Six Things I Think I Think After Filing Income Taxes

(Many apologies to the great Peter King, my favorite football writer, for the title of this article.)

Just this morning, I finished up my income taxes for 2007 (along with my estimated taxes for the first quarter of 2008), wrote a small mountain of tear-stained checks, and dropped them in the mailbox. This was my first year filing taxes with significant income earned from independent work and it was a real eye-opener.

Here are some of my collected thoughts on the income tax process.

1. TurboTax is a miracle worker. In 2007, The Simple Dollar really took off. In 2007, we bought our first house. In 2007, I sold mutual funds for the first time (to help buy the house). As a result, this year was loaded with new experiences when it comes to income taxes. Add into that the fact that my wife and I worked together on our taxes this weekend, working in shifts with the other one of us focusing on child care.

The end result is that TurboTax bailed us out. We’ve been using the bare bones version for years, so it pulled in the stuff we needed for last year, and then it walked us step by step through all of the new stuff. In the end, after several hours of typing away at the keyboard and shuffling through a mountain of papers, we ended up with a neatly filled-out tax return with all of the numbers in the right places. Even better, it got me on the right track with estimating for the future, meaning we actually had a little bit left over after a year’s worth of tax savings even after being hit with a penalty for a low estimate last year. That leftover amount’s going straight towards a student loan, as is our “economic stimulus package.”

2. Children are a splendid tax break. We have two children. Just by existing and by going to day care, they netted us $2,950 in tax credit. That’s right – almost $3,000 of our tax bill went poof because of our two children.

That obviously does not make up for their expense, but it does pay for about a third of their child care over the last year, which softened the burden. To put it simply, if you have a child, the tax system does help you out with those extra costs of parenting – and that’s nice.

3. If you’re making any sort of serious side income, pay the estimated taxes. Not only is paying it all the way along a great way to make sure you aren’t nailed with a giant tax bill at year’s end, but it also ensures you aren’t hit with a nice big fat penalty either. We were hit with a penalty for estimating way too low last year about how The Simple Dollar would grow – one year ago, I honestly had no idea how “big” The Simple Dollar would become.

The second you start getting enough income that you’re getting pretty excited about it, look into form 1040 ES and the equivalent form for your state. Don’t let it slip or else tax day will be very painful.

4. We printed out almost fifty sheets worth of paper just to mail in. That’s just plain silly, especially when most of this could be filed electronically. Even better would be a drastic simplification of the tax code – a true flat tax of some kind. The simple fact that we had to burn a good chunk of a weekend and print out fifty pages of rather confusing documentation just to meet requirements tells me there’s something wrong in the system.

So, yes, I just admitted to being in favor of a flat tax. After burning most of a weekend of lost productivity, printing out fifty sheets of paper, mailing in a bunch of documents, and paying what feels like a pretty arbitrary number in the end, I definitely can see the reasoning behind just writing down your income, taking a handful of very basic deductions, and then paying a certain percentage tax on what’s left. That sounds awful good to me.

5. Signing those checks was painful. I just watched a sizable amount of cash leave my pocket earlier today. It was painful to watch all of those check being written – all of that hard-earned money simply leave my pocket, never to return.

6. But even after all of that, I don’t really mind. When I was writing those checks, I grumbled a lot, but now that they’re in the mail and I’ve had some time to reflect on what that money really means, I don’t mind. It means public education for every child. It means streets and sidewalks and fire departments. It means local parks for my child to play in and national parks for me to look at in awed beauty. It means support for the arts, support for science, and support for people who really do need it, even if the systems aren’t perfect.

Regardless of your feelings about the things that are wrong in this country, our government does a lot that is right and it gives everyone an opportunity to work on fixing what’s wrong through voting and directly participating in the system. Much of the good that I identified does come from local government, but a lot of their funding and protection comes from up the food chain. If writing that check means my son can run down the sidewalk to the park and that some poor child is able to attend school, that’s a check I’m quite happy to write, in the end.

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  1. cvd says:

    If my federal tax dollars went to the things you mention in the end of the post, I wouldn’t mind so much either. But almost none of your federal tax dollars will go to those causes. Almost all those things are paid for by local and state taxes.

  2. Becky@FamilyandFinances says:

    I’m totally with you on simplifying the tax code. Jeez! Flat tax, Fair Tax, I don’t really care as long as they made it easier for the Average Joe to be able to do :)

  3. Johanna says:

    “To put it simply, if you have a child, the tax system does help you out with those extra costs of parenting – and that’s nice.”

    Not for those of us who don’t have children, it’s not. Because you’ve made the choice to reproduce, I’m paying more in taxes than I otherwise would – or, more realistically, the national debt is rising faster than it otherwise would, and I’ll end up paying more in taxes later. Do you think that’s fair?

  4. Kim says:

    Johanna,

    Those same kids will be paying for your Social Security checks at retirement (assuming we still have it then…). Do you think that’s fair?

  5. KellyB says:

    Trent, I like your attitude of showing the positive side of where some of those tax dollars go – the parks, roads, schools, etc. We all know too much goes to overspending and the war, but I try to think about the upside as well. It helps ease the pain of the $$! I also do this with Social Security tax…even though I may not see much of that money, I like knowing my grandmother and elderly relatives are being taken care of for the hard lives they lived and going through the Depression, WWII, etc.

  6. “We printed out almost fifty sheets worth of paper just to mail in.”

    Good heavens – why didn’t you e-file?!

