lowcost401k020215- WC
Each of the last three years I have done a post about taxes where I “revealed” the tax rate I’m paying. I’m not sure why people find that so interesting (voyeuristic maybe), but I’ve had a bunch of requests to do something similar this year. The last four years my tax bill has increased dramatically. I only paid 8% in federal income taxes in 2011, and I thought that was a lot since I had always paid much less prior to that. Anyway, prior posts can be found here if you’re interested:

I used Turbotax again this year. They’ve dramatically increased their prices, so I don’t blame anyone for switching to someone else. I managed to find a deal for 50% off, so it still wasn’t bad. But the biggest cost for doing my taxes is my time, not a few bucks for Turbotax. I spent about 8 hours this year, so I had to ask myself, would I have been better off working another shift and paying someone else to do this than to do it myself? Probably not, since I think I would have been charged a couple thousand by an accountant to do my taxes (personal and business, nearly a dozen schedules, dozens of 1099s to enter and send out, rental property, two K-1s, investments etc.) I don’t make a couple thousand, at least after-tax, for any shift. Plus, it’s not like I wouldn’t have had to spend some of that time anyway gathering together the papers, driving to the accountant to drop them off and then returning to sign and pick up the forms, and making sure the accountant didn’t screw up the 8606. Plus, I wouldn’t have learned all the little things I learned this year that I’m going to share in this post. To me, that’s the most valuable aspect of doing your own taxes-you learn the best way to live your life and keep your records for next year.

The Tax Report

All right, you voyeurs don’t have to read down any further than this paragraph. If I consider all of my income (without subtracting WCI and clinical business expenses like malpractice insurance), then my total tax bill is 22.6%- 14.4% federal, 4.9% payroll, and 3.2% state. However, the better way to do this is probably to subtract those expenses out first. Then my tax bill is 23.9%- 15.3% federal, 5.2% payroll, and 3.4% state. That percentage is quite a bit higher than the 15.5% I paid in 2011, and the total amount of taxes is dramatically higher, probably 3 times as much. Our marginal tax rate was 33% federals plus 3.3% payroll plus 5% state for a total of 41.3%. Not terrible considering an income 2-3 times the average physician income.

To make matters worse, I underpaid quite a bit this year (don’t worry, the penalty is only $32 thanks to the safe harbor rules- I should made a little bigger estimated payment for the second quarter and could have avoided that) and so get to write some monstrous tax checks in April, the same month I pick up that new boat. I’ll have to pay the federal underpayment for 2014, the federal first quarter estimated for 2015, and the entire 2014 state tax bill (Utah doesn’t make you do quarterly estimated payments.) It’s going to be very close whether I pay more in taxes that month or more for the boat, but when you combine the two, my net worth will drop by 10%! Ouch! I’ve never had so much cash sitting around in my life, but you can’t really invest money you need in a couple of months.

The Big Factors

So what did we do to lower our tax bill this year? Well, the biggest factor was far and away contributions to tax-deferred retirement accounts (partnership 401(k)/PSP, partnership Cash Balance/DBP, WCI Individual 401(k)) and my HSA. That was 24% of my income. When you combine that with a small taxable investment, our backdoor Roths, and 529 contributions, we put away 29.9% of our income for retirement and college. (So yes, we’re still pretty sure we can afford the boat.) Health insurance premiums, mortgage interest, property taxes, and last year’s state income taxes were all deductible, of course, but the really big factor in our deductions was our charitable contributions. We kept really careful driving records this year and discovered we drove nearly 5000 miles for charity between Boy Scouts, the soccer organization, the PTA, and the church. It helped that a lot of my Boy Scout training takes place on the other side of the state. All together, our charitable donations were 7.3% of our gross income, a massive deduction that is an order of magnitude larger than our mortgage interest deduction. It also helped that since my wife had no income, she paid no payroll taxes. I still don’t owe any AMT. If this year didn’t get me, I probably never will pay it since most of my deductions can be used under both systems.

New Experiences


I had a few new experiences this time around. I had to prepare a 1096 and a couple of 1099s for WCI. Super simple in Turbotax. I also finally got the rest of the energy-efficient home improvement tax credit for those fancy doors and windows we put in. That’s 10% of the cost of materials up to a lifetime total of $500, with a maximum of $200 for windows (good thing we did a door too.) For the first year I got phased out of our exemptions, not completely, but it was close. The kids are no longer a significant tax break. I also lost a few thousand to the itemized deduction phaseout. Given those phaseouts, my marginal tax rate is actually a little higher than it otherwise would be, at 41.8%. This is actually really easy to see with Turbotax. When you’re all done, just add $1000 to income and see how much your tax bill increases. Mine increases $418. (Don’t forget to go back and take that $1000 out.) The other little tip worth knowing, and this isn’t the first year I’ve had to do this, is that if you have more than one 401(k), you may have to go into Turbotax forms mode (only available on the downloadable/CD version) and manually override form 1040 line 28. You’re also on your own for calculating your maximum contribution to that second one. Just remember that it’s 20% of your income from that business net of the (deductible) employer half of your payroll taxes. I didn’t quite get to max out the WCI Individual 401(k), but it was darn close this year.

Well, how did you do? Did you do your own taxes? If not, how much did you pay someone else to do them? What percentage of your income did you pay in combined federal, payroll, and state taxes? What was your marginal tax rate? What did you learn about taxes this year? Comment below!

What percentage of your 2014 income did you pay in combined federal, payroll, and state taxes? (Effective rate, not marginal)

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How much did you pay to get your taxes done in 2014?

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What was your 2014 Marginal Tax Rate (combine federal, payroll, and state)? Use tax software for maximum accuracy

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