I got an e-mail I knew was coming regarding a 2015 tax refund. The e-mail was from our CPA (and family friend). The e-mail started “Welcome to the world of No Tax Refunds”. This wasn't a surprise as I had done some rough math. Still, that's never news you want to get. Especially for us, having gotten used to refunds for the past few years.
Our Normal Two-Part Refund
We typically get a refund from Uncle Sam. For simple years, we have the proper amount taken out of my paycheck that would normally lead to a balanced return, but things like itemized deductions (mortgage interest, etc.), credits for having children, and other various components usually push us to get a refund.
On top of it, we always have a ‘refund' fund running in our savings account. Whenever we make any side income, we put a percentage aside. In addition, if we sell stocks, or do other things that we know will be counted as income, we'll put a percentage aside.
Typically, the two of these together makes for a nice chunk of change, though usually it just goes toward savings goals, having funded our new roof, built our ‘one day new' car fund, car repairs, vacation funds, and things like that.
This Year, We Technically Still Get A Refund
Looking at the two part method above, this year we have our savings, and it more than exceeds what we will have to pay, as we've faithfully set aside money at every turn. So, in the end we will still have money ‘left over'. In all respects, it's probably better that we did it this way as we basically took a loan from Uncle Sam and earned (paltry as it is) some interest, as opposed to the usual method which gives them an interest free loan until we'd get our refund back.
Still, the net size is smaller, so it's still a bit less exciting!
One Other Gotcha
Since we had to pay this year, we're now on the hook to make sure that we don't underpay again for a second year. As such, our guy advised that I bump up our contributions from each paycheck to make sure we hit the required amount so that we would avoid the possibility of an underpayment penalty when next year rolls around.
Why We Had To Pay This Year
A few things happened this year that were outside of our normal tax related activity.
- Savings Bonds. I had some savings bonds that had been purchased years ago that had fully matured. They were cashed out and re-invested, but the interest earned over the years was taxable income.
- HSA Deductions. The plan that had previously allowed me to contribute to a health savings account was no longer offered. The HSA contributions in the past were able to reduce our stated income. We didn't have that benefit last year.
- Stock Market Gains. We have a small trading account that did well for a majority of the year, allowing for some capital gains.
- Wash Sale Losses. Although we came out positive for the year, we had some losses as well that reduced our income, but because of silly (I could use a stronger word, but will refrain) rules, we couldn't claim the losses. Eventually we will once we close out the positions, but effectively, the IRS defers allowing you to claim losses regardless if you actually suffered the loss. This is effectively what made us end up with a lesser net amount when adding together what we owe and what I had saved, as I did not ‘pay ourselves' the tax on the losses, though in essence, not being able to claim the losses raised what the IRS sees as income.
What 2015 Holds
We should have a much easier 2015. I don't foresee us having to cash in bonds this year. We'll be back to contributing to an HSA. This should be negligible, as my employer coordinates the deductions. This minimizes the effect on our tax rate. For investments, as long as I clear out the ‘wash sale' stock, we'll be able to capture the deferred loss. Add the increased payroll deduction in place, and we should be good next year.
Readers, how did your 2015 tax return shape up? If you got a refund, what are your plans?