It’s Tax Time

It’s tax time in the United States, and that means Mr. Tako is doing the family taxes!  Ads for tax preparation and tax software are everywhere.  Retailers are hawking their “tax refund” sales, and tax accountants are burning the midnight oil to get through all those tax returns.  Today we’re going to look at some tax stupidity and how a financially independent individual can use the tax system to their advantage.


Starting With The Refund

Whenever I see an ad promoting a speedy tax refund, or a “tax refund sale!”, I cringe.  Sometimes, I even hear people brag about what they’ll do with their tax refund.  Frankly, this is tax stupidity on a massive scale.  If you’re getting a tax refund, you’re doing it wrong!  

Why would you give the government a tax-free loan for the entire year?  That’s what a tax refund is – When you receive a refund, you OVERPAID the government for the entire year and received no interest on your money.  Instead of giving the government your money for the year, you should have been investing it!  

Shame on you for giving out interest free loans!  That’s no way to make millions!

2015 refund
The truth is right there on line 75. A refund means you overpaid.

Ideally, when filing your tax forms at the end of the year there should be NO refund!  In the event that you accidentally end up with a tax refund, it should never be spent!  That money should always be invested!

Unfortunately, not everyone sees this like I do.  Tax refund time is often used as an excuse for excessive consumerism…don’t even get me started on Refund Anticipation Loans


Underpayment and Penalties

Underpayment is another tax situation that should probably be avoided.  Underpayment is exactly what it sounds like, not paying enough!  Underpayment may sound nice on the surface…keeping your money for the year and squaring up with the tax man at the end of the year.  The unfortunate reality is that penalties need to be paid for significant underpayment.  For the 2015 tax year, the rate is 3%.  Check the IRS website for details on underpayment penalties.

Wait wait….I know what you’re thinking!  If you can beat that 3% over the course of the year with an investment, you’ll come out ahead at the end of the year!  Well…Maybe.  On average the stock market returns 7%, right?  Unfortunately, 2015 did not produce positive investment returns for most portfolios.  There are situations where this kind of ‘float‘ might work out, such as investments with defined returns (like bonds or preferred shares), but most of the time this is probably not worth attempting.

In general, I think it’s better to just get on with it, and pay your taxes as accurately as possible.


Doing It Yourself

The Tako family does our taxes ourselves without the assistance of a tax accountant.  We don’t see the need for one, and they are usually quite costly.  Filing your taxes yourself is a great money saver, and also helps educate you about the tax code!  

For most people, filing your taxes is quite simple.  There’s only a handful of deductions and tax credits to work out, and most income is derived from job income, or income from securities.  This is where tax software really excels, and one of the reasons we stick to using tax software to handle our returns.   Some tax software, like TaxAct is even free at the most basic level!

I suppose if I was a glutton for punishment, I could fill out the IRS forms myself and save even a few more dollars…but I’m not ready for that level of suffering (yet).

So when might we need a tax professional to help us?  Mainly, if we had a rental business or some other small business that generated income. Then, hiring a tax professional might make sense.  The tax rules for businesses are very different from that of individuals.  For example, if this blog generated any taxable income (it hasn’t), that might be a good time to approach a tax professional.  There’s also tax software for many of these common small business situations.  We’ll probably look into that option if it’s ever needed.


2016 Taxes

In 2015 our taxable income situation was pretty crazy.  For most of the year, both Mr. Tako and Mrs. Tako were working full-time at decent paying jobs.  This created a lot of job income (that’s highly taxed).  We also had significant dividend income for the year.  The net result is a five figure tax bill to pay next month.  Anybody want to volunteer to pay that for me?  I didn’t think so.  

2016 will be a very different year from 2015.  We’ll be down to just one income (Mrs. Tako’s), and our dividend income.  Currently we’re targeting a dividend income for 2016 of around $40k-$50k. The net result is, this should put us in a much lower tax bracket for 2016 and ease this large tax burden.  We also don’t expect any surprise large dividend payouts like we saw in 2015 with the sale of Montpelier to Endurance Specialty Holdings.


Manipulating Income Into Better Tax Brackets

After 2016, (if all goes well) Mrs. Tako will quit her job, and join the ranks of the financially independent.  When that happens, we enter the land of tax optimization happiness!  This is actually one of the greatest tax tips I’ve seen in years – manipulate income to fit within ideal tax brackets!

2016 tax brackets
Tax brackets for 2016. Thanks to for putting together this nice table.

In 2015 we sat in a tax bracket that pays 15% on dividend income and 33% on ordinary income.  After 2016, instead of paying those crazy high taxes, we’ll control our income to stay within the 0% dividend income and 15% ordinary income tax bracket.  That’s right, 0% on qualified dividends and long term capital gains!  It’s really an outstanding tax bracket!  

