Things were much simpler when I was young – I definitely wasn’t thinking about taxes!
Being the nerd that I am, I have been working on my 2012 taxes for the last few weeks. I haven’t received all the information to complete them, but I’m filling in as much as possible, and just guessing the rest to see where I end up. We actually ended up owing about $2,900 in 2011, but due to a combination of factors (we paid our 2011 property taxes in 2012, etc) we thought our liability would be less in 2012 – boy were we wrong! Well, it’s a good thing I’m not an accountant, because it looks like I was COMPLETELY WRONG!! As of right now (still missing one W-2, few 1099’s, and a couple more small bits), we owe $5091 in federal taxes….YOWZA!!!
So, how the hell did I screw this one up so badly?? Well, the biggest piece of this was grossly underestimating our withholding… Here’s what our federal withholding percentages looked like:
- Job 1 (mine) – 13.0%
- Job 2 (Mrs AB’s job for the majority of 2012) – 8.3%
- Job 3 (Mrs AB’s job at the beginning of 2012) – 12.8%
- Average – 11.8%
According to TurboTax, our federal tax liability is right around 18.1% – so we weren’t even close! Of course, if you look at our net worth, a $5k tax bill isn’t going to kill us or severely delay our financial independence aspirations, but it definitely isn’t something we were planning for or expecting. Because we screwed up so royally, we’re also going to have to pay a penalty for “underpayment of estimated taxes”. According to the IRS this penalty is due in the following scenarios:
- You owe more than $1,000 in taxes (guilty – we owe $5,032 as of right now)
- You paid less than 90% of your taxes owed (guilty again – we paid approximately 76% of what we should have)
- You paid at least 100% of 2011’s taxes (guilty guilty guilty – as of right now we’ve paid about $4250 less than 2011) – this seems to be for those whose income rose dramatically and along with it their tax burden
So according to the IRS website and TurboTax we definitely are going to owe a penalty, which looks to be approximately $59 as of today – bummer! As crappy as this situation is, it’s 100% my fault and completely avoidable.
My biggest mistake was not adjusting our withholding when we had life changes – like Mrs AB’s job change, selling our house (and losing the interest/tax deductions that go with that), etc. Now that 2012 is done, there’s nothing I can do, so once we receive the last few bits of info and finalize our numbers, we’ll just have to pay our tax and penalty. What I can do is plan better for 2013.
TurboTax To The Rescue (For 2013)
Something I didn’t know (or ignored) is that TurboTax (at least the Deluxe version I’m using) has a “Tax Estimator” function so you can get an estimate of your 2013 taxes based on what you know now. I entered in all the info and it spat out that we’re going to end up owing approximately $22,681 in taxes for 2013, about a 10% increase from 2012. I estimated that our income would rise a little, but I think most of this increase is probably due to the expiration of the payroll tax cut.
How Do I Fix My Withholding?
Now that I know I need to have more money taken out of my check each month, how do figure out what the correct allowances should be on my W-4 form? Well, TurboTax has another feature that will calculate this for you. I know this sounds like a commercial for TurboTax, but if I had looked into this a little more last year, I wouldn’t be facing such a huge financial hit today! It looks like Mrs AB and I will be taking home less money each paycheck during 2013, but hopefully we won’t owe the IRS any money at the end of the year – which would definitely be a relief!
I’ll update you with the final numbers, but that will probably be sometime in the middle of February when all of our statements are available. Until then I’ll just cross my fingers and hope that something changes and we end up owing less than expected!
Have you started looking at your 2012 tax liability? What program do you use, or do you have a tax professional do it for you? I hope things look brighter for you than for us! Let me know in the comments. Thanks for reading.