The following is a staff writer post from MikeS. He is a married father of 2. So, with the cat, he ranks number 5 in the house. He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.
I finally got around to filing my taxes. I wasn’t procrastinating because I owed money; on the contrary, I was receiving refunds from both the federal and state government. It just took me awhile to find a solid 2 hour block of time to get them done. When I was finished, the tax program that I use gave me a comparison to the previous year’s taxes as a way to make sure I didn’t miss anything. I found it far more useful to see how my finances changed over the past year and since I’m writing about it, that means you get to take a look with me.
The first item of comparison is wages and only shows a difference of $1,900. This doesn’t quite tell the entire story. To satisfy my own curiosity, I looked at my gross pay for 2013 and 2014. In 2013, I was paid a total of $106,000 between salary and bonus. In 2014, the number rose by $8,750 as I received a salary increase and a larger bonus. So, why might you ask did my wage comparison only change by $1,900? The reason is that my taxable wages only went up by that amount because I took advantage of more tax-deferred accounts in 2014. In 2014, I contributed an additional $1,200 to my 401k and I also fully funded an HSA. Those two things combined lowered my taxable income by almost $7,000. So, while it may not look like my income changed all that much, it actually did and I just increased my savings.
Dividends and Interest
The next two items to look at were dividends and interest. Now, the change wasn’t huge, an increase of about $300 from 2013 to 2014, they do represent a much improved financial picture for me. Since I have an additional $300 in interest and dividends that means my savings and investments have increased. This was due to a combination of a larger bonus than usual, as well as money I received from an inheritance. We continue to funnel money monthly towards the brokerage account on a monthly basis, but the savings account only has monthly deposits for our spending buckets.
I have itemized my deductions every year since I bought a house, as that’s usually the most tax efficient thing for me. What’s interesting about the comparison this time is that 2014 was significantly higher. The reason being was that in 2013, part of the inheritance I received was an IRA. Ideally, I would have left the money in the IRA and just taken out what I was required to every year. However, it was better for my overall financial picture to take a lump sum distribution. By taking that distribution though, I lost the ability to deduct mortgage insurance as my Adjusted Gross Income was too high.
That lost deduction was about $4,000, which meant I had pay taxes on an additional $4,000 of income in 2013 as opposed to 2014. When I file my taxes next year, the situation will be reversed as I was able to eliminate paying for mortgage insurance with my refinance a couple months back. I’ll happily pay the additional tax if it means I eliminated the $3,600 a year expense.
The total tax bill and refund amounts were the last big differences. Total taxed owed decreased by over $4,000 from 2013 to 2014. That was driven in large part to the IRA distribution. The IRA added almost $20,000 to my income in 2013 and as such, added almost $3,000 to my tax owed.
I had planned on owing the additional tax, so it wasn’t a big impact on my budget as I had adjusted my withholdings so that I wouldn’t owe anything come year-end. In fact, I got a small refund of $161 in 2013.
In 2014 my refund increased to about $1,400. The larger refund was driven by a larger bonus in 2014. The taxes withheld from the bonus were higher than needed. I could have adjusted my paycheck withholdings to minimize the refund, but I planned on using the refund to help fund the surprise trip for my wife. Since she doesn’t pay attention to the refund amounts, since they are normally really small, it was an easy way to squirrel away a little more money for the trip.
How did your taxes compare with last year?