My Net Worth

I filed my federal and state taxes this week. I experienced a few unexpected twists this year. Nothing major, but I think they are worthy enough to blog about.

First, we bought a house this year. With that comes being able to itemize tax deductions. Moving is also a great time to go through your belongings and donate to charity what is no longer needed.

With that in mind, I bought Turbo Tax's It's Deductible to track and itemize my deductions. Overall, this was a very valuable tool. (Editor's Note: I reserve judgement until the statute of limitations expires - if it does at all - due to the valuations of the items donated.) Overall, the program is useful. It is a bit clunky with respect to editing or changing things after the donation.

To enter in a donation, you have to select a charity and the date. I assumed that the charity I was taking my stuff to would accept it. Turns out they didnt'. No, the stuff wasn't garbage, but their bins were full and the staff was overwhelmed. I had to go to another charity down the street.

As soon as I came home, I ran over to my computer, fired up It's Deductible to make the change in charities. Turns out that this was not an option. So, I had to rekey in the donation under the new charity.

As much as I planned ahead, I wasn't able to get my withholdings down to a level where I would get little back. Maybe I was lazy or a bit nervous. By the 4th quarter, my federal/state w/h's were $65/week combined...and I still got a refund in excess of $1k.

I learned that getting a state tax refund could be a costly check. Why? The amount you can claim for federal taxes is the amount withheld, not owed. If you get a refund in year 1, it becomes taxable in year 2. If you marginal rate in year 2 is higher than year 1, this will raise your taxable income.

Fortunately, you can deduct state/local sales taxes. While each situation is unique, mine was such that claiming the sales tax deduction was a better deal when looking at both years.

As for e-filing, the feds won't accept certain returns. My return had more than one page of charitable donation listings and I had to snail mail my return. I don't really mind, except that the processing/refund time increases.

Overall, tax year 2005 was a good learning experience. My estimated taxes for 05 were less than the actual refunds, but not by much. The major lesson learned: don't get a state tax refund (that's taxable income in the following year), especially if you expect your marginal rate to be highger. Taking the sales tax deduction made more sense for me.