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!
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It is very empowering to do your own taxes and understand how everything fits together. I learn something new each year and try to get more familiar with the forms and deductions. I did my mom’s taxes this year for the first time to help her out so I got to learn a little bit about retirement forms.
I’m always amazed by people who are too afraid to file their own simple tax returns. It’s certainly one thing to have a myriad of different income streams, and consequently a myriad of taxable expenses/deductions, but it’s a whole other thing to have a salaried job and basic itemized deductions.
Personally, I’m not quite to the point where it’s pragmatic for me to hire an accountant – although I’m working hard to get there. So the best I can do is encourage my colleagues to do their own, otherwise I view it as throwing money away!
I do my own taxes as well. It really helps you understand how much taxes you really spend (otherwise it is taken out sneakily from your paycheck and you may not realize the amount). It also gets you thinking of creative ways to lower your taxes, increase take home capital, and brainstorm about creative life style designs. Someone can make $200k a year in the rat race and another person can have a relatively small passive income stream set up and leverage currency differences to live like a king.
Doing taxes isn’t that hard with currently available software as long as your tax situation is simple. I have been doing it myself and it makes you take control over your taxes. No one knows better about your tax than yourself. Right? Thanks for sharing!
BSR
Impressive amount of income coming from the FS audience. Looking at the poll results, I feel so poor since I’m on the lower portion of your audience’s tax bills. It also shows that there is incredible wealth and income in this country. You just have to find out where to obtain it!
My accountant e-filed my income tax but there was a small mistake in the FSA amount that is costing me an extra $160 in income tax. Is it worthwhile to get him to amend the return or would I be at an increased risk for an IRS audit?
One thing that later turned out to be extremely useful, was to take an H&R Block training course when I was younger.
Shortly after graduating college, I was looking for work and stumbled into an H&R Block office. They offered free training and licensing to everyone who would be working for them during the subsequent tax season (or reasonably cheap for anyone who would not – I think it might have been about $150 to cover the cost of the printed materials).
I thought to myself, “Hey, maybe I’ll get a job out of this, or at least I’ll learn a valuable life skill”.
I didn’t end up working for them, because I found a different job, but I’ve been using the knowledge ever since For the last 10 years, I’ve been very comfortable understanding and preparing my own taxes, saving me lots of money and headache.
I would recommend anyone who is reasonably competent, and who has anything but the most complicated tax situations, to prepare their own taxes using software at home. Not only will you save money, but you’ll also gain more understanding and control of what’s going on with your finances.
Hey Sam,
Similar to my other comment, I’m surprised you want to do it yourself when you could get someone to do it for save, save a heap on time (to therefore do other money-earning things) whilst they also have the tax knowledge that could get you more (legal) deductions.
Tristan
My taxes became too complicated for me to do on my own pretty early on. However, my accountant has given me suggestions that saved me around $100k in taxes last year that I would not have done with TurboTax. Saving $100k in tax is like earning an extra $166k before tax!
I’ve always done my own taxes, usually with TaxCut.
While I prefer a simple life, it would be interesting to reach the point where I felt it necessary to have an accountant, e.g. self-employed via my own llc.
I hire a CPA to do my taxes for $350-$400 per year and it’s the best money ever spent. I send him all my forms and he does the rest. No hassle for me and it frees my mind of worry. Plus it goes to your other blog Sam about looking up. I’m happy to pay the money to have the freedom and go enjoy my life.
Yep, agreed. I hope people read: How To Save More Than $100,000 A Year Pre-Tax Through A SEP IRA and Solo 401k
I hired H&R Block the first year out of college, they charged me ~$200 and they forgot one entry. I had to go back to ask them to amend and resubmit my taxes. After that I have been doing my own taxes. No audits so far. Keeping my fingers crossed.
I’ve done my own taxes from the beginning but they’re really simple. Thank goodness a year after I started working, the govt. simplified our tax return from a 12 page document to 4 pages (for me) and e-filing came online.
