FML Taxes

[guest]

I am a regular contributor to this forum, but because I'm posting financial information in this question I've decided to post as a guest. I guess this question is probably for SpringFlowers, as she is the most knowledgeable and above-and-beyond helpful person when it comes to taxes.... It's probably a pretty straightforward question

Today was not a happy day for me, I did a quick run-through of my taxes for 2009 and, rather than the return I was expecting, it turns out that I will be owing something like $2000 to the feds.
Where did I go wrong? I don't know, but I'll barely be able to come up with the money by April.

When I started my job fresh after finishing my post-graduation internship in February, I opted for the maximum allowable withholding exemptions. I knew my income would be low and I would have major above the line tax breaks due to student loan interest and moving expenses. I forgot about my additional tax responsibilities for self-employment income from freelance jobs (See below). Yes, this is basically my first time being fully employed, so maybe I was a bit clueless.

Here's how it breaks down:

For my Full-Time Job:
Income: $26,400
Federal tax withheld: $108
Social Security withheld: $1637
Medicare withheld: $383
State+ Local tax withheld: $1732

For my freelance work (half of this is from before I took the full-time job in February):
Independent Contractor Income: ~$2900

Deductions:
Student Loan Interest: The full whopping $2500
Moving expenses: Something around $900

Obviously, I'm freaking out a bit because money is extremely tight and I want to find any way possible to lower my tax burden due come April 15th. I may even have late payment penalties- I'm not sure.

Here are the things I've thought of:
For the whole year 2009 I paid $900 in Health Insurance Premiums. Though I have been employed full-time since February 2009, my employer does not offer health insurance. I see that independent contractors can deduct health insurance premiums, but can I? Can I deduct on the basis of my $2900 in self-employment income?

As part of my job, a couple of times I used my private vehicle to travel to day-long conferences a couple of hours away. Are the expenses associated with this travel + conference registration deductible?

For my job (and also for the freelance work, which is essentially the same kind of work), I use a $2200 laptop computer and about $1500 in software that I purchased for myself in Fall 2008. I also use the computer to surf the Smith Alumnae Forum and watch DVD's (non work). Can I deduct the depreciation on these items from my taxes? (Is it only deductible against self-employment income, or can I also deduct the cost of job-related materials from my regular full-time job?)

When working these freelance jobs, I work from a home-office (separate small room in my house dedicated to work). Is this deductible?

Also, I donated out the wazoo (ok, a pittance, which for me is out the wazoo) to various charitable organizations, but I'm pissed that these won't count since I don't itemize. Not that I donated for the benefit of the tax deduction, but still.

Anything else that I might possibly be able to deduct? I'm wracking my brain... It kills me that I'll be having to pay the IRS ~ $2000 and possible fees come April. That's so much money for me. Just last year I was a poor grad student claiming the EITC. Now I'm struggling with rent, student loans, and the IRS. Life can be so cruel.

[cecelia]

When I started my job fresh after finishing my post-graduation internship in February, I opted for the maximum allowable withholding exemptions.

Does that mean you put down a '1' or a '2' or does that mean you put down '0'? When I first graduated I ended up with two jobs and the form told me if I had two or more jobs I should put '2' as my withholding. Well the second job lasted all of 3 weeks but I never remembered the change the withholding. Two years later I was complaining to my mom about why I ended up owing the gov taxes every year when everyone else was getting refunds - it was cause of the damn withholding business. Could that be a factor?

[guest]

When I started my job fresh after finishing my post-graduation internship in February, I opted for the maximum allowable withholding exemptions.

Does that mean you put down a '1' or a '2' or does that mean you put down '0'? When I first graduated I ended up with two jobs and the form told me if I had two or more jobs I should put '2' as my withholding. Well the second job lasted all of 3 weeks but I never remembered the change the withholding. Two years later I was complaining to my mom about why I ended up owing the gov taxes every year when everyone else was getting refunds - it was cause of the damn withholding business. Could that be a factor?

Yes- I took 2 exemptions. I did this on purpose. I thought I would rather err on the side of owing since having money now is so valuable to me (at 6.8% student loan interest rate), and I figured I would have more than average deductions due to student loan interest & moving expenses, so I thought it would work out or come pretty close. I just didn't know I would come out this far off in the wrong direction!

[SpringFlowers]

Um, yeah, you should have had more withholding than that.... oh, well.

Okay, letting bygones be bygones, the $2,900 worth of contractor income will allow you to deduct the $900 in health ins premiums on Page 1. Definitely take that.

I plugged in another $807 in self-employed expenses on Schedule C and you're still good. I just wanted to see if taking your net biz income lower would hurt you there; it didn't.