    “TurboTax is a miracle worker.” I’m pretty happy with TurboTax also. I used the online version as well as the online version of TaxCut this year to do a side by side comparison. Bottom line – I was much happier with how TurboTax worked, especially since I spent a lot of time reviewing and changing the information over multiple sessions. If you do that, you’ll want to kill H&R Block by the time it is done, because it takes about 10x more screens to get where you want to go. Oh, and I think TurboTax handled the self-employed stuff much better; although both ended up with roughly the same numbers.

  7. margo says:

    “Not for those of us who don’t have children, it’s not… Do you think that’s fair?”

    Its fair if the government (elected by us and mostly motivated by giving us what they think we want) considers encouraging citizens to reproduce worth the tax subsidy.

    What would make encouraging reproduction worth the tax subsidy? Well, the expectation that with more young, working people, the government will receive more tax revenue. And/or the expectation that more young, working people are required to keep the Social Security and Medicare programs afloat for the old people swelling the ranks in them. And/or the expectation that more young, working people will continue to grow the U.S. economy.

    I’m not sure I believe any of those above listed reasons are TRUE, I’m just stating reasons that a child subsidy might make sense.

    I think a flat tax would be highly preferable to the system we have now. We’d have to be careful that it didn’t squash productivity at any level, lower OR upper incomes, and that it treated businesses, not just individuals, at taxable entities.

  8. Tax software is pretty much a required item these days. Outside of those who use accountants, does anyone know even one person who just sits down with a handful of forms and runs the numbers freehand? The system had made that almost impossible.

    Trent, I did the same thing when it comes to the 50 pages of paper forms. Some might think you’re exagerating for effect, but my total paper was right there as well. After the paper, ink, envelope, stamps, and trip to the post office, I think I might suck it up and just pay to E-File next year.

  9. Nathan says:

    I don’t mind paying taxes for the services it provides (school, roads, infrastructure, etc.). I DO get a little upset when I have to pay for the destruction and rebuilding of the schools, roads, and infrastructure in Iraq (and other places in the world who haven’t attacked us).

  10. “Some might think you’re exagerating for effect, but my total paper was right there as well. ”

    Oh, I believe it. Mine was actually more than 60 pages – yikes!

  11. Lurker Carl says:

    Turbo Tax is truly amazing. I’d used it for years when I had a side business, it was much easier than preparinging tax forms the old, hard way or schlepping all the documentation to a tax accountant. This has been the first full tax year since liquidating the business. Simplifying my income stream has made income taxes reduced a week long chore into only a few hours but it’s still painful to write those checks.

    I don’t expect to ever see a flat tax system to replace the current catastrophic mess, H&R Block and Jackson-Hewett would not allow it.

  12. Johanna says:

    margo: There are plenty of young working people around the world who would love to come to this country and grow the US economy and pay taxes and fund Social Security and Medicare. Why not invite some more of them to come here instead? What can Trent’s children do that immigrants can’t?

  13. Jesse says:

    @ Poster above, I honestly couldn’t believe the difference between paper and doing it with turbotax. The saving of information from year to year made it so that I was able to file my taxes this year in literally 15 minutes. woohoo!

  14. KellyKelly says:

    I think it’s fair that babies today will pay my SS when I’m old because I’m doing it today for seniors. It’s something EVERY citizen does.

    I do not think that tax deductions for dependents are fair. I also don’t think deductions for mortgage interest is fair. I benefit from that and would give it up without complaining if everyone else had to.

  15. Vered says:

    Another way to soften the blow of writing a big tax check, is to realize that if you write a big check, it means you had a large income. :)

  16. Peter Kovacs says:

    Okay, I get the idea that everybody would like the tax code to be simplified. But if you think about it:

    “I definitely can see the reasoning behind just writing down your income, taking a handful of very basic deductions, and then paying a certain percentage tax on what’s left. That sounds awful good to me.”

    Isn’t that basically what you’re doing when you file your taxes? The are two “hard” parts when it comes to filing taxes (For me anyway): Figuring out exactly what my income was, and figuring out exactly what deduction I can take.

    Up until this year I’ve always taken the standard deduction. So that was easy enough.

    Up until the past few years I’ve only earned income from my fulltime job, so that part was easy.

    Things got more complicated this year because I too had a lot of side income and big changes in my life (child, house, etc). Determining my income was trickier because I had a lot more that wasn’t reported to me on a W2 or a 1099, and I also had a lot more *expenses* in running these side businesses.

    So determining your income is never never never going to be as easy as “writing down a number.”

    If you want to lobby to have itemized deductions done away with, well, I suppose I couldn’t fault that plan, but everybody who itemizes their deductions might object.

  17. The CPA and tax software lobby will hate me for this:

    FAIR TAX!! It has weaknesses, but there’s less stress and waste of resources.

    My taxes were simple this year, but they will only get worse and my dad gets within seconds of a heart attack each year. This year his CPA told him to expect a big refund. Instead, he owes $4,000 because the CPA screwed up LAST year.

  18. margo says:

    “What can Trent’s children do that immigrants can’t?”

    I don’t know, what? What do you think are the reasons that the IRS instituted child tax credits?

  19. margo says:

    “I think it’s fair that babies today will pay my SS when I’m old because I’m doing it today for seniors. It’s something EVERY citizen does.”

