Friday, February 22, 2013

My 2012 Federal Tax Bill

The paper work is in, the numbers are tallied and I am as happy as a clam. Our 2012 household taxes are completed and here are a few bullet pointed highlights:

  • ·        Our effective federal tax rate for 2012 was 11.15%
  • ·         We owe the KGB feds $68

Yes I am thrilled and excited to not get a refund and to owe our wasteful government money. If it were up to me I would not send a single penny to those who waste our money in Washington until April 15th and I would pay our entire annual taxes, all tens of thousands of dollars of it, in actual pennies, but hey, that’s just me.

To help get us to our 11% federal tax rate we used a lot of the same options that were available to us in 2012. We made over $2,000 in after tax contributions to our health savings account, we made steady and consistent charitable donations and we utilized as many pre-tax expenses as we could through work. As a combination, all of these factors helped lower our taxable income and get us to an 11% federal tax rate.
It gets even better this year as well! The limit that I am allowed to purchase monthly mass transit passes with pre-tax income has been raised so this year I will be purchasing monthly transit passes for myself and my wife. Over the course of a full calendar year that comes out to $2,400 worth of bus passes that I can buy pre-tax – thus lowering my taxable income by that same amount. We are also continuing to plug away at depositing money every month into our health savings account which also does the same trick J.

For what it’s worth as well, and this is especially important for anyone who invests or plans to invest the Dave Ramsey way, there was a bit of a curveball the KGB feds threw at us last year. We spread our investments across 4 types of mutual funds through our Roth IRAs and our taxable brokerage account. Now growth on the ROTH is tax-free but our growth on the brokerage account is taxed at our investment income rate. When we started investing the Dave Ramsey way our superstar mutual funds started generating dividends and capital gains payouts which we elected to reinvest automatically. When these taxable dividends and capital gains payouts started happening, that triggered Washington to require us to send in estimated quarterly tax payments of over $300.00.

To combat this we use a simple savings account that we call our “tax account” which we use as a sinking fund to meet this quarterly payment. So every month we set aside a certain amount from our budget to go to the “tax account” and when the quarterly payments come due we just write a check. No scrambling, no guessing, no trying to play catch up, just peace of mind.

An interesting footnote as well to end on, our tax form states that our taxable income, in the eyes of the fed was just about $20,000 less than our reported adjusted gross income. To reiterate, we are debt free, don’t own a home, owe no one a single penny and we were still able to lower our taxable income with deductions that amounted to nearly $20,000. I’ll certainly take the charitable donation tax deduction over the mortgage or student loan interest deduction every day of the week! 

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