Tax Time 1

Tax Time for FI Champion

I have put it off long enough.  But with the April 15th deadline looming in the near future, I really could not wait any longer.  That’s right, it’s tax time!

Up until this point in my life (well, “our” lives since I should include my fiance) it has been fairly easy around this time of year.  Personally I never made that much money throughout the year.  This made taxes really simple.

Taxes During College

I would receive the W-2 form from whatever summer job (or on-campus job) that I held.  It typically showed earnings of $3,000-$5,000 in wages for the year.  I would fill out the Federal and State 1040 forms and usually some small refunds would follow.  Easy!  Took no more than 2-3 hours to fill everything out.

Taxes Now

It’s a bit more complicated.  Forget the idea of 2-3 hours, this is more like 10-20 hours!  First off, during the past year this was the most money we have ever earned.  Hey, I’m not complaining.  I just recognize that it makes tax time…..well…..less easy all of a sudden.  But there were several other issues that impacted us.  Here is the list:

  1. Dealing with more income/money
  2. Two people are earning money (me and my fiance)
  3. We are NOT yet married
  4. Owning our first home
  5. Owning our first rental property, which is really 1/2 of our home
  6. Sales of several stock investments
  7. Contributions to Roth IRA and 401k retirement accounts
  8. Earning money in two different States

All of these elements affected how our Federal and State tax returns were filled out.  And there were a LOT of forms this year.  In total, we had to fill out and send in TWO sets of Federal 1040 forms and TWO sets of State 1040 forms.   That’s right.  We cannot yet combine our tax forms, because we are not yet married.  That means this year’s tax returns need to be filled out separately.  One for me and one for my fiance.  Sigh.

With our 1040 forms, make it one for me and one for you

All complaining aside (for now), I am happy to report that I made a lot of progress over the past two weeks.  The tax forms are all filled out and I expect to drop them in the mail later this week.   So how did they turn out?  Let’s dig in a little.

Federal Forms Needed

Gone are the days when I only needed to fill out Form 1040 and maybe Schedule D.  I still need those, but I need several more now too!  Here are the forms and schedules that made up this year’s return:

My Federal Tax Return:

  • Form 1040 – U.S. Individual Income Tax Return
  • Schedule C – Profit or Loss From Business
  • Schedule C-EZ – Net Profit From Business
  • Schedule D – Capital Gains and Losses
  • Schedule D-1 – Continuation Sheet for Schedule D
  • Schedule E – Supplemental Income and Loss (from rental real estate)
  • Form 3903 – Moving Expenses
  • Form 4562 – Depreciation and Amortization
  • W-2 from College Job
  • W-2 from New Job

Fiance’s Federal Tax Return:

  • Form 1040 – U.S. Individual Income Tax Return
  • Schedule D – Capital Gains and Losses
  • Form 3903 – Moving Expenses
  • W-2 from College Job
  • W-2 from New Job

There were a LOT of pages to fill out and prepare for mailing.  I certainly had a few points in the process where I considered hiring a tax service to assist too.  But I trudged onward by filling it all out myself.

It seemed like all the difficult work was pulling together the information needed.  The actual “filling-out” of forms really didn’t take as long by comparison.

Wage Income (from W-2)

This past year we both had income from (1) our old college jobs and (2) our new jobs post-graduation.  This resulted in a total of four W-2 forms received.  Adding everything together, here is what the total wage income situation looked like:

W-2 Salaries Me My Fiance
Gross Salary $32,235 $17,272
401k $0 $3,392
Total W-2 Salaries $32,235 $13,880

Together we earned $49,507 in gross salary.  Since my fiance was able to participate in her company’s 401k program, the amount she contributed is deducted from the gross salary and the resulting lower number is what gets reported on the tax forms.

Now quick note, I was expecting our salary to be $419 more (based on what I reported in our 2005 income review) for a total of $49,926.  But upon further digging in our paycheck stubs, it looks like that difference was attributed to group life insurance and accidental disability insurance by our companies.  End result, it does not get counted as actual wages.  I don’t know why, but both of our companies did the same thing so it must be some rule or law.  Since I don’t have to pay taxes on it, I’m happy, so I’ll just move on.

Now as long as everything continues smoothly with both of our jobs, next year our total wage income will be higher because it’ll represent a FULL year of working.  Of course I already think $49,507 is a LOT of money for us to have earned.  Next year I’m sure to be even more shocked!!

Rental Property

Our duplex rental property earned us $7,798 in gross rental income for the year.  Now as I mentioned in our 2005 Income Review, this is “gross income” and does not yet take into account all the expenses associated with the property.