    I wish Social Security was managed in a way that most of us manage our retirement monies: saving today for a secure future. Instead the government has been raiding SS coffers for a long time, and so instead of your money coming in now and sitting around, securely, for when you retire, SS can barely keep up with current retiree payments using the taxes from currently working individuals.

    Something that, ironically, the IRS would NOT allow for qualified pension plans in this country. In fact the recent Pension Protection Act was all about encouraging businesses to more richly fund their pension plans in advance.

  20. Jayson says:

    A simple tax plan would be great, but with the culuture of the US as it stands right now it won’t work. Back in 1986 they re-wrote the entire internal revenue code. 2 decades later, it has increased in sized dramatically. Why? Loopholes were found and had to be closed.

    Because there are people out there who try very hard to actively find ways out of taxes, congress has to be very careful about how they write the code.

    A flat tax? On what? Income? A large portion of the tax code currently is just to define what income is. And if those tax folk had only one little part of the tax code to focus on, I’m sure they could rustle up more loopholes.

    Don’t get me wrong. I’m all for simplifying. I do taxes for a living, and I wouldn’t mind losing my job if the tax situation in this country was fixed. I just don’t see it happening for a while.

  21. Kacie says:

    Why did ya wait until the last minute to file? Even if you know you’ll owe taxes, isn’t it better to file sooner?

    Or did it take awhile to get all of your ducks in a row?

  22. LC says:

    I hate Turbo Tax. Who needs to pay for more sales pitches from Intuit? I just look at last year’s tax returns, and use a spreadsheet. Not sure that it would take me 15 minutes, though. Maybe there is something to it.

  23. Trent says:

    Kacie: I kept getting 1099s until early April.

  24. imelda says:

    Trent, could you explain why you support a flat tax? Suze Orman said the same thing on her show recently, which surprised me, and made me think twice. Moreover, I’m reading a book called “Perfectly Legal,” basically about how the uber-wealthy worm out of paying taxes, and it says that because of all the loopholes and complications in the tax code, we are essentially operating on a flat tax system. So I’d be curious to hear more about it.

    I love to hear that you keep in mind where all our taxes are going. At this point in my life, at least, I don’t mind paying taxes, for that very reason. Course, I hate the thought that I’m supporting the war in Iraq, but with this government, you can’t support one without the other.

  25. ericabiz says:

    Hi Trent,

    I’d love to see a breakdown of how much money you make from the site and how you make it vs. pageviews, subscribers, etc. It doesn’t have to be presented from a cocky “look how much I made I rock” point of view, but I wouldn’t expect that from you anyway. It would really help those of us who are just starting down the income path with blogging.

    -Erica

  26. china says:

    i’m thinking of trying to sell paintings, i’m not sure if that would qualify as a second business or if it would ever make any money, how do you report that kind of earning? would you necessarily have to start a business to earn extra income that way?
    (i’m sorry if this was more like a mailbag question)

  27. Carri says:

    As a tax professional who has worked for H&R Block and now for myself, I would recommend Turbo for Anyone with your average tax situation. However, Trent, I would have recommended that you go to a professional preparer for this year, specifically because you has so many different tax situations. For instance, if you had paid estimated taxes of 100% of last year’s tax bill you could waive the penalty. If it is the first time you’ve owed a tax bill at filing you could have waived the penalty. Did you capture all the real estate tax paid on your new property including that paid at closing? Did you amortize any closing points you might have paid? When you cashed in your stock, did you have the correct basis and time held? Did you check to see if you qualified for a Savers Credit or Continuing Education credit. Did you deduct any education loan interest that you or your wife paid. There are a number of questions that a tax professional would have asked you to determine the best possible outcome for your tax situation. Given the cost per hour for the time that it took you and your wife to complete the return,you might have been more productive letting a professional handle it for you.

    The Federal and State government prefer that you electronically file all the forms that you’ve discussed. There are less likely to be key punch errors and any refunds are handled much more quickly. You can efile your return any time during tax season and send a check for money owed on the 15th. Some states (MN included) charge extra for manually filed returns. The cost to efile is negligible.

    Finally, I enjoy your blog, Trent and look forward to many more entries.

  28. Adam says:

    Wow, you Americans have such a complicated system! We don’t have a flat tax here in Australia (although I personally agree with a flat tax), however we have a system called Pay-As-You-G0, or PAYG, for our income taxes. This is probably made easier by the fact that we only have a federal income tax (the states relinquished their income taxing powers during World War II).

    Essentially, all employers access the ‘tax tables’ from the Australian Tax Office. Let’s say I am expected to earn $100,000 in the next financial year. My employer knows that if I do earn that, I will owe the tax office $48,500 in income tax (48.5% being the top tax rate). They then divide this amount by 52 or 26 (depending on if I get paid fortnightly or weekly), and remit that to the tax office.

    So at the end of the financial year, there might be some minor adjustments (I might have lots of refunds that mean I have paid too much tax, or I may have some non-salary income which means I owe some more tax), but at the end of the year, for 99% of taxpayers, they merely sign the form, and send it in.

    Plus, you can download the Tax Office’s own software, which will import all of your details from their database (based onyour tax file number). You can then accept this, and have your refund paid by direct deposit into your bank account! You never even have to see a piece of paper!

  29. kim says:

    This was the last year for those beautiful $1000 per child tax credits. I can only cross my fingers that they will renew the credit again before the next tax season, otherwise with three kids, I will be paying an extra 3K in federal taxes.

