Does frugality decrease tax return/ increase taxes owed?

[texastumbleweed]

We are self-employed and work from home and receive mostly 1099's, therefore we try to take advantage of all our business expense tax write offs.  For example, before discovering mmm, we would have a large eating out budget, but 50% can be written off.  Now that we are barely eating out, driving and lowering our utilities, I'm concerned it might bite us in the butt with a much larger tax bill as our income has also gone up.  We usually get a small refund and now I'm not sure if we should be setting money aside for taxes (see previous post about difficulties finding a tax calculator for our situation that lets you input children and take deductions.)

Thoughts on this?

[seattlecyclone]

Yes, if you have fewer business expenses you'll owe more in tax, but you'll also be able to keep more money because you didn't have those business expenses in the first place.

As for calculators, have you tried Excel 1040? It should be able to cover most scenarios.

[teen persuasion]

Are you contributing to tax advantaged accounts?

The lower we got our expenses, the more money we could divert to retirement accounts.  That lowered our AGI, lowering our taxes AND increasing our credits like EITC.  Our state matches the EITC at 30%, and the child tax credit at 33%.  So for us, frugality increased our tax refunds.

Then we used the refunds wisely - first to pay down our high interest mortgage, later to fund Roth IRAs.

[texastumbleweed]

Is a tax advantaged account like a traditional IRA?  No, right now we just try to max out our roth IRA's.  Is that not the best place for savings?  We are new to mmm, so we are just getting going on reducing expenses and increasing savings.  This year there is a chance we will have a small amount saved on top of the roth's, but next year we should be able to save a lot more.... 

[Undecided]

We are self-employed and work from home and receive mostly 1099's, therefore we try to take advantage of all our business expense tax write offs.  For example, before discovering mmm, we would have a large eating out budget, but 50% can be written off. 

Were you working from home, but heading out to lunch or dinner and claiming the cost as a deduction?

[texastumbleweed]

yes, there is a separate office and the team typically eats out most days.  now we cook for everyone.  that also included a lot of buisness meetings over coffee that we now more commonly would have at our home. 

[MDM]

Is a tax advantaged account like a traditional IRA?  No, right now we just try to max out our roth IRA's.  Is that not the best place for savings?  We are new to mmm, so we are just getting going on reducing expenses and increasing savings.  This year there is a chance we will have a small amount saved on top of the roth's, but next year we should be able to save a lot more....

Does this help?  If not, what seems missing?


It isn't clear what you seek in a tax calculator.  There were several suggestions in the other thread, one of which has been repeated above.  Any of them "lets you input children" - what type of deduction input do you seek?

See https://www.bogleheads.org/wiki/Traditional_versus_Roth for that discussion.  For most people, traditional is better than Roth....

See the 'Investment Order' tab in the case study spreadsheet for some thoughts on "the best place" for savings.

Also consider http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/.

And everyone was "just getting going" at one time - stick with it!

[texastumbleweed]

Whoa, those links made me feel way in over my head.

To answer your question about which calculations I am looking for when I do a simple google search, teh calculators I have found have been too simple.  They don't factor in children (for credits) or allow you to enter business expense deductions (just profit and loss.) The main place our taxes seem to change when I am doing them is when I plug in our children (3) and our business expenses.  We usually owe several thousand until I enter that information and then we get a refund.  Since we are spending less (and saving more, but still not a ton), i just want to run the numbers to see if we need to set some aside. The one some have posted above seems so complicated I just immediately glazed over. 

I'm just trying to get a rough estimate of where we are heading tax wise and that seems surprisingly hard to do. 

In terms of the tax brackets, we are at the top end of 15% with a possibility for 25% in 2016 (freelance so hard to say until the fall.)  For 2017, it is very likely we will be in the 25% bracket with some bigger clients already lined up.  This year my goal is to max out our Roth Ira, but now I'm still confused about what is best based on the very interesting links above.  We are self-employed and have never had a 401k for either of us.  Matching sounds heavenly, but free schedules are a nice trade off.

[MDM]

Whoa, those links made me feel way in over my head.

Some of the bogleheads wiki entries do have "too much information", but AFAIK it is good information. 

E.g., for traditional vs. Roth,

The main reason to prefer one type of account over the other is the comparison of marginal tax rates. If your marginal tax rate now is higher than your estimated marginal tax rate at retirement, then the traditional account is better; if it is lower, then the Roth account is better.

That's the main point, and the rest is secondary.

To answer your question about which calculations I am looking for when I do a simple google search, teh calculators I have found have been too simple.  ...
The one some have posted above seems so complicated I just immediately glazed over.

Looking for the Goldilocks^TM tax calculator, eh?  How did you do your 2015 taxes?

[texastumbleweed]

turbotax.  i knew we wouldn't owe anything the last two years so i didn't worry about putting any aside (as i had done before.)  Now that i'm really trying to max out our ira this year, i'm more concerned about having to also pay taxes.

[MDM]

turbotax.

Have you tried opening your 2015 return, saving it to another file (e.g., happyclouds_2016_estimate) and then adjusting as needed from 2015 actual to 2016 estimated?

The difference in tax brackets will likely be within the margin of error of your estimating ability.  One potential issue is if you are trying to hit one of the tax law step changes (e.g., saver's credit).  AFAIK, from the previous suggestions only the case study spreadsheet has the 2016 tax tables.

[DavidAnnArbor]

can you do a 401k as well as a traditional ira on your own ?