation Day. Okay, that’s good. A few extra buffer days won’t hurt.
I was planning to write about something else, but taxes just took over my brain this week and I can’t focus on anything else. So I’ll just share a few interesting (?) bits about my taxes. If you’re thinking about self-employment, this post may change your mind.
What we owe this year
Ugh, we owe a bunch of money this year. Retire by 40 made $65,537 last year. That was more income than expected and I didn’t send in any estimated tax payment. When you’re self-employed, you’re supposed to pay taxes every quarter. I never had to do that before because the blog didn’t generate that much income previously. We rarely owed anything. Last year, we even got a refund.
Here is a list of what we’ll have to send in this year.
- Federal income tax: owe $9,162. Tax due is actually around $18,500. Mrs. RB40 paid her taxes through the withholdings.
- State income tax: owe $1,004. The Oregon state tax due is $6,683. Mrs. RB40’s employer withheld most of these already.
- Portland business license tax: $115. This is just above the minimum ($100). Any business operating in Portland has to pay this tax. This one is interesting. I was able to deduct property depreciation, 401k contribution, and self-employment tax. The taxable income was just $5,226 so we didn’t have to pay much. The tax rate is 2.2%.
- Multnomah county business income tax: $100. This is the minimum. The tax rate is 1.45%.
- TriMet tax: $484. This is payroll tax for public transportation. Employer usually pays this one, but I’m self-employed so I have to pay it myself. This one is 0.7% of total earnings. There is no deduction so the tax is higher than other local taxes.
- Art tax: $70. This one supports the arts. Every adult who makes more than $1,000 should pay $35. From what I read, many people don’t pay this tax. I’m not sure how they enforce this one.
- Estimated payment: $2,400. This will go toward our 2018 taxes.
The total is $13,335! That’s a lot of money. Fortunately, I knew we owe some money and saved up for this. It’s still painful to send off these checks, but way better than going to jail for tax evasion. Next year should be a lot better.
No Underpayment Penalty
The good news is we don’t have to pay the underpayment penalty. Here is the exception according to the IRS – Penalty for Underpayment of Estimated Tax.
Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year…
We paid more than 100% of what we owed the prior year so we’re good. Our tax liability increased tremendously in 2017. The previous year, our federal tax was under $8,500. More income = more tax.
Self-employment is great, but not when it comes to taxes. When you’re an employee, the employer pays many of these taxes. It’s part of the package. Self-employed individuals have to pay Social Security, Medicare tax, business tax, transportation tax, and more.
The SE tax rate is 15.3%. Social Security takes 12.4% and Medicare takes 2.9%. Usually employer pays half of these, but you pay the whole thing when you’re self-employed.
Retire by 40 made $65,537 last year and my SE tax is $9,260. This is in addition to regular income tax. If I was employed and made the same amount, we wouldn’t have owed any tax (probably…)
Anyway, I still love self-employment. One of the keys to happiness at work is autonomy and I have it in spades. I might as well list those 4 keys while we’re talking about them.
- Autonomy. This is the big one. Work is usually good if you can work on what you like with no micromanager lurking about.
- Commute. Or lack thereof. Everyone hates rush hour traffic.
- Impactful. Your work has an impact on the company/consumer/world.
- People. You like your coworkers.
There you go. That’s autonomy for ya – happiness tips in the middle of a tax post. 😉
Dividend income got taxed
We had $12,604 in dividend income last year. Unfortunately, our taxable income was just a little above the 15% tax bracket. This means we had to pay 15% tax on the dividend income. We haven’t had to pay this tax since I quit my job in 2012. Oh well, what can you do? Once Mrs. RB40 quits working full time, we should slip down into the bottom two brackets again. I really can’t complain too much because it means we made more money in 2017.
Credit card reward points!
One of our readers suggested that I sign up for a new credit card and use it to pay the tax. (Thank you!) That’s an easy way to spend money and grab the sign up bonus. I got Mrs. RB40 to sign up for a new card and we’ll use it to pay $5,000 of the taxes owe. The credit card payment fee will be around $100 (around 2%) and will net us 80,000 points. That’s not a bad trade.
I wish I recognized this opportunity earlier so I could have signed up for more cards. Next year, we’ll plan better and try to collect more points. Actually, we have a big property tax payment in November. I’ll try to get some points when I pay that one.
It’s too late now to sign up for a new card to pay tax, but check out my credit card page if you have a big expense coming up. I set up this affiliation earlier in the year and haven’t made any conversion yet. I don’t write about travel enough to plug credit cards often.
I think next April will be much better for us. We should benefit from the tax cut. Taxes are lower across all brackets so we’ll pay less tax overall. Also, Retire by 40 is a pass through entity. I’m pretty sure I will be able to deduct 20% of my blog income next year.
I’m also sending in estimated tax payments this year. We shouldn’t have a big bill next April. In theory, it’s good to borrow money from the IRS for free, but it is stressful to owe so much money. Besides, if we underpay again this year, we’ll have to pay a penalty. Anyway, next April should be much better.
Tax season is almost over
Whew, I’m glad tax season is almost over. I’m actually done with our taxes. Now I just need Mrs. RB40 to take a quick look and then we’ll send it off. I’ll close with some funny quotes about taxes. Enjoy!
The only thing that hurts more than paying an income tax is not having to pay an income tax. – Thomas Dewar
Taxation with representation ain’t so hot either. — Gerald Barzan, humorist
I am proud to be paying taxes in the United States. The only thing is – I could be just as proud for half the money.” — Arthur Godfrey, entertainer
Tax day is the day that ordinary Americans send their money to Washington, D.C., and wealthy Americans send their money to the Cayman Islands. – Jimmy Kimmel
Are you done with your taxes? Did you owe the tax man this year? Oh, that’s another reason why I’m filing so late. If I’m getting money back, I’d file it ASAP.
Starting a blog is a great way to build your brand and generate some extra income. You can see my tutorial – How to Start A Blog and Why You Should. Check it out if you’re thinking about blogging. Maybe someday you’ll be griping about self-employment tax too. 🙂
Image credit: Jared Sluyter
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.