  30. Brenda W. says:

    My husband and I (we use TaxCut) gulped several times at the eFiling cost — $19.95 EACH for both the fed and state. But then chose to eFile purely for the convenience, as well as the rapid return of the refunds we received (7 and 8 days after filing for the state and fed respectively).

    BTW .. one way to look at the $$$$ you had to pay is that you had a one year interest free loan from the government (or if you’re paying quarterly, I guess it would be a 3 month interest free loan!)

    With part of your payment being penalty for under estimation of your income, that isn’t quite true I guess, but with my husband and I getting income from a traditional job that withholds every paycheck, the years we’ve had to pay, that’s how we’ve looked at it!

  31. lorax says:

    TurboTax is OK, but only compared to the competition. TaxCut is pathetic for anything advanced – ESPP, ESO, covered calls – taxcut got them all at least partially wrong.

    The same return prepared with TurboTax Premium was more correct, although the program itself is buggy. Turbotax itself crashed, the updater sometimes hung, and without changing the data the audit predictor swung from low to high, to low, and then back to high.

    I’d like to see if something like the flat tax would work. The fair tax is nice because it encourages savings and reduces consumption, but is otherwise infeasible.

    @Avonelle Lovhaug – it doesn’t make sense to e-file if 1) you’re paying taxes and 2) turbotax is charging $15 for the privilege!?!

  32. Dan says:

    I know several people who do their taxes without a computer. I did my taxes by hand, with paper forms and an ink pen after one of them encouraged me to do so this year. It was glorious for a number of reasons. First of all, it was free; I did not have to PAY to pay taxes, which is completely bogus. I wonder how many lobbyists Intuit employs to make sure the government doesn’t set up a free system – which would not be relatively trivial and so much cheaper than the current system.

    Another great thing about using the paper and pencil is that I discovered how taxes actually WORK. Being only 25 years old and a relative newcomer to the I-have-a-real-job-(not-really-because-I-am-a-graduate-student)-and-so-I-have-to-pay-real-taxes game, I discovered that while TurboTax & Co. make it seem easy, they really do not teach you anything about taxes. My wife – a person not normally excited by numbers – helped and we had a wonderful time one weekend back in February.

    One might argue that our taxes were less complex than most. While we do not own a house or have children, we did have capital gains from selling stocks, student loans interest, estimated tax penalties and tuition payments to consider.

    I have recommended doing taxes by hand to my friends and I hope you consider it too.

  33. bilos says:

    Trent, can you clarify the penalty you had to pay? My understanding is that if your total taxes paid in 2007 (e.g., withholding from your regular job) exceeds 100% of your total tax due in 2006, then you are exempt from any penalties. In this manner people who have a sudden surge of income aren’t penalized for that surge. Did you not have enough withholding to meet this criterion?

  34. Chris says:

    Johanna, if you went to public schools, single people paid for your education; I’d submit that’s no less fair than the child credit.

  35. Nate says:

    My father still does his taxes with pencil and paper.

    What I’d like to see is a tax on phantom capital gains disappear. Currently if you buy a stock at $10 and over a period of time it increases to $15 tax is paid on $5, even if $3 of the gain was inflation. With inflation indexed capital gains taxes an investor would only pay tax on $2, which is the amount of economic benefit the investor enjoys from the gain.

  36. Lisa says:

    Nate, I’m not sure why inflation is phantom capital gains. You had $10 and now you have $15. Would you also calculate inflation on the interest you gain on savings each year?

    I can’t even imagine figuring out the cost basis for things if inflation was included in the calculation.

  37. Flexo says:

    I managed to avoid the federal underpayment penalty, but last year, I found myself owing a small fee to New Jersey (about $20 I think) for underpayment. Now I pay estimated taxes to both NJ and the feds.

  38. Trent says:

    “Trent, can you clarify the penalty you had to pay? My understanding is that if your total taxes paid in 2007 (e.g., withholding from your regular job) exceeds 100% of your total tax due in 2006, then you are exempt from any penalties. In this manner people who have a sudden surge of income aren’t penalized for that surge. Did you not have enough withholding to meet this criterion?”

    I didn’t meet that criteria.

  39. Todd says:

    I agree with Trent. I have no problem paying taxes to live in a country as great as the U.S.A.. I don’t believe for a minute that our country is perfect, but, given the challenges we face, I truly believe the U.S.A. is a great country. Leaving the weightier issues to those better versed in politics, I would like to see one thing; I would like to see pork barrel projects be eliminated so that the taxes we pay could do more good for those in need.

  40. Mike says:

    Flat tax/ Fair tax is a myth. How would a corporation pay income tax then? If a corporation is allowed to deduct its expenses then so should every citizen.
    Unless companies had to pay tax on gross sales it creates an unequal society. Although the system seems complex computer software does a better and better job of making it a painless exercise. And just like people making soap by hand is time consuming yet frugal, so is doing taxes by hand.
    Our Government ( i dislike the present admin) has on the whole done a very good job of providing for the welfare of its citizens this is its main job. BTW don’t believe a word anyone tells you that Social Security is going to go broke. Its a myth. Check the timeline. Medicare on the the otherhand does present a problem. One which we as citizens have a responsibility to manage.

  41. Well said Trent,
    I have been a preparer for a great number of years and i found it funny that Carrie Prior from HeRB.ert, now on her own, only reflected how she felt you should have gone to a paid preparer. Funny, I found the peace to be a great view on those thoughts on why we do it all, pay our taxes.
    I say again, “well said”.

