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