A Taxing Situation

I did our taxes yesterday. Let me be honest I enjoy doing our taxes, it’s the one time during the year when I can effectively do a “State of the Union” for our finances. This was more critical before we FIRe’d but even now it’s useful to see how things are doing.

I haven’t filled in a 1040 by hand in probably 20 years though. Like most people I’ve taken advantage of third party software or tax professionals. When we lived overseas it was impossible to complete US taxes on our own, the US is one of the few countries that operates a worldwide taxation system, so any income earned in a foreign country is taxed both in the foreign country and also has to be reported to the IRS in the US. Luckily there are systems in place to ensure that you don’t have to pay full double income tax, but it definitely requires a tax professional to do this for you.

Now I use TurboTax, It’s pretty intuitive and being able import all my 1099’s and other tax forms directly in is pretty nice. The cost is about $100, which isn’t too bad. Previously Vanguard used to have a reciprocal arrangement with TurboTax so that their clients could get access to free, however that ended a few years back unfortunately.

The main difference this year from other year’s returns is that for the first time in a long time we had to file a state return. Oregon has a pretty high state income tax varying from about 5% to 10% depending on income. However there isn’t a sales tax so it’s probably a wash. Personally I would prefer to have no income tax but a sales tax instead as there is less paperwork and you can control how much you pay by monitoring your spending. I can’t grumble too much about paying state taxes though as my democratic socialist tendencies certainly err towards improved schools, transport, infrastructure and amenities through taxation. As long of course as I can see where the money is going.

The federal form this year was pretty straightforward. I had no W-2, although Tuffy had one as she worked a month in 2017 and also received her 2016 annual bonus. This was of course taxed as though she would be working all year so we were confident we would be getting a refund.

The other two items that were unusual this year were we had to report our 401K rollover. On paper this looks like a massive distribution, however none of it is taxable. Also as we sold a home we needed to report that. Although we were well under the $500,000 profit that would have triggered a tax payment we still needed to work through the paperwork.

In the end we ended up with a pretty hefty federal refund. Obviously this is a good thing but in general i’m not in favor of getting tax refunds. Why would I want to give the government an interest free loan? I would much rather pay (as long as I have budgeted for it) and sometimes try to ensure that we are paying just enough to avoid the penalty fees. Interestingly though a lot of people use there refund as effectively a savings mechanism. They know they are overpaying tax through the year but as they don’t trust themselves they rely on their refund to get a large item they need. I can’t think of a worse savings scheme.

On the state form we ended up owing quite a lot. This is mainly because Oregon treats dividends as ordinary income. So we had to pay State tax on pretty much all our dividends and capital gains during 2017. It didn’t help that most of our dividends were distributed at the end of the year so I couldn’t even claim them as not being Oregon income.

In 2018 our income will be 100% from dividends and capital gains, and due to the new tax code i’m expecting that our 2018 federal tax rate will be close to 0%. However we will still need to pay State tax, so will almost certainly pay more in state taxes than federal! This is counter intuitive.

I just need to do one more quality assurance check before filing, but this should be out of the way by early next week.

Do you enjoy or dread doing taxes and how much help do you typically need? For those in other countries is your tax code as labyrinthine as the US one?

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Hi Steve

I have an accountant that does my taxes. I still have a company that has to file corporate taxes/filings so it makes things easier having the accountant do personal and company filings.
Canada tax code is as labyrinthine as the US and although I enjoy bookkeeping and accounting he has saved me more money than his fees over the years. If it was just a personal tax filing I would use turbo tax or another tax software program. Have a great weekend