  42. 144mph says:

    It’s sad to see intelligent people so indoctrinated into the system. If anyone is under the impression that their income taxes are used to light the sidewalks at night, provide public services likee libraries or parks, or education to those in need, they are severely deluded.

    Income taxes are primarily used to pay the interest to the Fed on the government deficit. (You forgot to mention this in your glowing review of the Fed from a few days back.) All that other stuff that you mentioned that gives you the warm fuzzy feelings are money gained from state and local sales taxes, as well as property taxes. If your income taxes are paid so that you can feel safe and warm at night because there are police cruising the street and putting the riff-raff in the slammer, then where do you think all the money that is used to pay for atrocities like the war of terror comes from? Corporate taxes? lol…

    We’re being ripped off in the US and the most ridiculous part of the whole situation is that there are good, smart people who think that we’re getting a fair deal.

    Please, use your talent as a writer and your broad audience to truly inform people of the methods which are being used to enslave them. Debt is a prison, but we need to be asking questions beyond how to just break out of our cells. Like, who built this penitentiary? Who is the warden and who are the jailors?

    I’ve seen in your writing that you’ve got a strong sense of what freedom and liberty really mean. Start asking yourself critical questions and I think you’ll find the experience enlightening.

  43. Lurker Carl says:

    The problem with paying taxes is the complexity of the tax code. Every line on every tax form is the result of some special interest group or PAC getting Congress to pass legislation for tax relief on their behalf. You can give identical information to a dozen tax preparers and you will get a dozen different figures for taxes owed.

    When you turn to the IRS for advice, they don’t guarantee their answers to be correct. If the agency in charge of tax collection can’t be relied on for accurate guidance, how are we supposed to figure it out?

    And as far as the tax penalty for underpayment of estimated taxes, Uncle Sam is fining us for not paying enough before the final tax payment is due. If anyone else does such a thing, it’s called extortion.

    One more week until tax freedom day!

  44. Johanna says:

    Chris: First of all, obviously, I was too young at the time to understand the financial implications of my parents’ choice to educate me one way or another, so I don’t see how I’m responsible for their decision.

    I’m not opposed to public education. In fact, I think it should be socialized to a much greater degree than it already is. We all benefit from having an adequately-educated next generation.

    It’s a classic case of moral hazard. I don’t like the idea of parents counting on government subsidies when they make the decision of whether to have children. But the children, once they’re born, shouldn’t be made to suffer for their parents’ decision.

    I opened this can of worms, not because I think speaking out against child tax subsidies will do any good (although it would be nice if it would), but because it drives me nuts when people argue that a parent’s decision to have children should be immune to criticism, because it’s a “personal decision” and it has nothing to do with anyone else. But when parents get tax credits and deductions because of their children, then it DOES have to do with everyone else, because those tax benefits are coming out of everyone else’s pockets.

  45. Moni says:

    Hear, hear on the flat tax!

  46. Jason says:

    What’s especially ludicrous about e-filing is that it could be a service provided by the government for free (or no) cost, since it drastically reduces errors, processing time, and so on.

    But the tax preparation companies won’t allow it and so no one e-files because a few stamps and paper cost less than the $15-20 per return charged.

    http://www.npr.org/templates/story/story.php?storyId=9112083

    Pathetic.

  47. Amanda B. says:

    Johanna,
    I have NEVER heard of anyone justifying having kids for the tax credit. Financially, they are definitely a loosing investment. But you are right, speaking out against it does no good because it is one of the most widely supported tax laws there is. It was recently extended with a senate vote of 99-1. I suppose you must have been the one?

  48. What will the fairtax do for the black market? Won’t it get even bigger? Look what it’s done for the cigarette black market, especially in NY? I guess money would have to come from somewhere for more enforcement then. I can see the mess this country would be in right now…

    Why can’t they just rewrite the whole tax code so it is not 66,000 pages long?

  49. clevelis says:

    Good points! I’ve only had to pay taxes once and was just glad I had the funds on hand to pay and get it over with. As I’ve lived in various areas and traveled to other nations, I’ve become one of those who wouldn’t mind higher taxes. Actually, I’m “against” seeking out politicians who promise no higher taxes. Why? Because of #6! If everyone puts in their share, then social services/recreation/infrastructure for us all. I think it would be cool if we had like 15-20% tax on income across the board, just one flat percentage for everyone earning over a certain amount, let’s say $25K for household of 2. To take it a step further, this tax should be 5% less for teachers, fire fighters, police, b/c we refuse to pay them what their services are worth.

  50. Michelle says:

    Aside from Johanna’s point, school taxes are slanted against those of us without children–at least in my area. We homeowners pay a huge property tax for school funding (it’s gone sky-high due to renovations), and yet parents who live in apartments pay nothing. It would be more fair to have a base school tax rate for everyone, plus an additional amount per child.

  51. A.M.B. A. says:

    I’m one here who still does the tax return BY HAND and a CALCULATOR. And it’s a fairly complex one, always including schedules, credits, capital gains, etc. As another poster said, I like to see how it works. One year I sought help from an accountant because I wasn’t quite sure on a particular item. All he did was plug the info into a computer and get a number, but couldn’t EXPLAIN anything to me. I ended up explaining a few things to him. And he’s got the (legal and expensive) credentials to offer tax services? No thanks. When I sign that return I’m also signing that I’M FULLY RESPONSIBLE for it’s content and accuracy. The accountant is off the hook.

