I’ve been doing my own taxes for over 10 years. I didn’t do them when I first graduated college in 1999 because I didn’t know how. Further, DIY tax software wasn’t as easy to use as it is now. But after paying some accountant over $500 to do my taxes one too many years, I finally took the plunge and was surprised how simple doing your own taxes was after gathering all my documents.
The only downside to doing your own taxes is the potential for more mistakes compared to a CPA (although CPAs make mistakes too). Some of the most common mistakes include: forgetting to deduct certain expenses, inputting the wrong figures, and forgetting to input the cost basis for your stock sale.
One time, I got a surprise $250,000 tax bill because the IRS thought I had made ~$1M from stock sales that year! In reality, I just forgot to input the cost basis of each purchase. After I sent them my cost basis in the mail, all was good and I didn’t have to pay a penalty. Phew!
Doing Your Own Taxes To Change Your Life
The biggest benefit of doing your own taxes is that you get to viscerally see how much you pay and how many different ways the government gets you. There’s the state income tax, federal income tax, city tax, Medicare tax, Social Security tax, franchise tax, property tax, sales tax, net investment income tax and more. Those who don’t do their own taxes tend to just look at their net paycheck with blissful ignorance.
From 2002 – 2012 I paid well over $100,000 a year in federal and state income taxes alone. Every time I did my taxes, I felt a little ill. Although I was fortunate enough to make a good income, I was working 60-70 hours a week, felt stressed all the time, and didn’t like how the government wasted our tax dollars. What’s more, there was asymmetric tax laws that left me scratching my head.
There was this one bill in California that imposed an extra 1-3% tax on everyone to help fund public education. The bill would have raised ~$8B. There are very few things more worthwhile to fund than public education. But instead of the bill passing with ease, it was shot down and replaced by a new bill that only taxed those who made over $200,000 a year, whether you had children or not!
The new bill was estimated to generate only ~$3B, to the detriment of our kids. It passed no problem. I understand nobody wants to pay more taxes than they need to. But come on. What's wrong with EVERYBODY pitching in for the sake of our children?
After paying a retroactive $5,000+ in public education taxes due to this bill, I started imagining how nice it would be to retire early or at least take things way down in order to make less and pay less. I wanted a more care-free life. It would be one thing if I had three or more children in public school, but I had none. I was already paying $30,000 a year in property taxes at the time in addition to my ~$100,000+ in income taxes.
Realizing that ever increasing taxes would never end, I began reverse engineering how much I felt was patriotic enough to pay my fair share as an individual. I came up with the handsome sum of $50,000.
Paying what the median household makes each year in taxes meant that I would pay ~5X what the median household would pay in income taxes. That felt like a fair amount given I was lucky to get a decent job right out of college.
In order to pay $50,000 a year in income taxes, I’d have to earn roughly $200,000 a year in adjusted gross income, which so happened to also be the most frequently cited income cut off figure to define rich in America. Paying a 25% effective tax rate felt about right. Any more and killing yourself at work to make more money didn't seem as worthwhile.
Life Is Much Better Now
Even though my taxable income is less because I no longer work for Corporate America, I feel so much happier because all my work stress and work-related physical ailments have gone away. I no longer grind my teeth, suffer from debilitating allergies, or get any migraines. I’m also much more pleasant to be around because I'm always smiling.
As an entrepreneur, I decide how much or how little I want to work. If my adjusted gross income is closing in on $200,000 I reduce my work load. And if my income is fortunate enough to go far above $250,000, I put my e-mail autoresponder on and go on an extended vacation.
There’s only so much in itemized deductions I can take. My goal has always been to work to live. Now I just want to work a couple hours a day whether at home or while traveling.
Analyzing your own finances will help bring you out of the Matrix. Instead of trying to make as much money as you can and then pay ever increasing taxes on your spoils, consider figuring out how much you think is a fair amount of income taxes to pay each month and then see if you can adjust your work accordingly.
I feel paying ~$50,000 in income taxes plus ~$50,000 in property taxes a year to support our federal government and the local communities of California is about enough. I hope the Federal government and the state of California are happy with my ~$100,000 annual contribution as well!