Our 2016 tax return exposed; The good, the bad, and the awesome

Benjamin Franklin said there were only two things certain in life: death and taxes.  The Finance Patriot is working hard to avoid both.

Before diving into the details of our 2016 return, which I know you are all dying to know, let’s start with our 2016 tax summary (from taxact.com).  After reviewing the summary, please scroll down for a detailed discussion of each line item.

Federal Tax Summary, 2016

W-2 Income
$105,626
Adjusted gross income
$105,626
Deductions
$14,133
Exemptions
$16,200
Taxable income
$75,293
Tax computed using Form 1040 Line 44 – Qualified Dividends Capital Gain Tax WS
$9,779
 Credits
$(2,000)  special note, I added in parentheses to note this is a credit against our amount owed.
Other taxes
$500
Payments
$9,626
Federal Refund
$1,347

Income

gotta get that cizzash

Our main source of income comes from my day job, in the form of wages paid.  The wages shown on box 1 of my W-2 are after all deductions.  The amount shown on the W-2 equates to $102,093 (pats his self on back).  As this is a financial independence blog, I am certain you will wish to know the deductions that occurred to get to this figure.  During 2016 I contributed $11,086 to a company sponsored 401(k) plan, and also an additional $10,346 to the company sponsored 409(a) plan.  During the course of 2016, I participated in employer sponsored fringe benefit programs to the tune of $5,003.44.  These plans were family medical (family of 4), family dental, family vision and participation in a FSA plan ($850).

The FICA guy seems to like me a lot, but I assure you this affection is unrequited.  For those of you who don’t know what FICA is, it’s the social security/medicare taxes that wage earners pay.  Our total paid in 2016 was $9,136.  Epic fail on that front.
The FICA guy seems to like me a lot, but I assure you this affection is unrequited.
 Taxable interest income amounted to a successful low of $64.  This money came mostly from our Capital One 360 savings account.  Since taxable interest is taxed as “ordinary income,” we try to minimize this amount as much as possible.                                                                                                                                                                                                                                                                                     During 2016, our total dividend income amounted to $4,042.  Of this amount, only $3,932 were classified as “qualified.”  Qualified dividends receive magical and special tax treatment, and in our case are taxed at 0%.  Unqualified dividends are taxed as ordinary income, which for us would be at the 15% marginal tax rate.  I do not compute what is qualified and what isn’t.  I simply take the forms that Capital One Investing provided me and trust their math.  Hey, they are the experts right?
Capital Gain or Loss
During 2016, we had a tax loss carry forward from 2015 in the amount of $2500.  In addition, we had tax loss sales, from taxable investments, in the amount of $8001.  Thus, the maximum loss we were able to deduct on our tax return is $(3,000), which is the annual limit or cap.  The good news is the excess losses can be carried forward to future returns.  Assuming no additional tax gain selling, we will have full losses on our 2017, 2018 and partial losses on our 2019 return.
 IRA Distributions 
 Suffice it to say, we’d much rather have our family member back than an inheritance.  However, I’d be remiss if we left out this distribution, and, I’d like to help out anyone who incurs this issue.  I received a taxable inheritance from a traditional IRA in 2016 (non-spousal).  I had the choice of receiving distributions over a five-year time-frame, or all at once in a lump sum distribution.  Given the relatively small amount, I chose to receive this as a lump sum.  Total amount received was $2,427.  This is treated as taxable income and is an addition on the 1040 form.    Because the inheritance was from a family member, there is no 10% penalty to be paid on this distribution.  This was part of the attractiveness of receiving it via a lump sum.
That concludes the income part of our tax return.  The summary math so far is:
Wages $102,093
Interest income $64
Dividend Income $4,042
Capital Loss (3,000)
IRA distribution $2,427.
Adjusted Gross Income:  $105,626

Deductions

Jack Catchem

Now on to a much more fun part of our 2016 return: deductions.  The IRS gives you the option of claiming either the standard deduction, or itemized deductions (if those deductions exceed the standard deduction).  We file our return as Married Filing Jointly.  Therefore, the standard deduction was $12,600 for 2016.  Alas, 2016 was an itemizing year for us (we itemize every other year), and our total itemized deductions totaled $14,133.  Our itemized categories can be broken out as the following;  state sales tax table amount, $2,076, real estate taxes paid, $5,036 (we paid two years worth of property taxes in 2016), Total mortgage interest paid during 2016 amounted to $6,483 (I made one extra mortgage payment early in December as allowed by the IRS and tax laws to maximize this category), our total charitable deductions totaled $538.

Personal Exemptions

We have a family of 4 and, therefore, claim 4 personal exemptions.  These amounts are set by law, and equate to $4,050, per person, for 2016.  Our total personal exemptions are $16,200.

Taxable Income

This is a computed amount.  If you have  been following so far, the computation looks like this:

Adjusted Gross Income $105,626
Less:  Deductions                (14,133)
Less:  Exemptions                (16,200)
Equals: Taxable Income:  $75,293

Computed Tax

$9,779 is the total tax amount we owe.  This is taken off of IRS tables for Married Filing Jointly.  Warning:  Do not try to do the math.  The math won’t work.  We would owe over $10,000 if we just used the tax tables.  However, of the taxable income, $3,932 are QUALIFIED DIVIDENDS.  Break out the champagne glasses everyone, because if your qualified dividends are in the 15% federal tax bracket, which ours are, you pay 0% on these dividends.  Hip Hop Hooray!  Yup, you can basically deduct $3,932 from the total above to reach our real taxable income, which is more like $71,361.