  52. Johanna says:

    Amanda B.: Many people take the tax benefits into account when determining how many children they can afford to have. See Trent’s post from October 18, 2007, “Five reasons why having a child isn’t as expensive as you might think.”

  53. Bill says:

    No TaxACT fans here? I used to be a TurboTax guy. I did TaxACT this year – pretty much the same product but 100% free.

  54. Amanda B. says:

    Michelle,
    Renters pay property taxes to, just through relay. Building owners actually pay the taxes and then divvy up the cost along with utilities and mortgage to the renters.

    Johanna,
    Fair play on the article. I had forgotten about it. However, it is still not a winning financial decision. And I can’t imagine someone choosing to not have kids if the tax break goes away. Anyway, the Adoption tax credit is substantially bigger. If you are going into the kids raising “business”, adoption is the way to go. (No, and am not suggesting raising kids for anything other than the joy they bring to your life. So put down your lighters.)

  55. Trent, could you talk a little bit more about how you estimate taxes throughout the year for The Simple Dollar? I try to keep my net freelance income below $1,000 to avoid penalties (which the free tax advisor at Intuit told me was the cutoff between penalties and no penalties), but it’s really, really hard for me to project throughout the year to make a guess as to how much I’ll actually bring in. How do you work this out in advance?

    And yes, I’ve read Form 1040 ES but tax-ese makes my eyes cross. :) I’m looking for a step-by-step guide from someone who’s been there (and you do it very well).

  56. Jenn says:

    Tax rebate. Everyone is talking about how great the tax rebate is and how most people get it. I’m not, though I think I should. I earned slightly over whatever the maximum is — 87,000 — and do not qualify. Sure, 87,000 seems like a lot to sme people and it is it some parts of the country. But I am single and live in Manhattan and pay 2500 a month in rent. Where’s the fairness?

  57. Debbie M says:

    Trent, here’s some advice about estimated payments.

    I have a friend who makes all of her income from self employment, it’s quite a lot (compared to mine anyway), and it fluctuates wildly from quarter to quarter. She makes estimated payments each quarter based on how much she actually made that quarter. She says Turbo Tax doesn’t really help her with this–it’s too intent on assuming she’s making the same this quarter as she did on average over the previous year. She just ignores the warnings of Turbo Tax and sends in her own estimate.

    I don’t know if there are problems if you make most of your money at the end of the year, and thus it looks like you haven’t been sending enough in all along and thus they want to fine you. And I forget what percentage of her earnings she sends in each quarter (I don’t know if it’s an overestimate), but I thought I’d pass on the little information I do know.

  58. KellyKelly says:

    I am self-employed. I tried using TurboTax once for my taxes and will never do that again!

    I spend about $300 a year on a CPA. It is WELL worth it. He finds deductions that more than compensate for his fees.

    Plus my peace of mind.

  59. getagrip says:

    @ Johanna

    I know of no parents I have met or talked with who have seriously considered tax implications of having a child prior to having one. The conversations I’ve had with respect to finances and a new child usually cover the ability to afford paying for child care, impact on their career(s), savings for college, impact on their current family and their individual financial goals, etc.. In no case have I ever heard, “Hey, I’m having another kid to get a tax break,” because even if someone said as much, they must have been joking because it can quickly be shown that children equate to a negative impact on net worth no matter how many you have. Even Trent’s article only points to it isn’t as expensive as you might think, not that it won’t cost you financially.

    Additionally, going back to your original statement I guess you should be mad at property owners, because they get a break on property taxes and mortgage insurance.

    You should also be mad at people who invest because they have been getting a break on their investments over the last dozen years or so.

    You should also be ticked off at people who have had to pay lots of medical bills, because they can deduct those.

    And just for fun, lets include the elderly, the blind, head of households, and anyone else who qualifies for those other tax breaks which you may not, at this moment, be able to utilize. You should be mad at all of them since it’s just not fair they can deduct things you can’t or haven’t chosen to.

    Because, after all, everyone taking any of these deductions means you theoretically have to pay more in taxes because you may not qualify for it.
    Picking on someone having children because you don’t, and ignoring all these others, is showing anti-kid bias.

    Oh, and by the way, you’re suggestion of pulling in all those immigrants rather than having kids grow up and support the system, only works if you have the immigrants agree that they and their spouses are neutered prior to arrival. Otherwise you still end up with their coming here and producing more of their own kids, which they can deduct on their taxes.

    Just some food for thought.

  60. L says:

    I also kept getting 1099 updates. We filed back in March, got another 1099 at the beginning of April, filled out the papers again and as soon as I went to the mailbox to send it, we had another 1099 on April 13! At least we have a year to amend our form.

  61. Johanna says:

    @getagrip: I never said that parents do, or would, have children entirely for the sake of the tax breaks, and I don’t know why you think I did. I also never said that nobody should ever have children. All I’m doing is pointing out that that “nice” tax break that you get to subsidize your child-rearing costs doesn’t just come out of thin air. It comes out of somebody else’s paycheck.

    As it turns out, I do disagree with the way investment income is taxed, and I’m not sure I see why the mortgage-interest deduction is fair, either. But Trent didn’t mention either of those things in his post, which is why I did not bring them up.

    As for the other things you mention: People do not choose to be blind or elderly or (for the most part) to have large medical bills. But in this day and age, having children is entirely optional.

  62. keith says:

    Oh please, don’t go encouraging the flat tax! You seriously want to give billions to the top 5% and have the middle-class pay more, all so your paperwork is easier?!? God damnit people.