Now it only takes a few minutes (just to double check all the figures because it comes pre-filled :D ) and it even has a calculator so if you’ve typoed, you can check the calculation and fix it before hitting “File” instead of getting a shocking return!
This is one of the very few govt. systems that works right, I can brag about and is an absolute pleasure to use. In addition, the tax website now includes calculations to teach you how tax is calculated. So now you can figure out which tax bracket you fall in, how much overtime you can work before moving into the next tax bracket and how much tax you have to pay on your income. So no more crossing fingers and toes as you hit “File”. It helps with my financial planning as I can calculate my tax for the year and set it aside to pay the govt.
Their call centre and email service though is terrible. One year I was selected for an audit and had to submit supporting documents and they didn’t mail/notify me. Instead it sent a message to my e-filing profile only.
I found out when I enquired why my return wasn’t returned to me and then the consultant told me I had outstanding documents and sent me the notification.
But we pay a lot of tax (I’m looking at you fuel tax!). My uncle worked his entire life in a shoe factory and as a result suffered from occupational illnesses. When he was alive I often wished that I could just give my tax straight to him since it was way more than what he was making so he could stay home and rest instead of slogging. I was very proud of him, earning as little as he did and still being frugal enough never to have debts or short of anything (house, food, clothes, car).
It would be nice if the govt. worked like that and we had more control over how our taxes are spent.
I wonder if Intuit(TurboTax) and others would consider making their full program free sometime after April 15th? This would let people try it out and see it work vs what their CPA computed for the year and prove to themselves that it would compute their taxes correctly. There seems to be all this up front cost for Intuit to develop the program and they presumably must extract its value up to April 15th (save anyone who files for an extension), so maybe there is little to be gained for them by continuing to charge for its use after that, and if they gave away for free (and maybe somehow prevented anyone from printing out the forms) after that, people can try it out and see it work and so next year they might be swayed to use TurboTax instead of their tax preparers.
turbotax every year. effective tax rate less than 5%. everyone in America should use tax software – and I say that as a CPA who doesn’t do his own taxes.
I paid about $50k in taxes for 2015 and it stung like hell. I feel like we need to make more money (and I will this year). I just dread the thought of paying more.
Ps. I know a family that was surprised by an additional $150k tax bill after paying all year. They can “afford it” but I’m sure writing that check was no fun.
Not sure how one can ever be SURPRISED w/ a $150K tax bill. That’s like being surprised w/ $500K in gross income! What was the surprise from?
They sold a lot of investments to fund a house investment. And they generally make a lot of money.
I did my own taxes for a few years once I realized how bad H&R block was with more unique situations. I’m getting income from multiple sources right now and want to make sure they’re done right, so for the 2-300 dollars a year I pay someone else to do them.
I totally do my own taxes. With tools such as Turbotax it’s super easy even in a complex situation. People just don’t know how easy they have it.
When I had to do my taxes in Japan, with the whole thing on paper and 100% in Japanese, now *that* was hard.
Taxes in the US, where I actually understand the content, and software does most of the job for me? Easy as pie. And I had 5 sources of income in 2015, so no excuses for others ;)
In Japanese? With different laws? Now that does sound much harder indeed! Reminds me of trying to take a history exam all in Chinese while I was studying in China. Hard enough to understand Chinese, but to then add another fold to it… uh oh. Wo bu zhi dao.
Hi sam,
What were you grossing when you were paying 100k plus in taxes? I would think you would gross around 400k to 700k a year. what kind of work was this? could you link me to an article about your earlier days?
love this approach of reverse engineering.
it’s not about what you make it’s about how much you keep.
look forward to your reply
You must be new here. He talks quite often about his past as an exec at GS. I don’t remember the specifics but if you read through some of his early posts he alks a lot about those days, and how he came to be where he is now.
Check out this post: The First Million Might Be The Easiest
I have always done our taxes, and do them for one of my family members (who has an intellectual disability) too. When our taxes started to get a bit more complex, I took a tax preparation course so that I could have a better understanding of the big tax picture. Nowadays it’s so much easier thanks to on-line programs.