Break out the champagne glasses everyone, because if your qualified dividends are within the 15% federal tax bracket, which ours are, you pay 0% tax on these dividends.

Credits

This is ANOTHER really fun area of our tax return.  Ergo, whereas deductions and exemptions will reduce your taxable income, which still get taxed, credits act like a direct reduction of your taxes owed.  You get your taxes reduced dollar for dollar, with tax credits.

I have two children, ages 5 and 7.  These kids are expensive… wink, wink.  They cost millions of dollars, or nothing, or next to nothing– you be the judge.  The Federal Government offers $1,000 tax credits, each, for children under the age of 17.  Since we have two kids, our total credits equal $2,000.

Tax Tip:  Child tax credits start to phase out above $110,000 in adjusted gross income.  In order to reduce your adjusted gross income, max out your 401(k) plan or other employer plan.  If you qualify for traditional IRA contributions, these also reduce your adjusted gross income.  Max these deductions out as well.  You have until April 15th, 2017, to make tax-deductible IRA contributions for your 2016 return, so if you screwed up on not putting enough money into your 401(k), shame on you, you can still try to rescue your 2016 child tax credits by making deductible traditional IRA contributions.  

Other Taxes

We are paying back the government, $500 per year, each year over 15 years.  I am not going to bore you to death with the details, but we purchased a home in 2008 and received a $7500 tax credit to do so. The catch was we had to pay this credit back over 17 years, with the first two years not requiring any repayment.  This is basically a 17 year interest free loan from the government.  I will take that any day, and I did so on our 2008 return.

Payments

If you made it this far, I salute you.  Payments equal all that we paid towards our taxes.  We did not have a business in 2016, so our only source of payments are payroll withholding for Federal Taxes.  Our total federal withholding’s in 2016 were $9,626.

Federal Refund

Drum roll please.  Our Federal Refund equates to $1,347.  This amount is simply the difference between the taxes we owed vs. the taxes we paid (withholding).  The math works like this:

Computed Tax                     $9,779
Less:  Child tax credits         (2,000)
Add:  2008 Repayment             500
Less:  Taxes Withheld            (9,626)
Equals:  Federal Refund     $1,347

If you have already filed your tax return, you can check the status of your refund at where’s my refund? Before they will give you any information, you must know the exact dollar amount of your refund.

What is the status of our refund?  Final Thoughts

This is the current status of our refund, directly from our Capital One savings account:

Irs Treas 310
Deposit
TAX REF 1,347.00

I recommend that if you owe, or are getting a refund, to file as soon as possible.  This will help you eliminate any mistakes, clear up any issues, or allow time to contribute additional funds to a traditional IRA.  Even if you owe, most tax software will let you schedule a payment for April 15th.

The tax software we use is taxact.com.  I have been using this software for at least five years and find it fairly user-friendly.  For a fairly basic version, we paid a discounted rate of $13 for our return, well worth it in my opinion.  There is also free tax software available at credit karma.  I haven’t used it, but if it’s anything like their free credit reports, it’s certain to be fantastic.  Turbo tax is the leader in user friendly tax software, and I used it years ago and loved it (when I could still get it for free).

What do your taxes look like?  Do you use tax software?  Would you recommend the tax software you use?

7 comments

  1. I was waiting on one document which I finally got so I’ll be filing this weekend. Ours looks similar to yours. Nothing too crazy. Although I am pumped b/c I am projecting that we’ll get $400 back which is the lowest I’ve gotten it. Finally adjusting my w-4 after all these years has really helped.

  2. My taxes are fairly straightforward, but due to an attorney spouse, she (wisely) insists on us being very careful with taxes. We have a certified CPA we use every year. He’s smart and not focused on giving us an unbelievable return by silly deductions (thanks for the picture drop, you got me with a “WTF?” Moment there).

    What I am acid of is friends who use “Guy” and are all super excited about Guy’s ability to get them back more money than they paid in taxes. Apparently I’m one o the few who believe if its too good to be true, it probably isn’t true.

    Tax software would be cheaper than the $200 a year i pay the CPA, but it is worth the cost (to me) when I factor in the time sink of doing it myself AND passionately declaring to my wife that i not only did it, but did it well over the course of the fiscal year. In this case, there is a very distinct dollar amount to peace of mind.

    1. Thanks, I hoped you would enjoy the caption. I laughed at your attorney comment. We roll our eyes at work at our legal department. They are overly cautious about little things and don’t understand taking on risk in a business. Even with someone preparing your taxes, I would urge you to learn as much as possible. You can’t really take advantage of the tax code, to its fullest, if you don’t fully understand it. Also I think gaining an understanding opens up endless opportunities. Tax loss selling is a great example.

  3. I’ve never heard of taxact before. We filed our own taxes for the first time this year using turbotax, and it was amazingly easy to use. Taxact does look cheaper though. Have you tried turbotax? I was wondering how you’d compare the two.

    1. I did use turbo tax years ago, when it was free to me because my income was under a certain amount. I would describe turbo tax as the gold standard for tax software. It’s the best. I started using taxact because it was free to anyone, and now I use the paid version for convenience.

      I find that it’s almost as good. The company has improved the software over time. However, it’s likely not as good as turbo tax. I hope that helps.

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