  63. Jayson says:

    @ #54

    You actually have 3 years to file an amended return (not that you should procrastinate!)

  64. Aaron says:

    Very good article. I appreciate your transparency on the outcome of paying taxes. I have an accountant do my taxes every year and absolutely recommend doing so. If you keep good records through out the year and have it all organized when you meet with an accountant, it should be over in an hour or so. Then you just sign the forms, write the checks (if needed) and go on your way, without breaking a sweat. Every year, he gets me enough in refunds to more than cover for his fee.

  65. beth says:

    “Tax software is pretty much a required item these days. Outside of those who use accountants, does anyone know even one person who just sits down with a handful of forms and runs the numbers freehand? The system had made that almost impossible.”

    I always do my taxes on paper, by hand. (I really can’t get behind paying a fee to file my taxes!) There aren’t 50 pages – my situation was fairly complicated this year and I had, maybe, 7 pages total. That includes state too.

  66. escapee says:

    “It means public education for every child. It means streets and sidewalks and fire departments. It means local parks for my child to play in and national parks for me to look at in awed beauty. It means support for the arts, support for science, and support for people who really do need it, even if the systems aren’t perfect.”

    This is your STATE government you’re talking about ,right (except for the national parks bit)? I have no problem paying my state taxes because I can see where the money is going. Federal taxes, though, those are a different story. Consider the *billions* of missing (as in it just disappeared) dollars sent to Iraq:
    http://www.bloomberg.com/apps/news?pid=20601103&sid=aRfRyhT0yHzU&refer=us

    This is what your federal taxes just paid for. Not a good use of your or my money, in my opinion.

  67. Grant says:

    Why are you printing out paper to mail in? And why are you writing paper checks? I’ve done my taxes electronically for the past 8 years and the tax forms and payments (refund or tax owed) have all been done electronically. Especially since you are using TurboTax, this should be a no-brainer.

  68. Selena says:

    Keith: “You seriously want to give billions to the top 5% and have the middle-class pay more, all so your paperwork is easier?!?”
    Let’s do a little math here – if I make $50,000 and pay a 10% flat tax I have to pay $5,000. If I make $250,000 and pay a 10% flat tax I have to pay $25,000. Um, isn’t $25,000 still greater than $5,000? Or is “new” math changed even that?
    Bottom line is we shouldn’t be taxed for earning money anyway. The Fair Tax taxes spending – even the spending done by the “black market” folks. After all, those expensive cars they buy with their illegal funds would get taxed! And poor people (who spend less) would pay less taxes than rich people (who spend more).
    As for corporation taxes – who do you think pays those now? The consumer! With lower/no taxes on corporate income, prices go down, people spend more, more tax is collected.
    Educate yourself people – don’t just listen to the media and make ignorant comments.

  69. Kristen says:

    I don’t know why people are under the impression that corporations don’t pay taxes on corporate income. (As Selena stated above). I am a corporate tax accountant for a large corporation and let me tell you we definitely pay taxes. Taxes most people don’t even know about. Sales and use taxes, property taxes, state and local taxes, the list goes on. We get deductions just like individuals do for things that the government has decided to encourage but when it is said and done we pay taxes on our income. And if we don’t pay it this year we will probably be paying it in a few years when our deferreds reverse. I am all for taxing big corporations but remember in the end the consumers end up paying those taxes in higher prices for goods. I think more than just changing the tax system it is about changing the government spending so that the taxes dollars go further.

  70. Phil A says:

    There should be no tax for anyone earning under $35,000 a year. People earning under that amount shouldn’t even have to file taxes.

  71. Erin says:

    @ Johanna

    I understand your frustration, but I disagree with your basic assumption: I’m not sure why you believe the fair/unfair argument is relevant at all. Nothing about taxation is fair; the system is, by design, inherently, unavoidably unfair. Every citizen of the United States could point to huge sections of the tax code and describe how it works against them. However, it is also the only system that WORKS when the goal is to redistribute money to achieve the greatest good for the greatest number. In many cases, a tax break that doesn’t directly benefit you may in fact be responsible for positive overall effects that DO benefit you, in terms of economic, social, and environmental improvements. I would be interested in hearing arguments against certain taxes based on overall economic effects, but “that tax break doesn’t directly benefit me so it’s not fair” is not a particularly useful approach.

  72. JJJJJJJ says:

    I enjoy your website and read daily, but I have to say something that has been eating at me since a few posts back.

    Your worship of the state is frightening, and think you would benefit from reading up on opposing view points on matters such as the FED and taxes.

    Read up on some Austrian economics, check out sites like mises.org or financialsense.com. I think you are doing your readers a disservice by telling them things like “The Fed is doing all it can to fix the housing bubble” or “I feel good cause my taxes go to making sidewalks and schools”.

    That being said, I wish you the best with your writing career, and hope you take the time to take a look at things from a different angle.

  73. It means the Iraq War and the deaths of millions of innocents.

    It means the drug war.

    It means the erosion of civil liberties at home.

    It means torture and extraordinary rendition.

    Oh I pay my taxes too, but only because the government would put me in prison and take all my worldly possessions if I didn’t.

  74. Christopher Smith says:

    Just as a note, be careful not to conflate the ideas of a simplified tax structure and a flat tax, even though the two are often advocated by the same camps. It’s entirely possible to slash through much of the spaghetti of the tax code while still leaving a progressive (meaning high-income people pay a higher percentage) rate structure–or, on the other hand, put a flat tax rate into effect while still leaving the nightmare that is the IRC.