We had the following categories of expenses to report on Schedule E for our rental real estate property:

  • Advertising
  • Auto and travel
  • Cleaning and maintenance
  • Insurance
  • Legal and other professional fees
  • Management fees
  • Mortgage interest paid to banks, etc.
  • Other interest
  • Repairs
  • Supplies
  • Taxes
  • Utilities
  • Acquisition costs
  • Depreciation

Each expense category and amount had to be reported in our tax return on the Schedule E form.  For the sake of brevity in this post, I am going to skip some of the specific details.  At some point I’ll complete and share a better analysis — but that topic could be an entire post (or series of posts).

The end result is a total rental real estate loss of $11,490.  I know, I know…..that’s a BIG swing going from a positive $7,798 in gross rent to a net loss of $11,490.

A large chunk of that loss is depreciation, so it’s only a “paper loss” and is not something that has an immediate hit to our wallet.  The other large chunk was acquisition costs and other one-time expenses to acquire tools and resources to manage/support the property.

I’m not too concerned with this short-term circumstance.  The real test will be reviewing how 2006 turns out.  I plan to manage the properties very closely to keep expenses low.

Stock Investments

I had to sell a handful stock and mutual fund investments because of money needed to purchase an engagement ring and to use as a down-payment for our duplex property purchase.  These were originally purchased in high school and throughout college.

The net gain (or realized gain) was $3,689.

Each individual stock and mutual fund sale had to be detailed out on the Schedule D form.  On the form, you must fill out the description, date acquired, date sold, sale price, and original purchase price.  From there you calculate your gain or loss.

Normally the total gain would then get copied over to your Form 1040, but because I had a prior “long-term capital loss”, I had a carryover amount that I was able to report on my Schedule D form.

Huh??  Let me try saying that again, but this time in simpler English….I lost money investing in previous years and the IRS lets me recoup some of that loss.  Nice of them, right?  But there is a limit each year.  If you total loss is bigger than that limit, then the IRS makes you spread it out over multiple years.

The end result is on Form 1040 I get to report a capital loss of $3000.  This will reduce our overall tax bill further.

Now I do not want to make it a habit of losing money in the stock market.  Nope.  Definitely not!!  Let’s blame it on bad decisions in high school and the dot-com crash of 1999.  Oh well.

It was good news to me that 2005 ended with me earning $3,689 though.  So long as we keep that trend moving forward — having gains — then I’ll be happy.


There are more deductions available before we need to compute our overall tax bills.  In our specific case, they include:

  • Moving expenses
  • Student loan interest deduction
  • Tuition and fees deduction
  • Standard deduction (instead of itemized deductions from Schedule A)
  • Exemptions

All combined, this amounted to $21,119 for the both of us.  That’s a BIG number!  Now what does it mean?

In simple terms, it means we will not have to pay taxes on that much of our income.  Read my lips.  No taxes.

That’s the power of deductions.

Total Tax Bill

As we reach the end of our tax journey, Form 1040 reveals our total tax for the year.

It doesn’t really matter how much was taken out of our paychecks each month for Federal and State taxes.  Those are just estimates.  This is the number that matters.

If it’s bigger than what we had already paid in through the year, then we will have to write a check to the IRS.  If our tax is less than what we had already paid in through the year, then the IRS sends us a refund.

Drum-roll please……

Our total Federal tax for 2005 is $1,563 and our State tax is $453.

Initial impressions?  Not bad, not really that bad at all.  And it is considerably lower than what was collected from our paychecks each month.  That means we will see a BIG refund check coming our way.  Woo hoo.

Next Year

I put in a LOT of work to prepare our tax returns for 2005.  As I mentioned above somewhere, most of the work really is preparation.  It’s pulling together all the details needed.  And there are a LOT of details when you have rental real estate and/or sales of stocks and mutual funds.

When it comes to filling out the actual forms, that part really does not take too long.  If anything, you spend more time “checking your math” at this stage, just to ensure you didn’t make a simple mistake on the forms.6

Knowing that preparation is the biggest time commitment, I will try to document things a little more intently throughout the year.  I already have a good system setup for managing our rental property expenses and income receipts.  But it can always be improved.

Our income next year will be higher because it’ll represent a FULL calendar year of working.  That means more taxes.  But that’s okay.  If we’re earning more, we can certainly afford to pay more in taxes.  But you can bet I’ll be on the lookout for every opportunity to maximize our deductions and save.

So with that, I’m planning to seal up the envelopes this week and send in the returns.  Taxes are officially finished for this year!  Whew!

-FI Champion





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