Many years I have an “aha moment” when I do our taxes. This year it was the realization that it was time to switch from a SEP IRA to a solo 401(k) for my husband’s business.
Just today at work I think I was able to help a colleague due to a basic understanding of taxes and personal finance. We were talking about our 401(k)s and I said something about RMDs. He had know idea what I was talking about; he is 75 years old and has never taken one! I told him that it was something he really ought to look in to. He doesn’t want to have to take money out and have it taxed as income, so I suggested that he just increase his 401(k) contribution to offset any required distribution.
Sorry to ramble, but I kind of geek out about taxes! :D
“A-ha moments”! Yes indeed! I have them every year too. This year, my A-ha moment is in using a car as a MONEY MAKER! Check out upcoming post.
Have you seen this post? How Much Can I Contribute To My Solo 401k?
I agree that for the majority of us with fairly complicated returns a CPA is worth the money. After all, “You don’t know what you don’t know” applies to taxes as well as other specialized areas such as law, medicine, and so on. I would have left plenty of money on the table if I had not gone over things with our accountant. And I learn new things each year we sit down to talk. I suppose there comes a point when one has learned enough confidently to do taxes independent of a CPA–I just haven’t hit that point yet.
Maybe you’ve already written about the topic but it would be interesting to lay out the tax differences for a business owner/or employee who could operate from anywhere. What would the actual % differences be to domiciled in Nevada vs. California for example. I know many people set up their residence in Incline Village, NV for example but still spend considerable time in California. (up to legal limits for tax reasons)
If the business was in Nevada, the business would save roughly 8-12% in taxes every year since there are no state income taxes.
Incline Village prices are more expensive by 20%+ around Lake Tahoe b/c of this arb.
I just got my tax bill today, so this one hits home. I’m an entrepreneur and I live in California, it’s ridiculous what I ended up owing.
I agree with you that people need to be aware of what they’re paying – I get the privilege of paying unemployment taxes on myself, even though it would be borderline impossible for me to claim unemployment benefits as someone who is self-employed…
I disagree that people should do their own taxes though. My CPA saved me $16,000 this year. It would have taken me a ridiculous amount of time to file my taxes myself. I was far better off spending the time working to pay the bill, and the ROI was huge.
Still… I feel like I was punched in the gut by the fed, then the state of CA kicked me while I was down!
I might take your advice – if my income gets to a certain point, I might just throw the away message up and take off for a vacation.
Isn’t it amazing that a business owner has to pay unemployment tax, but can’t claim unemployment benefits if the business shuts down? Truly one of the bewildering tax laws we have.
So what did your CPA do that allowed you to save $16,000 that someone couldn’t do on their own? I’d love to learn, b/c that is a huge amount!
I have an LLC which I use to manage my business, and then took the S-corp election. I take part of my earnings out as income, part as capital gains. In doing that, I avoid certain taxes I’d pay on “employment income” (both as an employer and an employee)
The administration behind this, as well as the need to file two returns (corporate & personal) has an increased cost. It’s not something I would want to manage on my own, more focused on growing my business – and again, substantial ROI as far as what I pay my CPA to take care of it.
Have you read this post? What’s The Right Balance To Pay In Salary And Distributions As An S-Corp?
Dang! I got a lot of great material on FS that covers so many things people think about! :)
I did my own taxes for many years. As they became more complex, I began going to a CPA and having them review my efforts. I paid for an hour of their time ($35 originally!). The second year I went to her, she saved me 4x’s what I paid for the consult. Through the years sometimes she saved me money and sometimes not, but she also gave me good financial advice – after all, I bought an hour and it took 30 minutes to look my taxes over and advise me on them. For the last few years I have had the accountant do them after I complete a lengthy questionnaire – a real pain but it is comprehensive! It is worth every dime of her time and she gives me good financial advice during/after the review. Often I go with questions for future actions of a tax and/or financial nature. We discuss them and I walk away better educated and in a better financial position. I believe that properly used professionals can greatly enhance your financial position. However, don’t abdicate everything to them, learn, understand and be the final arbiter. YOU sign the tax form saying it is complete and correct!
