The last few months have been hectic and I haven’t had as much time to blog as I’ve wanted. I filed my 2021 taxes in April, but writing a blog post about it took a back seat to finishing my book on 529s. While it’s a few months late, I felt like it was still important to share what I learned. As with every tax year, I learned a lot, including from some mistakes I made.
Tax Filing Process
My tax filing process changed a bit this year. What stayed the same was that I still used my own custom spreadsheet to compute my taxes. I update the spreadsheet depending on what’s changed for the current year. It’s time consuming but ensures that I understand every aspect of the process.
I’m not a CPA. I like to use another source to check my work. In the past, I’ve put my tax data into the online version of TurboTax to sanity check my spreadsheet. This year I took Frugal Professor’s suggestion and used FreeTaxUSA instead.
Alas, I couldn’t file with FreeTaxUSA because of some ISO transactions that I had in 2021. Instead, I used FreeFillableForms, an IRS site that provides tax forms in a digital format and supports e-file, regardless of income level. Drawbacks include needing to manually enter all of my W2s and knowing what forms I needed to file. The site is reset every tax season, so nothing is pulled forward. I’m okay with manually entering data in exchange for avoiding TurboTax.
I usually file my state taxes using a similar site. It’s no secret that Intuit was behind the site. Last July, Intuit informed the state that they were dropping the site. With no way to e-file for free, I mailed in a paper copy of my return. This meant waiting a few more weeks for the state to process my refund, but I didn’t think it was a huge deal. This action deepens my disdain for Intuit.
2021 Filing Summary
- 5 child tax credits, 1 dependent credit. In 2022, this will become 4 and 2, respectively.
- I bunched my 2020 and 2021 charitable gifts into 2021 and itemized my deductions. This increased the total amount of income I could deduct across both years
- AMT Tax Credit of $1,436, that I carried over from 2020. I’ve carried this credit since 2017, which required filing Form 8801 each year. Now that I’ve recaptured the complete credit, I won’t need to file this form in 2022.
- Ordinary Dividends: $1634, Qualified: $1314 – Up 16% and 51% from 2020, respectively
- Interest: $310, down 90% from 2019, or down 75% if you exclude the savings bonds I sold in 2020. I didn’t chase as many bank signup bonuses in 2021
- Business Loss: -$117 from some business expenses related to my 529 book
- I rolled over over a workplace 401(k) plan, messing up a backdoor Roth conversion
- I helped my four oldest children file their returns, two of them for the first time.
Lessons Learned (or Rediscovered)
FreeTaxUSA Doesn’t Mix with ISOs. I exercised ISOs during 2021 and held them beyond the end of the year. I had to include the bargain element in my AMT calculations (Form 6251, line 2i). In addition, I had sold some shares that came from ISOs that I exercised years ago. Because I’d paid AMT on those shares previously, the capital gain had to be adjusted down for the purposes of the AMT (Form 6251, line 2k).
Fortunately, my AMT remained below my regular tax, and no additional tax was to be paid. But unfortunately, FreeTaxUSA doesn’t support either of these scenarios, meaning that if I wanted to file with FreeTaxUSA I’d have to ignore the transactions. I don’t know if the IRS would care because there was no net tax difference, but it seemed easier to avoid trouble and not use FreeTaxUSA.
Here’s the excerpt from FreeTaxUSA:
We support ISO transactions that aren’t qualified and were sold in the same year they were exercised. If the exercised options weren’t sold the same year or you have qualified ISO transactions, we won’t be able to support your situation and you’ll have to file with another software.
How to Mess Up a Backdoor Roth Conversion. I executed a backdoor Roth in 2021. This meant contributing to a traditional IRA and rolling it into my Roth IRA a few weeks later. Later in the year, I rolled over a workplace 401(k) from a previous employer into a traditional IRA. What I should have immediately rolled the money into my self-employed 401(k) before the end of the year, but I didn’t. Screwing this up meant I paid $1,734 more in federal tax and $331 in state tax than I would have otherwise.
I fixed the mistake in 2022 by rolling over the rest of the after-tax contribution into my traditional IRA and the rest into my self-employed 401(k). I’ll need to file Form-8606 again in 2022 to track the backdoor Roth.
Business Loss. I started working on my 529 book during 2021 but I didn’t publish it until 2022, so I had a net loss. I decided to file Schedule C to capture some of the expenses. What was interesting is that just $9 of loss decreased my tax bill by $50. This is because I’m in the middle of some credit phaseouts, so even a small drop in income restores some of the credit. In other words, the tax brackets are a lie. I’ll be filing Schedule C in the future to capture additional expenses as well as profit from book sales.
My tax filing in 2021 was the biggest yet: 39 pages for federal. I’m hoping that will drop a bit in 2022 since I won’t need to file Form 8801 (four pages). If Congress ever gets around to closing the backdoor Roth, I expect it to get even smaller in the future.