With a maximum income of $75,300 in that tax bracket we’ll be able to live an extremely luxurious lifestyle.  $75k is nearly 50% more than our current budget!  We currently spend somewhere around $48k/year, so this leaves us with plenty of room to grow our income with part-time jobs and small businesses.

I’m pretty excited about this idea – filing a tax return where I pay absolutely nothing but still have up to $75k in income!  I’ve always had to pay big tax bills every year, so this will be a welcome change!


How are you doing your taxes this year?  Know any great tax optimization techniques?


[Image Credit: Flickr]

13 thoughts on “It’s Tax Time

  • March 9, 2016 at 12:32 AM

    One thought: I use a spreadsheet to track income and cap gains/losses and toward the end of 2015 I made sure I knew whether late year payable dates for divs fell in 2015 or 2016 and then realized a small stock loss so that I stayed within the 15% tax bracket. Once I knew what my totals were for the year I was able to do a small IRA to Roth conversion a few days before year-end so my total federal tax bill was zero. I did pay quarterly estimated tax – with every cent to be refunded.

    I’d be curious whether your plan will be to not pay estimated taxes. For 2016 tax year I plan to pay zero taxes again but I’m afraid that if I earn too much investment income I’ll end with a huge tax bill and penalty. Hard to know whether you’ll have stock loss offsets you can take though perhaps the best plan is to take them earlier in the year if they are available so you leave yourself some head room.

    I do my taxes manually and submit paper forms. Luddite, I know. I tried tax software for a few years but I never used the auto download of stock sales (trust issues) and that use to be a bigger effort to type than to write. True story – one year I missed one trade entry and got a $60,000 bill from the IRS. For some reason, once I missed one trade their computers didn’t match several other trades due to rounding differences between the brokerage 1099 submissions and my tax forms. After many correspondences and calls the final bill was a few hundred dollars. Scary. But the people I called at the IRS were actually quite nice and helpful. Who’d have guessed?

  • March 9, 2016 at 5:29 AM

    $75,300 is a magic number. Over the past few years I have been able to get under that number and now the dividend income and gains are not taxed. Pretty awesome. Of course having two kids within 24 months and going from two incomes to one helps with the math but hey I’m an optimist. Your point of the $75K of tax free investment income in retirement and keeping spending below that is backbone of my plans moving forward.

    I enjoy the blog.

  • March 9, 2016 at 7:02 AM

    I’m using H&R block software this year. The good news is we won’t have to pay any tax on our dividend income for 2015. I love it! A big tax bill is no fun. We had to pay a pretty big bill for 2014 because we sold a rental. I don’t like doing taxes, but at least we don’t have to send the IRS a big check this year.

    • March 9, 2016 at 8:27 AM

      Indeed! The largest check I write all year is to the IRS!

  • March 9, 2016 at 7:45 AM

    If I do recall correctly you’ll only get hit with underpayment penalties if you don’t pay more than 90% of your tax liability throughout the year. I owed about $500 to Uncle Sam this year. I was trying for $0 – 100 underpayment but ended up selling more stock than I had projected to. My roommate asked how big my refund was and I said $0, I owe $500. And he said, “THAT SUCKS!” He was getting a grand back. I tried explaining to him that he gave the gov’t an interest free loan all year for that money. He understood what I was saying but still thinks getting a refund is better. He’s a CPA mind you…

    • March 9, 2016 at 8:22 AM

      Wait…What? Even a CPA doesn’t get it? Frightening!

      It’s actually pretty easy to exceed the threshold for underpayment penalties. It’s happened to me a number of times due to sudden stock sales or large dividends.

  • March 15, 2016 at 8:06 AM

    Like Joe, I use H&R Block software to do our taxes. My dad is even more hardcore…he uses a paper and pen. I know plenty of friends who pay a lot of money to get their taxes done and they just have a W-2. And they always argue that they got X amount for the refund so the account must have done an excellent job! And since I got less, I must not know what I’m doing.

  • March 15, 2016 at 9:26 AM

    Thanks for your blog. I enjoyed reading your insights. I was researching on the MRH special dividend and found yours. Is the MRH 9$+ special dividend qualified or non-qualified? Just wondering how yours is classified.

      • March 15, 2016 at 1:30 PM

        My broker tag it as non-qualified. I already told them about it and they say their tax department says it is such. I’m not sure which one is right then?

        • March 15, 2016 at 4:25 PM

          Get a new broker? It’s definitely qualified on my 1099-DIV. Call Endurance’s investor relations. I would think they could answer with authority.


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