It’s definitely a good idea to ask all the questions possible and learn from a CPA before doing one’s own taxes. That’s what I did for the first several years back in 1999. Always be learning!
Thankfully, the tax software preparation business is very competitive. Hence, the software should be smart enough to know about the latest rules and should provide a lot of education to the client.
This is the first year we’ve had a high tax bill and our Fed +State tax bill was greater than all of our other expenses put together. It will probably influence my vote in the next election and I can’t say that has happened before.
Keep up the good work! I feel like I only write a message when I find a mistake in your post but you do a great job and I check your site multiple times a week for good info.
You remind me of a post I wrote: Are You Saving More Than You Are Paying In Taxes? Learn About The TITTS Ratio
I have done my own taxes every year I’ve had an income with the exception of the first year of my marriage (my husband was an independent contractor who always paid someone to do his taxes, and I wasn’t comfortable dealing with the local income tax issues especially until I had seen how a professional handled them).
I LOVE doing my own taxes. I like that I get to see what is happening with my money, how much I actually pay, and how much I would hypothetically pay under various circumstances. When we hired someone, we only paid enough for one appointment with her, so we pretty much had to do our own taxes anyway by bringing the right documents to that appointment. When we realized later that we had overlooked a charitable contribution, it was too late to the amend the return. When I do my own taxes, I give myself several days (and sometimes weeks) to make sure I get every deduction. On top of everything else, the year we paid an accountant (1) we had to educate her about a deduction for which we were eligible, and (2) we realized later that SHE overlooked some deductions for which we were eligible (e.g., I assumed that she would automatically include the money my husband had paid her the previous year as a deduction since the amount was in her own records….she didn’t). We didn’t have a bad accountant or anything, but there is only so much you can expect when you are paying a professional $200. Normally, I am highly responsive to the “but your time is also worth something” argument, but the thing is we also save time by doing our own taxes: either way, we have to gather the right documents and brainstorm all the potential deductions to make sure we have everything. At least when “we” do them, we don’t have to make an appointment at an inconvenient time and both show up to watch someone else do data entry. I do data entry and my husband works on refinishing furniture until I call him for his signature.
I do NOT love doing my state income taxes. I have had to file in three states so far and only one of them made the process easy. The other two have had very unclear instructions when it comes to forms and defining rules. The IRS website is a dream in comparison. It’s still worth it to me to do it, though, for the knowledge issue.
Thank you for sharing the other side of the story! I do my own taxes, too, and my boyfriend’s, and I completely value the in-depth review of my own finances to see what I might be able to change in future years. Also, my boyfriend used to have a CPA prepare his taxes in prior years, and they made all sorts of errors. He had bought a Palm Treo phone (remember those?) many, many years ago, and the CPAs were depreciating it slowly for a couple of years, and then they just stopped depreciating it even though more than half of the phone value had never been depreciated. He stopped using that phone YEARS ago, so I took the remainder of the depreciation and zeroed it out. That’s just one of the dozen mistakes I’ve found on professionally prepared tax returns.
The pros may know the tax laws (or sometimes not, as in your story), but they don’t know YOU. I find that when I prepare my own return, it prompts me to think about and find more deductions and things that I would have forgotten to give a CPA if I only spent 15 minutes gathering documents and didn’t get into the actual process itself.
That is funny you say you love doing your taxes. I hate and love doing my own taxes haha. I love doing the proforma stuff like entering different numbers to see how much I would pay etc. In fact, I put some random numbers in for a new post I’m publishing soon on using your car as a money making machine!
State tax is easy online b/c it just transfers through from federal. Stop changing states! :)
Sam – I had the same thing happen to me on a tax return where I missed entering the cost basis. The IRS sent me a notice saying I owed an additional $20,000. This was probably back in 2010, I ended up hiring a CPA to revise the return for $800 and the issue was corrected.
I guess I could had done it myself, but at the time I was exactly sure what I had done wrong.
Cheers,
Dom
Easiest $800 the CPA ever made! Glad it worked out.
