[As with anything tax-related, see my disclaimers.]
My previous twenty tax returns are a treasure trove of lessons learned. In many ways, my experience can provide a road map for young, up and coming professionals that are fresh out of college and embarking on the rest of their life. Here’s a one sentence, Jeopardy-summary-plus-commentary for each of the previous twenty tax seasons.
1999 – What are W2s, 1099s and 1040s? First time tax filing. Three separate W2s and a 1099, meaning a full 1040 instead of the 1040-EZ.
2000 – What’s MFJ, 1040-EZ, and wage garnishment? MFJ = Married, Filing Jointly. No 1099s this time but still three W2s between my bride and me. Discovered that the state can use tax refunds to cover past due bills, bills I didn’t even know existed.
2001 – What are Hope and Lifetime Learning Credits? First time getting a credit, this time for tuition and fees (form 8863). Required filing a 1040A. Three W2s to account for.
2002 – What are Child Tax Credits, Earned Income Credits, Part Year Residents, and local income tax? Moving means filing taxes in two states. Child numero uno born, but since we were now poor graduate students, we got both a Child Tax Credit and a Earned Income Credit. Introduced to the concept of county governments collecting income taxes. First time getting a student loan interest deduction for my undergraduate student loans. Three W2s and a 1099.
2003 – What are tax brackets? Likely the first year when our taxable income pushed us into a new marginal tax bracket due to a summer internship at MegaCorp. With an offer of full-time employment from MegaCorp, I question my plans of completing a PhD.
2004 – What are itemized deductions? Accepting the offer at MegaCorp means moving states again, this time to a state with no income tax. Becoming first-time home owners introduces us to deductions on mortgage interest and property tax, making it the first year we itemize deductions. Consolidated our student loans to lock in a super low rate.
2005 – What is the Qualified Dividends and Capital Gain Tax Worksheet and what is an adjusted cost basis? MegaCorp’s compensation includes stock awards and an employee stock purchase program (ESPP) and this is the first year that I experience both. Dip toes into the ESPP and hold both ESPP shares and stock awards instead of selling.
2006 – What is a disqualified ESPP disposition and an adjusted cost basis? In 2006 I sold the ESPP and stock awards from 2005 as well as everything I acquired in 2006. To prevent paying tax twice on the shares, introduced to adjusting the cost basis (form 8949). Questioning why it has to be so complicated. Discover that my 10% discount on ESPP shares is always taxed as regular income, even if I hold the stock longer than the two-year holding period. Go all in on ESPP, maximizing my contribution to buy shares and flipping them immediately.
2007 – What is a mortgage servicer? Did our first refinance this year to stamp out a HELOC and secure a better rate on our primary mortgage. Learned that mortgage brokers almost always resell mortgages, leaving us with three mortgage interest statements.
2008 – What is a child tax credit phase out? First year we brush the child tax credit phaseout. In hindsight, making an IRA contribution would have delayed this phaseout for another year.
2009 – What is the IRA deduction? First year we make a deductible IRA contribution. Four kids now, but only a partial child tax credit.
2010 – What is a student loan interest phase out? First year our modified AGI cuts into our student loan interest deduction, effectively increasing our student loan interest closer to their nominal rate. Another refinance to take advantage of even lower mortgage rates.
2011 – What is an abnormally quiet tax year?
2012 – What is a non-deductible IRA contribution? Turns out IRA deduction has a phase out as well, introducing us to non-deductible IRA contribution and tracking IRA cost basis for future tax years.
2013 – What are excess FICA contributions? Switching jobs to LittleCorp, a privately held company .3% the size of MegaCorp. Means another cross-country move, this time with us footing the bill and scoring a deduction (yea!) but back in a state that levies income tax (boo!). Learn that multiple employers during the same year can lead to a credit for excess Social Security contributions. Income change brings back a full child tax credit and IRA deduction. Made maximum annual contribution to an HSA at MegaCorp before exiting.
2014 – How are excess HSA contributions taxed? LittleCorp doesn’t have a health savings account (HSA) based health plan and I learned that my contribution to my HSA at MegaCorp was excessive, requiring a taxable distribution.
2015 – What are ISOs, self-employed 401(k)s, the AMT, and robo advisors? LittleCorp acquired by DumpsterFireInc means incentive stock options (ISOs) from LittleCorp are no longer pretend money. Cashing out means our first time being exposed to the alternative minimum tax (AMT). Open self-employed 401(k)s for a side business, enabling back door Roth contributions. Signup for Wealthfront and introduced to tax loss harvesting. DumpsterFireInc has ESPP and I redeploy my maximize-and-flip strategy from my tenure at MegaCorp.
2016 – What is the Credit for Minimum Tax or additional medicare tax withholding? The additional medicare tax introduced by Obamacare means we end up paying too much in medicare tax and credit for the overpayment. Find out that paying AMT in 2015 translates to a AMT credit (form 8801) that we ultimately don’t realize until 2019. First time making estimated tax payments to avoid paying penalties for not withholding enough.
2017 – What is AMT on ISOs, an 83(b) election, a 401(k) rollover, or 1040X? Jumped ship from DumpsterFireInc to be employee number twelve at StartupInc. Exercising remaining ISOs from DumpsterFireInc within the 90-day window but holding on to them past December 31st means more AMT. I risk early exercising ISOs from StartupInc and make an 83(b) election to avoid paying AMT on shares I can’t even sell. Rolled over 401(k) from DumpsterFireInc into self-employed 401(k) to escape crazy high fees. Find out in 2018 that paying AMT during 2017 actually meant my state income tax refund wasn’t completely taxable income, leading to an amended tax refund (form 1040X) to get back $150 of our phased-out child tax credit. A lot learned this year.
2018 – What is itemized deduction bunching? With 2017 tax law introducing a cap on state and local taxes (SALT), I discover that shifting 2018’s charitable contribution to 2019 allows us to take the standard deduction in 2018, the first time in fourteen years. Alternating years between itemized and standard deductions means saving a little more on tax. Significantly more tax paid this year but a bigger child tax deduction and phaseout balances everything out.
2019 – What is a 199A dividend, 8801 credit, dependent child credit? It’s an “itemize” year and we’re finally able to realize the AMT tax credit. I learned about 199A dividends, saving 44 cents of tax. Ka-ching! Sad face for the oldest child moving from child deduction to dependent deduction, a year earlier than I expected.
Tax Filing Size
Here’s another view of the past twenty years with the number of pages in our federal return in blue, and the percentage of tax paid as a percentage of our AGI in red, with trendline:
Maybe my return could fit on a postcard if it was printed on microfiche.
Reviewing the past twenty years of my tax returns has been illuminating. My taxes have definitely become more complicated over the years but not all at once. Some of the complication has come through tax law changes, but most of the changes have been through hitting normal milestones on a young professional’s trajectory.
There’s a wealth of lessons learned along my journey that I hope to address in future posts. If you have additional lessons that you’ve learned along your path, I’d love to hear about them in the comments.