Tuesday, March 18, 2008

2007 Tax Preparations are complete

Finally finished! Today, I was finally able to verify/research the last couple of issues and close out my returns. I e-filed my federal return even though I won’t actually send a check to pay the tax man until April 15th. Unfortunately, Turbo Tax couldn’t e-file my “adopted” state return, so I printed that out to mail in. Now, for the results.

The good news first – I will be getting money back from Alabama! I live in Texas, but work out of state quite often and must pay state income tax to AL. The cool part is that my employer pays the tax directly to AL and they pay the maximum possible, or premium amount based on my income earned there. So, if I have any deductions, I get a refund. A refund of a tax that I never paid. Awesome. My HR employee rep kept saying that they were going to pay a “premium” – I didn’t get what that meant until Turbo Tax showed me the money.

The bad news – I owe a lot more federal income tax than I expected. Two reasons: (1) The market was rocking last year. So my capital gains and dividend income was much higher and (2) I also worked a lot of overtime, so my income was higher.

I don’t think I will have either of those two issues in 2008 because the market is a disaster and work has slowed down. Regardless, I’ve already adjusted my W-4 withholding allowances to the minimum possible: 0. As the year progresses, I may have to add supplemental payments to make sure that I pay in for 2008 as much as I paid last year in 2007 to avoid a tax penalty.

I learned the hard way about underpaying my taxes. Back in 2000, I sold some over priced dot-com stocks in March for a hefty gain and didn’t pay tax on those gains until April 2001. The IRS does not like that. They want their cut of your money upfront, right when you make it. In other words, to have complied with the IRS, I would have had to send them a special payment in March 2000.
Even so, I rationalized that paying a small penalty to avoid the possibility of the IRS improperly crediting my account or someone else’s with my prepayment was probably worth it. LOL

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