Don’t forget to input your COST BASIS for all stock sales folks! The IRS will think you made that much more money if you don’t!
I did our taxes, did my parents, and my brother’s. Our taxes aren’t really super complicated enough to warrant a CPA. Plus online software is so easy to use!
I hired someone one year but it wasn’t worth the money to me. The initial effort of getting all the appropriate documents together is the majority of the work. I use Turbo Tax and the import feature worked well for Vanguard and Lending club this year which helped speed things up. Been paying more than our fair share of taxes for a while, but should be pretty close to nil this year as we travel the world and test out early retirement abroad.
Itemized deduction was able to keep my tax rate under 5% this year. I’ll get to take advantage of similar benefits in 2016 and then I’ll be screwed the rest of my life until I die paying 30%+. Hopefully I can find some nice deductions to lower that burden though.
Death and taxes…
The best way to do your own taxes, in my opinion, is to do them manually.
Go through each line of your 1040 and follow the corresponding instruction.
Then, one would have a better understanding of what they’re truly putting in their tax software.
Last, if included as an option, use the “CPA lookover upgrade” that comes with the software. The upgrade is usually $20, which is far less than the $500 of a CPA.
I haven’t done my own taxes for a decade now. Once the time commitment to complete them was over 20 hours, I bailed. That and a variety of other reasons (including a 130 page federal return plus returns for three states) has led me to stay with my CPA all these years.
I still have to be up-to-speed on tax law though, as I need to know what to collect and suggest to my CPA to make the return as accurate as possible.
I am in agreement with “doing your own tax at least a few times in you life”.
Though your public education tax argument is ungrounded. Within your logic, taxing everyone is unfair for those who doesn’t like children or doesn’t want to have children or prefer to home-educate their children.
Taxation is one of the solution for extremities, in economy consideration. The argument that better public education would benefit “everyone” by improving wealth, safety… would be more agreeable.
Yet, from the political stand, it’s easier/more popular to persuade the public to tax the rich than for everyone to bit the bullet.
Hence, in my opinion, it’s a better solution to tax the rich compare to getting nothing done (about the public education) in the situation you described.
It’s a better solution to tax everyone to pitch in to help educate our children and receive $8B in proceeds versus only receiving $3B in proceeds by focusing on only those making over $200K.
Isn’t $8B better than $3B? What I found was that many people DID NOT believe $8B is better than $3B for XYZ reasons and it got so frustrating that I wanted to join them! And I did for two years and it felt amazing.
I’ve always believed we should all pitch in if we all benefit. After experiencing not paying as much taxes for two years, I empathize with those who aren’t willing to pay more taxes themselves, but are happy for others to pay.
If only the institutions getting spent it as frugally as the people reading this blog.
As for the $3b vs $8b people as a group seem to be happy raising taxes as long as the payors are a voting minority that doesn’t include them.
Sam,
Great post. While I personally do not do my own taxes, I think you articulated the benefits of doing so very well. How did you learn to do your own taxes? Are you still fearful that you will make a mistake that costs you money in the short-term (and significant time, the commodity that you seem to value most)?
Ironically, two years ago, my former CPA talked me through the process for completing my own federal tax return by modeling the work he did from that current year’s return. My tax situation changed significantly by the next year, and it just so happened that I became friends with a great accountant whom I trust implicitly and also charges very reasonable rates, so I severed ties with this accountant. Still, I often wonder why he was seemingly talking me out of doing business with him.
If you’re going to hire an account/CPA to do your taxes, I think being able to converse with this person and speak comfortably and freely far outweighs rate considerations. Through these conversations, I have learned a great deal about optimizing my current tax situation to align with long-term and short-term goals.
I first asked my CPA to teach me the basics. Then I learn as I go through a tax software program. Now I also just follow the instructions of a tax software program and I use their live echay or telephone to help me with problems. It is pretty straight forward.
A lot of people really fear the IRS, but they don’t go after you and throw you in jail. My experiences with them of been pretty pleasant and fair. They understand the tax code is very complicated and everybody makes mistakes.