    As far as the parent comment about corporate taxes, I don’t think the flat-tax people are at all recommending that the corporate tax (which is the highest in the developed world) stay the same and business deductions get taken away from individuals; business deductions for sole proprietors would still go on Schedule C as business expenses. However, I say from personal experience in filing both partnership and corporate tax returns that the individual return (form 1040) is drastically more complicated than either because Congress has been using the tax code as a carrot-and-stick combo to try to get individuals to behave in ways it (i.e., the loudest lobby) likes.

  75. Gayle says:

    Nice post, Trent. I’ve been using TaxACT for the past several years, though I debated going to a pro this year due to some similar changes in my life in 2007.

    For about 3 months in 07 I was pulling 2 full-time paychecks, one for severence pay and the other as freelance work. This was the first time I’ve ever done freelance work and ended up earning 1/5 of my normal annual gross salary this way, on top of my regular earnings (was rehired by the company that laid me off as soon as my freelance gig ended, so there was never really a break in pay from that company).

    One of my conditions for rehire was that I be made immediately eligible for 401(K) contributions–I immediately started dumping 20% of my pay into my 401(K) to try and bring down my taxable income, but it wasn’t enough.

    I did end up having to get some advice from a pro regarding Business income deductions, but in the end TaxAct seemed to handle it just fine.

    The uptick is that I’ve continued participating in my 401(K) at 20%, and will continue to until it becomes unbearably painful.

  76. gr8whyte says:

    Tried TurboTax (TT) 2 years ago and abandoned it after I checked a TT worksheet calculation by hand and it was wrong. Returned to my tax form preparer and while it’s a bit steep, it’s once a year, I have a lot of fun bemoaning taxes with her and she’s worked some extra stuff for me for free.

  77. Lisa says:

    Amen to the post! My father always says, “Taxes are the price we pay for a civilized society.” (I think he stole it from someone. Let’s hear it for the public sector.

  78. Nancy Brooks says:

    First, I can’t believe you didn’t take your taxes to an accountant, i.e., someone who specializes in their field. It’s not wasting money. They can save you money in the long run. We spent $85 for our taxes to get filed for us. If you spent 16 hours this weekend, having someone else do your taxes for you would only cost $5.31 per hour based on that figure. That’s money well spent in my book. Maybe you wouldn’t have owed so much money.

    Second, it seems like the majority of the American public doesn’t realize where most of our federal tax dollars go: interest paid to the Federal Reserve on the principal we owe them. With a debt of $9.4 trillion, the government owes a huge amount of interest. You know we’re not paying any principal when the debt grows instead of shrinks.

  79. Cat says:

    A warning for turbotax users. And taxcut, or whatever automated system you use. Check it for reasonableness. I know two people that used it and screwed up. My poor sister thought she was getting $10K back for a while there because she followed the turbotax interview, and it ended up double counting her mortgage interest. Oops. It is not foolproof, by any means.

  80. Cat says:

    Australia- we also have a system of withholding, and tax returns are filed for “adjustments” like yours. Employers have tax tables and take out what they think taxes will be based on the person’s situation (kids, marital status, etc). Probably for Trent, it got complicated because there was no employer to know he was going to make a gazillion dollars via blog, and therefore no employer to deduct taxes from his blog income.

  81. Sunbee says:

    How about those of us homeschoolers who get to pay both for other folks’ kids to attend public school and to educate our own kids? We don’t even get to take the teacher deduction, you know.

  82. Random reader says:

    How do you feel about tax evasion? I live in a country with the world’s highest tax rates and it’s not going to things I wish to support either. An article on resisting taxation would be much appreciated :)

  83. jm says:

    “It’s a classic case of moral hazard. I don’t like the idea of parents counting on government subsidies when they make the decision of whether to have children.”

    That is a really good point. Its very similar to how people are using their income tax refunds to ‘get caught up on bills’ this year. If it gets down to that, you have deeper problems. I was raised to never EVER count on money that is not in your hand to be there when you need it.

  84. Macinac says:

    Over the years I have moved from doing it manually, to my own tailored spreadsheet, to commercial tax software. While the softrware may be buggy, I do like the flexibility (skipping back and forth), the ability to look up answers to questions, prompts for things I may not have thought of, and instant availability of most forms I might want to open and see directly.

    On the other hand, I really dislike having to pay for e-filing! After all it would be cheaper and more accurate for the government to receive a packet prepared by TurboTax or TaxCut or the others. So far I have stuck with paper forms.

  85. Bri-Austin says:

    Just in case you haven’t tried TaxSlayer.com – you might want to. For 3 years now , I and 2 co-workers have simultaneously run our taxes on both Turbotax and on TaxSlayer and found we got more money back (or reduced what we owed by several hundred dollars) when using TaxSlayer – which permits you to e-file for $10. Why? Don’t know. However, since I work as a seasonal mailclerk for the IRS, no tax errors are allowed for us – and we get audited! Taxslayer seems to be doing a good job for us, it is very easy to use, addresses all areas – including selling stocks, moving IRAs etc., costs less than TurboTax (no deluxe version needed to do the above) and saves us money to boot. Run your taxes both ways next year and tell us what you think.

  86. Gramps says:

    I think, why don’t we just pass the FairTax and make things simple, and put America on the road to economic prosperity! http://www.fairtax.org/

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