Monday, March 24, 2008

Nick’s Adventures in Tax Land, 2007 Edition

Author: Nick
Category: Money

comic 4 - tax telepathy

After an adventure-filled first quarter of the year full of Wii hunting, economic stimulation, and financial apocalypses, it was finally time to sit down this weekend and sort out my tax situation for 2007.

For the last few years, tax time has been pretty much the same picture: do them the first week in February, go the cheap route and pay $0 for Tax Act’s software, and have my painfully large refunds in the bank in time to bet it all on Duke in the Final Four. And yet here it is, the last week of March, and I’m just now getting around to filing my taxes for 2007. Was it clever strategy on my part, designed to lull the IRS into a moment of weakness so I can sneak in my deductions for gold-plated toilet paper? Or was I just a lazy bum who just didn’t want to dig through that shoe box full of receipts which was at least 10 times bigger than before this year?

A little from Column A, a little from Column B.

Unfortunately, as I found out rather quickly, going with el cheapo Tax Act wasn’t going to cut it for Nick Tax Year 2007. That’s because, believe it or not, I somehow made money from operating this and other websites. And as I quickly discovered, America’s tax system rewards you for your entrepreneurial efforts by burying you in 86 pages of tax paperwork. While there are business versions of Tax Act, I couldn’t tell if I should get the 1065, 1120, or 1120S package. On the other hand, Intuit (the makers of Quicken, to which I am a slave for life) sells a Home and Business Edition of TurboTax which very clearly spells out that it’s for me because I have (1) a home, and (2) a business. Home and Business. Very nice. If only everything were that simple.

Of course, simplicity has a price, and this time it cost $61.99 to download the tax software I needed, whereas the non-business edition of TurboTax that normal people will want to use only costs $40. So you better believe that, come next year, I’ll be deducting $21 for the business portion of my 2007 tax return. (Crap, now I have to haul out my expenses spreadsheet just to enter that. One second…)

So for those of you still undecided as to how you will file your taxes this year, or if you’re just really bored, or if you’re hoping I’ll use exact figures so you’ll find out just how much I make for writing crap like this, here’s a quick little recap of how things went down during my Adventures in Tax Land.

Welcome to TurboTax, Now Take Off Your Clothes

It took me a good day to sort through my shoe box of receipts to separate the business, education, charity, and volunteering receipts (that’s what I get for being a slob the other 364 days of the year). I also downloaded a lot of 1099s and other files that were available online and organized them into folders on my computer like you see below.

my tax folders

Installing and loading TurboTax Home and Business was as easy as deducting prostitute expenses on a gubernatorial tax return. I was expecting to have to enter a lot of personal and prior-year information, but TurboTax rather surprisingly located and imported my tax file from last year—the one from Tax Act, its competitor! Kinda freaky if you ask me, but it only got freakier later.

Skipping ahead a bit, TurboTax also imported my W-2 from who-knows-where, and it even offered to scour through Quicken to locate possible tax deductions. I passed on that offer as well as a later offer by TurboTax to automatically download information from my banks. Sure, it could’ve saved me from having to enter that data manually, but all of this automation was making me feel a little naked. After putting on some pants, I proceeded to the next section.

Fun Fact: Internet Publishing is the Same IRS Business Code as Atlas Makers

TurboTax directed me to complete my business tax return first—something I thought was a little weird, but it ended up being the right choice in the end. It guided me through a series of expense and income calculations in the classic question and answer format. I had expected the business part of my taxes to be long and painful, but it turned out to be relatively straightforward.

Of the five business income and expense categories, I only had to fill out items in the first, Business Income and Expenses, which turned out to be just a fancy interface for inputing the IRS Schedule C and my various 1099-MISCs.

turbotax business screenshot

TurboTax and other tax software regularly advertise that they can help you find deductions you wouldn’t normally spot. I was hoping TurboTax could find some bizarre tax laws to let me deduct my ceramic rooster collection as a business expense; alas, deductions for rooster collecting are limited to porcelain only. In the end, I did save a good bit of money with deductions for things like:

  • My home office (a room upstairs I use exclusively for business work). You can deduct all sorts of regular home expenses—utilities, whole-house repairs, homeowners insurance, and some other things—based on the percentage of your home that is used only for business. TurboTax walked me through calculating the area of my home office and determined it to be about 9% of the total area of our house. This ended up saving me a ton on business taxes, so I’m glad I put that tiny room upstairs to good use.
  • Business startup fees. I started a Limited Liability Company (LLC) for this and several other websites last year, and Maryland charged me $150 for the honor. Every penny was deductible as a business expense.
  • Web hosting. This is the only expense for a lot of personal finance writers I know, but it didn’t turn out to be that big of a deal to me. Still, it saved me about $30 in taxes.
  • P.O. box. Boy are these things expensive, but at least I recouped some of the cost at tax time.
  • Various other small expenses. Legal fees, subcontractor expenses (from back when I experimented with paying writers), and some light travel for business purposes rounded out my business deductions.