Not looking forward to the Obamacare tax penalty for 2015, but at least I’m helping someone else get free healthcare that I cannot afford. Need to relocate to reduce expenses.
I agree. I think if more people had to write a check there would be more outrage. There’s a reason it’s just skimmed off the top, the government avoids mass protesting, and I believe most people wouldn’t be able to put enough aside to cover their tab. Most people don’t even do that for themselves. Another excellent article
We’ve used an accountant to prepare our taxes for the last 8 years. I had a financial counseling benefit through my job that paid for it for most of those years, and we have continued to use accountants. I heard Dave Ramsey talk about a study that showed that the average person who uses a tax preparer saves $884. That about covers the bill each year. Even though I just early retired (on Friday – April Fool’s Day!) – I would rather have an expert spend time on our returns than do it myself.
It is interesting that you don’t like taxes yet live in one of the most heavily taxed states. You have location independent income you could move abroad and save a boatload of taxes. Even moving to Puerto Rico could get rid of your capital gains taxes.
I felt working less and starting a business was easier than establishing new residency.
You have to live in a no state income tax state or overseas for over half the year to get the benefit. I still might do it if I can’t help but make mega bucks!
Austin is calling brother!
Wages are the highest taxed form of income. I think everyone should focus on passive income from investments. Pay less taxes, work less, make more… seems like the way to go.
I haven’t done my own taxes since 2009 when I bought my first investment property. Now my taxes are seriously over an inch thick every year. I would probably have to spend an entire month to get my own taxes done because the govt just makes it too difficult to do.
The best part of retiring early will be deciding how I want to spend each and every day.
A close second will be paying very, very little income tax. I’m in those brackets you were for 10 years. It’s so aggravating to hear the the “rich” (meaning high earners) don’t pay their fair share. The doctors, lawyers, bankers, small business owners, etc… are paying a fair share and then some!
The tax system is a bit unfair for doctors. A 32 year old doctor could be massively in debt yet pay high marginal tax rates. The government seems to classify rich as high earnings rather than high net worth.
I find it strange that capital gains and dividends are taxed lower than wages, yet wage earners actually work for their money.
No kidding on capital gains! In addition, work needs to be incentivized more than investments. I would still invest my $$ in the stock market even if earnings were taxed at 50% (what else am I going to do with the money). I am NOT suggesting that the capital gains rate should be 50%, I am just pointing out that the “if you tax it, people will take their ball and go home” argument works much better when the ball is labor compared to when the ball is gains from investments. So, from both the fairness (wages require work) and incentive/ efficiency perspective, it makes sense to tax investment income at at least the same rate as labor (and very possibly a somewhat higher rate).
Why on earth would you lock up your money only to have it taxed at 50% when and if it grows?
I’m not sure the tax it and take your ball home argument works better for investments or wages. I’d say both are equally valid and equally disincentive certain behaviors.
Well, what else are you going to do with it? Put it in a place where you expect to get zero return with zero taxes, such as a mattress? Spend it? (Which wouldn’t be bad at all for the general economy but leaves you without the money that you presumably want to have at a later date). Also, while there is no guarantee that you will get a return, there is no tax if you don’t make money (you just get your cash back), and if you lose money, you actually get a proportional tax benefit. (Realizing a 50k loss one year saves you from 25k in taxes when you make 50k over the next few years). For the life of me, I can’t come up with a scenario where a 50% tax rate on capital gains would cause me to pull my money out of the stock market. The only thing that would prompt that would be (A) a belief that I won’t make any money in the market or (B) the realization that I no longer need to accumulate money and can concentrate on spending (and even if scenario B, I’d still keep some money in the market–namely, whatever amount I didn’t think I should spend that year).
I totally agree with your statement! Sam- you need to do a post about this inequity in our country today! Why are hedge funds, etc paying way less in taxes?!?! As Obama says- they are societies’ lottery winners!
They are not paying way less in taxes. They are paying the same rate that everyone else pays – actually usually a higher rate since those who manage hedge funds are in a higher tax bracket.
