Taxes, Income, Spending

[Rianne]

Looking at the various posts regarding spending. Some include taxes with spending, others don't. Our taxes seem so much higher than most. 2017 taxes approx. $7800 on 52K income. VG investment income approx 12,000K but that is included in 52K. Of course, tax write offs for expenses.

Just seems unusually high to me.

 

[Spock]

rough scribbles that is high. 52K - 24k standard deduction = 28k taxable, which would be about 3K in taxes.

 

[LOL!]

Those are your 2017 and they do seem very high.

But I will guess that includes FICA, medicare, and maybe even property taxes.

What taxes are included in your $7,800 of taxes?

Generally, about half our income is income tax-free because we put most of it into 401(k) and health insurance which are not taxed. So when you say $52K of income, is that AGI or taxable income? AGI already removes a lot of income, so even AGI is a bit fishy.

 

[cathy63]

What's included in that $7800? I'm sure you include Fed tax, but what about state tax and property tax?

 

[USGrant1962]

Rianne, are you talking about total taxes? Federal, State, Social Security, property, etc.?

Because Spock is right, Federal income tax on that amount (assuming Married Filing Jointly) would be about $3,700 in 2017, and only ~$1,600 in 2018 (assuming $40K earnings and $12K qualified dividends).

 

[Rianne]

Rianne, are you talking about total taxes? Federal, State, Social Security, property, etc.?

Because Spock is right, Federal income tax on that amount (assuming Married Filing Jointly) would be about $3,700 in 2017, and only ~$1,600 in 2018 (assuming $40K earnings and $12K qualified dividends).

Let me re phrase to be more accurate:
1. Income based on qualified dividends ($12K) and Income from DH consulting ($42K) State of Illinois/Federal.
2. DH consulting does not WH and we have deductions for office space etc.
3. We chose to prepay 2018 taxes in full based on 2017 income.
BUT here's what we wrote checks for in April 2018
2017 Treasury: $6703
2017 Illinois Dept Rev: $1105
2018 Treasury $8200
2018 Illinois Dept Rev $1840
Total $17,848
I'm thinking we'll a nice refund this year. We use a CPA, always have. Does that seem totally out of whack?

 

[USGrant1962]

Oh, OK. So you are paying two years' taxes at once and paying self-employment tax for DH. Then the numbers generally make sense. Though I would expect 2018 to be lower than 2017 if income was the same.

I would guess you will see a refund on your 2018 FIT due to the TCJA changes.

 

[Rianne]

Oh, OK. So you are paying two years' taxes at once and paying self-employment tax for DH. Then the numbers generally make sense. Though I would expect 2018 to be lower than 2017 if income was the same.

I would guess you will see a refund on your 2018 FIT due to the TCJA changes.

But still, 2 years should be $6-$8K. Where does $17K come from?

 

[lemming]

When I posted my expenses for the year I included state and federal taxes that I paid in quarterly payments. I tried to keep my income below the amount where ss will be taxed which should make my tax liability for federal zero. State does not tax SS but does tax dividends. I hope to do the same again in 2019 then I will have to draw enough to be taxable income. I don't know why congress decided that things we used to value, home ownership, children, charity, medical self sufficiency, and moving expense to work are no longer of value to society but the changes might just make me pay off the mortgage.
On my expenses I put real estate taxes as part of my home expenses not lumped in with income taxes.

 

[RetireAge50]

But still, 2 years should be $6-$8K. Where does $17K come from?

Why waste money on a CPA if he won’t explain it to you?

My guess is you have to pay both sides of FICA taxes since you are self employed.

 

[Rianne]

Why waste money on a CPA if he won’t explain it to you?

Because we're lazy. It's funny you say that, we'll talk about how FA rip us off then let our CPA spout numbers and we just sign the checks. And we're not that rich. Thank you for the kick in the butt.

 

[USGrant1962]

But still, 2 years should be $6-$8K. Where does $17K come from?

Self employment tax (Social Security and Medicare) is 15.3%. So that is about $6,000 each year on $40K of consulting income. That is on top of federal and state income taxes.

 

[SecondCor521]

But still, 2 years should be $6-$8K. Where does $17K come from?

I'm confused. Didn't you itemize the $17K in your own post #6 on this thread? And the numbers on those checks that you wrote came from your tax returns, so you can look at the tax returns and figure out how the totals were arrived at much better than those of us on the Internet who don't have your tax returns handy. Right?

 

[LOL!]

Yep, it is clearly the FICA (SS) and Medicare tax on self-employment income.

It wouldn't hurt to pull out the tax returns and read them line-by-line and also understand what the numbers are.

 

[MarieIG]

Self employment tax (Social Security and Medicare) is 15.3%. So that is about $6,000 each year on $40K of consulting income. That is on top of federal and state income taxes.

Bingo!

 

[target2019]

Self employment tax always hurt. 1/2 gets deducted from gross income.
https://www.irs.gov/businesses/smal...oyment-tax-social-security-and-medicare-taxes
Helps to invest some each year on business equipment. Also have a savings plan like SEP or Solo.

 

[Sunset]

Self employment tax always hurt. 1/2 gets deducted from gross income.
https://www.irs.gov/businesses/smal...oyment-tax-social-security-and-medicare-taxes
Helps to invest some each year on business equipment. Also have a savings plan like SEP or Solo.

OP - this person has mentioned an important thing, a self employed person can open a solo-401K,
https://investor.vanguard.com/small-business-retirement-plans/individual-solo-401k?Link=facet

Lots of benefits to it.

 

[gauss]

If I am not mistaken, I don't think the solo-401k will reduce the Self-Employment taxes any.

It will however reduce Federal Income tax and likely State income tax.

-gauss

 

[target2019]

Yes, gauss is correct. I mentioned business deductions as way to reduce consulting income. That will reduce self employment taxes.

 

[bada bing]

If I am not mistaken, I don't think the solo-401k will reduce the Self-Employment taxes any.

It will however reduce Federal Income tax and likely State income tax.

-gauss

I'm not a tax expert, but I think there are some qualifiers. If you have incorporated
as an S-corp, I believe the "employer" profit sharing contributions reduce the s-corps
profit but do not pay FICA. I know an unincorporated sole-prop pays FICA on both
profit sharing and salary deferrals. I have a solo 401K but I am not incorporated
so I don't know for sure, but I believe that's correct.

If everyone experienced FICA costs the way a self employed person does, they would
be less ambivalent about the costs of the programs. For a moderate income self-employed
person, Social Security + Medicare tax dwarf their Federal income tax.

 

[Rianne]

OP - this person has mentioned an important thing, a self employed person can open a solo-401K,
https://investor.vanguard.com/small-business-retirement-plans/individual-solo-401k?Link=facet

Lots of benefits to it.

DH consulting is an LLC. Appreciate this info!