How I got to $807:

Yes, you can depreciate the computer and the software, both are "listed property". If you're not using them more than 50% for business, you cannot use an accelerated method of depreciation, but you can still depreciate. I guessed 30% business use to come up with $282 in depreciation. Whatever software you're using should handle this if you just answer the questions correctly. If you're using them more than 30% for business, by all means, take more depreciation.

I stuck in 500 business miles for the conferences at 0.55 per mile (the standard mileage rate) and got $275 there.

I put in $100 for the conference fee. If it's education that expands or improves your ability to do your current job, you certainly can deduct it as a reasonable business expense, yes ma'am. No meals or anything else if you were only away for the day.

I stuck in another $150 as "office expense". Meh. I'm sure you had some paper or something, right?

Just don't even bother on the home office. It's complicated; the benefit is very, very small; you very likely don't qualify if you're not meeting with clients there; and it's an audit red flag. I'm more comfortable throwing in the reasonably estimated office expense of $150 in miscellaneous supplies than I am taking the home office deduction.

Unreimbursed employee business expenses are deducted on Schedule A, Itemized Deductions, as are Charitable Donations. If you can't beat the $5,700 Standard Deduction with those, don't bother. Also, you get a 2%(AGI) haircut on the employee biz expenses. I've got your AGI (Line 38 of the 1040) down to $24,045 right now, so you'd need unreimbursed employee business expenses of more than 2%(24,045) = 480.90 to even hit the Schedule A in the first place, then you have to beat the $5,700 Standard Deduction. I don't think you've got a hope, there.

How I got your AGI down to $24,045:

$26,400 in W-2 wages
$2,093 in Schedule C biz income = $2,900 contractor income minus $807, from above
That's $28,493 total income.
Deduct:
$900 moving expenses
$148 in 1/2 Self-Employment Tax
$900 in Self-Employed Health Insurance
$2,500 in Student Loan Interest

We're down to $24,045 in AGI.

Problem is, that's hardly "nothing" - yes, it certainly feels like nothing! - but you're still in a 15% tax bracket.

You get your $5,700 standard deduction and your $3,650 personal exemption. You've still got $14,695 in Taxable Income, for $1,784 in tax, plus another $296 in Self-Employed tax from Schedule SE.

That's $2,080 in tax. You withheld $108. Because of under-withholding, you've got another $47 in estimated tax penalty. Just don't even worry about that. It's done and it's not your biggest worry. Your biggest worry is that, yes, I've still got you owing the US Dept of Treasury $2,019.

The thing is, I can stick in another full $1,000 in Biz Exp on your Schedule C and you still owe $1,735 to the Treasury. If you use your 'puter 90% for biz, drove 1,000 miles to conferences, and had a $500 registration fee, you're still looking at a pretty sizable tax bill (and the under-withholding penalty only drops to $40, so, whatever on that).

I do hate to be the bearer of bad news; truly, it's my very, very least favorite part of my job. The best I can give you is that you've got a bit of warning, and the IRS does have payment plans with relatively reasonable interest rates. You set them up on irs.gov.

The most important thing is to go ahead and file on time, pay the most that you can, and set up the payment plan immediately. The IRS can be surprisingly reasonable if you are. Also, get that W-4 fixed immediately, so that you're not in this boat next year.

Take a look at Schedule C and see if any of those categories there jog your memory on any other business expenses, but that's about all you've got, since you're not itemizing.

Do let me know if I can be of further help, with the depreciation or anything. I'm sorry I couldn't give you more hope.

[SpringFlowers]

Yes- I took 2 exemptions. I did this on purpose. I thought I would rather err on the side of owing since having money now is so valuable to me (at 6.8% student loan interest rate), and I figured I would have more than average deductions due to student loan interest & moving expenses, so I thought it would work out or come pretty close. I just didn't know I would come out this far off in the wrong direction!

I do understand what you were thinking, there, but the (major) error was in thinking that the moving expenses and student loan interest was so much more than others. Others are Itemizing their property taxes & mortgage interest, and taking exemptions on their kids. You've got well below what many people would have to reduce their taxable income.

I'm sorry that this has been such expensive tuition to the School of Life.

[guest]

Wow, Springflowers!! Thank you sooo incredibly much! You are so very thorough and far beyond what I might have expected.
... Should have had you around back when I was deciding how many exemptions to take in February! Live and learn.... I get paid by business check, so I this whole year I never saw where the money coming off of my paycheck was going. Never got any pay stubs, and never really thought to ask. I knew it was a gamble to take so many exemptions, but I saw how much was being taken out of my paycheck. It seemed like a lot! even when I've made a salary in the past, it was always on a part-time/part of the year basis, so my low annual income always ensured a fat tax return in the end. Anyway, I saw how much was being taken out of my paycheck and figured I must have been paying a significant amount in federal taxes! I guess I spaced on the high rate of payroll taxes, and ESP state and local taxes!! I'll actually get a small return on my state taxes, why do they have to be so effing high?!!