Why is that strange? Capital gains and dividends taxes are double taxation; you earned and paid taxes on the money already when you earned it. The better question is why do you pay taxes AGAIN for taking a risk in investing it?
Would you really work any differently if taxes were higher or lower?
In some ways, the blissfully ignorant approach works best since I can’t really change the tax laws. I have an accountant do my taxes, then I work through the tax return to make sure I understand it. After that, I let it be.
I have and I am. When I got hit with the retroactive $5,000 California tax bill some time in 2011-2012, that cemented my desire to move on with severance negotiations.
I suppose it could be a factor among many, but I also suspect that you enjoy working.
The taxes would have to be pretty high for me to alter my work effort. I’m not sure what the percentage would be though.
I’m essentially a stay at home dad due to the taxes. I did hate my job, ironically as a tax attorney, but the tax rate, on top of my wife’s income was extremely high. In California, my wife’s income puts us in the AMT bubble with an effective federal tax rate of 35.9% (35% AMT plus .9% Obamacare), 9.3% state income tax (no deduction for this under the AMT) and self-employment tax of 15.3%. All of which adds up to 60.5%. Of course, the effective rate is about 3.5% little lower because half of the self-employment tax is deductible. In addition, after about $120K you save 12.4% of the self-employment tax.
However, when the effective tax rate is 57% on your first $120K, I think it is a huge disincentive to work. In addition, child care and other work related expenses need to be paid from the after tax income, driving the effective earnings even lower. I often wonder if dual income households fully understand the tax dynamics, especially if one partner earns substantially more or they have childcare expenses. It is easy to imagine a scenario in a high tax state like California where one partner’s income of say $60K or $70K is completely consumed by taxes and childcare expenses.
Great work being a stay at home dad! I believe it’s a $100,000+/year job. I hope you are happier that you’re no longer working as a tax attorney and paying less taxes as well.
The Europeans have some of the highest unemployment rates partly due to the highest tax rates. BUT, they are always ranked the happiest people on Earth. Being dis-incentivized to not work is one of the greatest blessings that has increased my happiness tremendously. I can see a scenario where if I was only taxed a TOTAL of 10%-15%, I would work my ass off until death and regret it!
Check out: At What Income Levels Does The Marriage Penalty Tax Kick In? Everybody needs to read this who are planning on getting married!
Of course European countries are the happiest in the world. I’d be whistling dixie if I didn’t have to work and the gov’t gave me all kinds of free stuff.
More and more people are receiving gov’t benefits in America too, and I imagine future candidates will be elected based on how much free stuff they promise (regardless if it’s even possible). Some programs incentivize(sp) not working, or having more children, etc.
Sam,
Since there are two in your household (including you) and another potentially coming along the way one day, that is a household income of $600 – 750K per year, or $200-250K per person. That was the number for the ideal level of happiness, but at this level you will be paying far more taxes plus an additional 3.8% on all passive income generated.
Am I understand this formula correctly?
I pay about 28% effective tax rate but this goes to the wonderful Thai government. Unfortunately I also get hit by the 3.8% net investment income tax. It’s disappointing that I cannot offset my extra tax paid overseas that is used for Federal tax credits with this tax. It’s an ambiguity that screws over medium to high income US citizens living abroad.
Change you can believe in? Thanks Mr. President for getting ACA through in all it’s glory full of unintended consequences.
-Mike
I have paid someone to do our taxes the last few years and to your point, I can’t tell you how much we pay exactly in taxes (income and property). It is in the neighborhood of 25k in income taxes.
We built a house last year and get to pay lot taxes for all of 2016 (about $600 total)
Since our returns are still fairly simple I should be doing them myself. We are paying in for the first time ever this year, not having a mortgage or property taxes for half of last year dropped what we can deduct!
I am so glad you are still here! Had internet connectivity issues on Friday, and couldn’t comment. Thank you for everything.
I used FreeTaxUSA to do my taxes online for last year. Since I am starting my online business this year, I may need to go with a CPA for my 2016 taxes.
As a CPA, I’m constantly shocked to see people leaving money on the table during tax season. To be fair, no one teaches us how to do our taxes.