About thirty minutes later and a few offers to “purchase QuickBooks to make your taxes easier next year” later, TurboTax displayed a number in red letting me know I owed some tax money for my business. Since I didn’t file quarterly taxes like many business owners do, this didn’t come as a surprise. But I purposely didn’t file quarterly taxes in 2007 due to various complicated tax rules that I half-understood then and 3/4-understand now. I finished the business part of my tax return hoping that the personal side would cancel out that red number (but not by much! no tax-free loans to no gubberment from Nick!) so I didn’t have to write my first check ever to the IRS.

Personal Taxes: The Hard Part

The fact that TurboTax has eight categories for personal income…

turbotax personal screenshot

…and ten for deductions…

turbotax personal deductions screenshot

…(versus just five categories for business income and expenses) just goes to show you how screwed up U.S. tax law is. It also took me three times longer to complete the personal section than the business section. And while the business component of TurboTax was nothing short of awesome, I had several gripes with the personal part.

For one, the donations section is more a commercial for Intuit’s ItsDeductible service than it is useful for calculating your charitable contributions. This section did not address a huge deduction area for me: expenses incurred while performing volunteer work for a qualified organization. I had to look up tax law and IRS publications myself to determine what part of TurboTax I should squeeze these numbers into.

Another big problem area for me: I received a corrected W-2 form from my employer after I uncovered a big error on its part, but TurboTax’s way of letting you input the changed values is simply to run you through the whole W-2 input process from start to finish again. This wasted a good amount of time I could’ve saved if TurboTax simply presented a checklist from which I could choose the one or two values that needed to be corrected.

Perhaps most importantly to me was the Educational Expenses section which I was accustomed to being very simple to complete from my experience with Tax Act. TurboTax presented it in a completely bass-ackwards manner that forced me to double-check my own math a few times. It’s important that this part be easy to understand because my wife typically has tuition expenses that translate into a $1,000+ tax credit.

I finally limped away from the personal section, whizzed through a section simply called “Other”—only to be trapped in Retirement Deduction Optimization calculations for another 15 minutes. TurboTax encouraged me to open all sorts of lettered things—IRAs, 401(k)s, and the NAACP—for tax benefits, to which I said “thanks, but no thanks for now.”

What, You Thought You Were Done Spending Money?

I was coming down the final stretch, and only a few obstacles stood in my way.

TurboTax performed its ominous-sounding “error checking,” which makes me wonder what the hell it was doing for the last four hours that it didn’t spot any errors as I was making them. Sure enough, I had two errors: the residency section for my wife and me were blank. Apparently these parts get filled out at the beginning, but I skipped that section because TurboTax imported most of that data from last year’s Tax Act file. I don’t know how TurboTax didn’t conclude automatically that we were Maryland residents seeing as the only state I had referenced in the whole damn return was Maryland. Why can’t you import that, stupid software???

Next TurboTax assessed my audit risk. I suspected it would be high simply due to my business and volunteer tax deductions, but I was pleasantly surprised when TurboTax showed me this:

my audit risk level - irs can bite me, a.k.a. low

To help me feel even better about my audit risk, TurboTax allowed me to download its free Audit Support Center software. I was instructed not to install or run it now; just to put it in a safe place in case I’m ever audited. It’s sort of like a birthday gift someone gives you a few weeks ahead of time, except in this case birthdays are bad.

The state tax component of TurboTax was a breeze. Time to download and install to completion was less than 15 minutes, mostly because TurboTax simply used all of the numbers from my Federal section to complete the Maryland state forms. I did have a few extra questions to answer though, but as soon as I confirmed that I had not received any reparations from Nazi Germany for my experiences during the Holocaust, I was done with the state return.

TurboTax tried to sell me a few more products near the end—professional audit support, tax advice from a real person, and Girl Scout Cookies in the shape of Form 1040. I passed on all of them, but that didn’t mean I was done giving Intuit my money. Indeed, I had to cough up $17.95 for each of the Federal and State returns to file electronically. I could have filed on paper for free, but as I later discovered, I would have needed to print and mail 86 pages of tax documentation. As easy as business taxes were to compute, it apparently takes 53 pieces of paper to do it.

So I gave in to TurboTax’s extortion and paid the $35.90. For comparison purposes, Tax Act charged me nothing to file my Federal return last year and just $7.95 for my state return. When it came time to enter my payment information, TurboTax offered to take its fees out of my tax refund—for about $30 more. Having sat in my chair for four hours, I almost relented because I didn’t feel like getting up. I think Intuit plans this, but I was tired of dirty tricks, so I asked my wife to grab my wallet for me.

Did You Say “Refund?”

Yes, even though I often cry “interest-free loan to the government” on tax refunds (though sometimes I don’t), and even though I adjusted my W-4 numbers again this year, we’re still getting back over $5,000 from Uncle Sam and his Maryland cousin, Aunt Susie. I’m going to have to spend some serious time with my W-4 this week because I’d rather get higher take-home pay now than a refund later. I think.

That $5,000 should hit our bank account in a couple of weeks, and our $1,200 economic stimulus tax rebate shouldn’t be far behind. We’ve decided that the $5,000 will go straight to savings; and after some discussion, my wife and I have agreed to spend all of that $1,200 to help stimulate the economy. We’re not sure yet if that money will go to a vacation, a giant TV, or maybe just barrels of delicious, tax-ridden booze.

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