I guess the only real loss is the $47 fine. I've done some budgeting (and sad perusing of my savings account) and I think I'll be able to come up with the $2K by april. But, the school of life, mostly with the aid of Springflowers, has taught/whipped me well.

I'll be sure to take all of the deductions you mentioned. Every little dollar helps these days.

Do people have any spcific reccs for self-tax preparation software? I've always done free-file online with H&R block - but mailed in my state taxes separately to avoid the fees they charge for state taxes. I think (because of my self-employment income), I'll have to "upgrade" to some non-free-file thing (at least that's what the H&R Block website made me do when I did my first quick run-through to estimate my taxes). If this is the case, I'm thinking I might as well buy some software at a comparable price. Any recc's?

[righteousjen]

Check your state department of revenue page before you buy anything. A lot of states are now allowing free files online for state tax returns w/ a similar income range to the federal free files -- in MA last year, I did a federal free file online with taxact and then a state free file through the ma.gov/dor page.

[SpringFlowers]

Watch out for H&R block's trick!

Once you've e-filed for free - they send you the software the next year - but the free e-file is ONLY through the IRS website. They get you into their software, not via the IRS website, and they can charge you. The IRS website uses an Adjusted Gross Income cut-off to determine if you qualify. The source of the income, self-employed, wages, whatever, is NOT relevant.

H&R Block's software is just fine; but they are bastards.

You definitely qualify for free e-file. Go through the IRS website, shop for truly free software, and then send in your state to avoid that fee, or check your state's website, as suggested by righteousjen, who is right-on.

[guest]

Hi- I'm the OP again.
I had dinner with my parents last night and happened to let slip about my IRS woes. I mentioned that I was particularly peeved since with the return I had (foolishly, I know) been expecting, I had hoped to start an IRA or something similar. I guess my parents took pity on me (particularly since I have basically no savings whatsoever, retirement or otherwise), and they offered to help me out this tax year with some money if it would grant me some tax advantage and I would use it to start a retirement account. Hell, if I had the extra money, I would have looked into this idea sooner. My employer does not offer a 401K.

I was just thinking about a Roth or Traditional IRA (would probably have to go with the traditional to get the tax advantage, right?). My mom mentioned something called a "self-employed 401K" which she thinks would allow me to offset the payroll taxes on my $2900 of self-employment income. I did some searching around online, but I have only succeeded in getting myself more confused.

What kind of contribution, either to a (traditional/roth) IRA or 401K, would make a dent in my taxes in this situation? I don't want to ask them for a huge amount of money, so I'm thinking that I shouldn't get my hopes up and this kind of tax trick won't really help a whole lot.

[SpringFlowers]

First things first: you're in a 15% tax bracket, so that would be the maximum amount of savings on any money. So, for example, your parents gave you $2,000 and in some way, shape, or form, you were able to make it fully deductible on Page 1, eliminating $2,000 worth of income. 15% (2000) = $300, maximum tax savings possible.

However, the issue is whether you CAN do anything for the 2009 tax year, here in 2010. It MAY be possible, but I'm not sure. You can definitely contribute through April 15th - but can you establish through April 15th? See the difference?

Your mom is talking about a SEP plan, and it's an actual, written retirement plan for your "business" - but there are limits to your maximum contribution, which is a percentage of your net earnings on Sched C. You won't even get near the $300 in actual tax savings. The clients I have who bother with SEPs are pulling in $100,000 or better of self-employed income, not $2,900. Again, the tax savings are a percentage of a percentage, so you need some significant numbers at the top to see some significant numbers at the bottom. My gut instinct on that is "too much hassle for the benefit", unless you're expecting to continue with self-employment and at greatly increasing income levels. And, again, I also have a sneaking suspicion that it's too late, anyway.

Only tax advantage is in a Traditional IRA (not Roth), which I think would be easier to establish and make more sense for you. It's probably not too late for that. Your better resource there may be an investment adviser. Just call up your local Edward Jones (or similar) office and ask if you can open an account NOW and contribute for the 2009 tax year. Again, your actual savings will only be 15% of the amount contributed. Ask a lot of questions and be skeptical. Remember, they WANT you to open an account and aren't always as clear as possible on when and how much the benefits take effect.


See page 32 of this to figure what you could contribute:
http://www.irs.gov/pub/irs-pdf/i1040.pdf