Plus, to view each expense from a tax perspective is counterintuitive. When I spend $100 on a dinner with my girlfriend, I know the true expense is $130+ because this is the amount that could have gone into our retirement accounts.
Developing a tax perspective was easily the largest single contributor to my savings rate going up.
I paid close to 15k in 2015. I also have the benefit of my unknown sales tax expense (didn’t track it). At 10.25%, Chicago has one of the highest rates in the country.
If I take my $130 dinner example above, that means my $100 dinner requires me to pay $40+ in taxes! That’s why we pick our fancy dinners more carefully now!
what a romantic :)
That’s a great endorsement coming from my CPA. Thinking about how much something costs in pre-tax dollars is a great way to reduce spending.
I would never buy anything in Chicago with the 10.25% sales tax!
I believe a truly free market where all potential competitors are free to join in (we currently do not have these. Government regulation kills the smaller competitors of big corporations) and provide a better service is superior alternative to government run public education, free healthcare, and almost all other government services. The only job of government should be to protect our liberty and our private property. This is the best way to have a prosperous economy and lift the poor out of poverty. Private charity is the way to help those in desperate need. Sure, we may need to pay some taxes if we continue to have police forces, fire departments, and courts, but we don’t need income tax. Income tax is the most damaging form of tax on the economy. I believe NONE of us should have to pay income tax. Property tax and minor sales taxes are all that is needed on a state and local level for bare basic services.
Quite the simplistic world view you’ve got there. So if someone loses the birth lottery and is born into poverty their only option is to pull themselves up by the bootstraps, and whatever charity good gracious rich people may decide to throw down at them? If you’re homeless, unemployed with medical emergencies, or happen to have a drunkard for a father you’ll just have to figure it out yourself or pray that some private individual/organization takes pity on you?
Sure, when you’re rich it’s easy to think that way – but please remember that a huge majority of people, most of whom do add value to our society, rely on public services. It seems to be your view that if they can’t get rich on their own then they don’t deserve any help. United we stand, divided we fall indeed.
I agree with Prof. Services Consultant. The vast majority of taxes we pay are to fund the Entitlement State, which didn’t exist until the 1940s. Prior to that people found a way; through family, through charity, through hard work. Income taxes didn’t even begin until after WWI. There was a brief interlude in the Civil War when there was a small income tax of 1 or 2% to pay for the conflict. But it was rescinded thereafter. The idea that we must rely on the government if we have personal issues is a modern one, and a foolish one. No matter how much is given to the government, it always needs more. We had record tax revenues last year and that STILL wasn’t enough. This is not a rich versus poor issue. It’s a common sense issue.
I was stumbling through some old blogs here and read this comment and thought how outrageous cameljockey’s statment truly is. “Prior to (1940s) people found a way, through family, through charity and hard work.”
The life expectancy was almost 20 years(!!) shorter than it is today, source: https://www.infoplease.com/ipa/A0005148.html Charitable giving per capita was abysmal in those days as well, source: Nostalgia is a roadblock to progress.
The fact that the statement ends with “it’s a common sense issue” shows how uninformed many people are about these types of issues, and that it’s not basic “common sense”. If you want to pay less in taxes than you should demand more transparency from your government so you know exactly what you are paying for. Demand more accountability. April 15th should be a day of celebration in the United States, a day where we all come together and say “Yes, these are the exact programs we want to fund!”
Ever since I came to America, I have always done my own taxes. I was so scared of paying hundreds of dollars to other people to do my taxes. My thought about that is, if they can do my own taxes so can I do my own taxes.
I guess it’s a good thing that there are software that can assist you on just about almost anything related to tax returns (unless you’ve got a really complicated tax situations that need professional help). But for someone who makes a so-so decent income with not a lot of assets to worry about, doing tax returns is easy and doesn’t take a brain surgeon to complete it.
Fortunately, the taxes I pay to Uncle Sam and the other government entities aren’t much because I am the only one earning an income in our family and my earning isn’t a lot. It will definitely change once my wife gets a job this year.