Tax day has come and gone. So how did you make out? Mommy Pig and I managed to get a $2,100 tax return. So that money will go straight to the wealth building fund. 2012 was a good year for us to determine what our effective tax rate is versus other years where we had a lot of complicated tax situations.
Mommy Pig owned and operated her own medical related practice which was sold in 2010. I have always worked full-time but in 2005 I bought a Liberty Tax Service franchise and operated it from 2006 – 2008. I sold it and had tax consequences until 2011. Now that Mommy Pig works full-time with a W2, and we have no other business related income/write-offs, we were able to get a picture of what our taxes will be for the future.
Our effective tax rate is 11.1%. This is pretty good considering the earned income that we make. I consider it especially good since 62% of our income was in the 25% & 28% tax brackets. So how did we do it? It all comes down to using the tax advantages that are available to you. Below are the 2012 tax rates listed in a Forbes article listed here.
|Tax Bracket||Married Filing Jointly||Single|
|10% Bracket||$0 – $17,400||$0 – $8,700|
|15% Bracket||$17,400 – $70,700||$8,700 – $35,350|
|25% Bracket||$70,700 – $142,700||$35,350 – $85,650|
|28% Bracket||$142,700 – $217,450||$85,650 – $178,650|
|33% Bracket||$217,450 – $388,350||$178,650 – $388,350|
|35% Bracket||Over $388,350||Over $388,350|
In our case, for every dollar that I could find a way to eliminate from being considered taxable, I save $.25. So if I can find $4,000 then I have $1,000 less to pay in taxes. I found $58,000 that I was able to reduce as “taxable” income. “Daddy Pig, are you some sort of super genius?” - unknown. Yes, yes I am, but the quote isn’t really from unknown, it’s from Daddy Pig.
Actually it’s not complicated or difficult to reduce your taxable income if you’re in similar situations like us. Here is how we did it with deductions:
- Property Tax
- Mortgage Interest
- Business expenses (there are still some for Mommy Pig and they are un-reimbursed expenses she pays that are required)
- Sales Tax (I saved every single receipt I could for the whole year knowing that with the new house and all the things we were going to buy would well exceed the sales tax standard deduction. This even included receipts for $.12. When I say every receipt, I mean EVERY receipt.
- Tax prep. fees
There are also all the standard exemptions for ourselves, kids, etc. But that is standard items that will be on every tax return.
We also saved a lot from how we spend money too. My employer has a health care & dependent care flexible spending accounts. I max both out as they are tax exempt. So my pre-tax money goes in and gets used on expenses we are going pay anyway. I also put about 15% in my 401K which lowers my taxable wages.
The key for me is find ways that are LEGAL to reduce my taxable income on things I was going to spend the money on anyway. If you are not thinking about it throughout the year, or at least trying to plan out these tax consequences then let’s do a little generic exercise on what you might be missing out on.
I’ll use my family as the test case here. Let’s say I lapse on my 401K and my health care flexible spending account and reduce both. The total change could be $6,000. That would be an additional $1,500 that I’ll pay to the government. At age 38, let’s say this goes on for the next 17 years till age 55. That’s $1,500 that I won’t be additionally investing.
Take $1,500 and average 8% per year for 17 years and you’ll have approx. $54,344. If I let that invested money then compound untouched until that age of 65 without adding any more capital, then it would be worth approx. $120,000. That money won’t exist because I would be too busy paying my “fair share”.
Anyway, this is just a simple exercise with $6,000. What could you do with $10,000 or $12,000? These are very rough examples and my tax shelters/deductions will reduce as the kids get older or we stop working in corporate jobs, but the point is to have you think a little more about tax consequences.
So how did you do for your effective rate this year? Can you lower it next year and save money?