I just finished filing my taxes.  I must say, even with the addition of a little ‘business income’, the whole process was pretty mundane.

I had under-withheld by about $400, which isn’t bad, considering that I didn’t really ‘know’ what my annual income was going to be.  I didn’t have to pay any penalties.  The tax forms were submitted electronically to both the IRS and the Georgia Department of Revenue.

The IRS allows payments via a direct draft from a checking or savings account - but the State of Georgia requires a check.  So, even though I ‘e-filed’ both returns, I still had to mail a check to the Georgia Department of Revenue.

A few weeks ago, in an effort to reduce taxes and increase retirement savings, I opened a SEP-IRA.  And, today, I authorized a withdrawal from ‘business checking’ to my Vanguard SEP-IRA account.

Interesting fact about the Vanguard SEP-IRA -

While Vanguard has ‘minimum-contribution’ limits for most of their funds, these limits are ‘waived’ for those who open SEP-IRAs.  Why?  Well, not all businesses will make enough money to meet the ‘minimum-contribution’ limits.  Also, while they typically charge a $20 a year ‘maintenance fee’ - this fee will be ‘waived’ if you select ‘e-delivery’ of all financial information.

I’m going to put my contributions in The Vanguard 500 Index Fund (VFINX)

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Over the course of my financial life, I’ve made some pretty silly mistakes. I’ve financed the purchase of brand new cars. I’ve purchased goods and services that I never really used. But, my biggest regret - by a long shot - is that fact that I failed to aggressively fund my 403(b) retirement account from the ages of 21 to 31.

For the past two years, I have been fully-funding my 403(b) account.

By doing so -

I reduce my taxable income. Instead of sending tax payments to Uncle Sam, I send contributions to my retirement account. Depending on what your effective tax rate is, the savings can be quite substantial.

I increase my chances of retiring with wealth and dignity. There are no guarantees, but I plan to contribute as much as I can, as often as I can, for as long as I can. I hope to save enough money to retire and enjoy spending time with my friends and family.

I really wish that I would have contributed more during my first decade as an ‘adult’. But, I can’t go back and change the past - and perhaps the fact that I was slack then is the primary motivation for being aggressive now.

If you have questions about effective tax rates,consider reading this article I wrote about the subject.

This article is part of March’s Money Blog Network Series on Taxes.

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Tonight, I’m sitting down to file my taxes.  I’m still waiting for a few 1099s to arrive in the mail, so I’ll probably just enter my basic information and get a feel for where we stand.

Last year, I managed to fully-fund my 403b account.  By doing so, I have reduced my overall taxes.  But, I also earned some money from blogging and eBay sales.  I’ll have to pay income tax and self-employment tax on this income.

I’ve already entered some ‘estimations’ - based on a spreadsheet that I have that tracks my income and expenses.  It looks like we did a great job estimating our with-holdings, and we’ll be within $100 of where we need to be.  Of course, this doesn’t mean that we won’t ‘pay’ taxes for 2007 - But it does mean that we did a good job of estimating our ‘prepayments’ - And we avoided giving the federal government an over-sized interest-free loan.

I actually enjoy filing my taxes.  It’s always interesting to see how the various online tax preparation sites have changed / improved over the years.  I usually pick two or three online preparation sites, enter my information, and check for discrepancies.

By the way - many tax payers can file their taxes for free.  Checkout the IRS site for more information about free file.

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It looks like the President and various members of Congress have agreed to the details of a new economic stimulus plan.

For more information about the plan, read this article from the NY Times.

Basically -

If you made $3000 in 2007 (or more) - you should receive a rebate check of $300 (or more).

If you are marred (and have kids), your check should be between $600 - $1200.

When I receive my check, I’m going to deposit it into my non-retirement savings (and forget about it!).

What will you do with your check? Are you going to use it for debt reduction? How about building up your emergency fund? Or, will you use it to buy something nice for your family? What do you have in mind?

The details surrounding the plan are still a little ‘fuzzy’. It will be interesting to see how things work out. I wonder how long it will take for this plan to actually work its way to the president’s desk?

By the way, this article from Yahoo Finance seems to indicate that families with kids could receive MORE than $1200 dollars.  Read the article.  Is that what it is saying to you?  If so, my family could conceivably receive a check for $2100!?!

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I will be the first to admit - I know very, very little about taxes. So, in an effort to learn a little bit more about ‘tax rates’, I did a search of the IRS website and I found this page - 2007 Federal Tax Rate Schedules. (Please visit the IRS site for detailed information about your tax rate. I’ve provided a summary of the information provided for those who are Married - Filing Jointly. This summary is provided solely for the purpose of discussion, and you should consult with a qualified tax professional before making any tax-related decisions.)

Married - Filing Jointly

When most people talk about their taxes, they talk about their “tax bracket”. I have been thinking about my “tax bracket” - and since my wife and I earn between $63,000 and $128,500 - I assumed that I was in the 25% “tax bracket”. I was, as is often the case when it comes to stuff like this, wrong. Or, at least, I was “kinda” wrong.

See, my “tax bracket” is the percentage of tax that I pay on my “last dollar” I earn. In my case, that would put me in the 25% “tax bracket”.

So, if I want to figure my federal income taxes for the year, I just multiply my taxable income by .25 and, bingo, I know how much I’ll owe, right? In the words of Lee Corso, “Not so fast, my friend!”

The .25 is multiplied by the amount of taxable income that I earn ABOVE $63,700. Different rates are applied to the amount I earn BELOW $63,700.

Let’s assume, just for this example, that my wife and I had a taxable income of $70,000. (This, by the way, is not the time or place to discuss what “taxable income” is. See the bottom of this post.)

We would pay a 10% tax on the first $15,650 of our income. ($1,565)

We would pay a 15% tax on the next $48,050 of our income. ($7207.50)

We would pay a 25$ tax on the next $6,300 of our income. ($1575)

If our taxable income was $70,000, our total federal income taxes would be $10,347.50.

Our EFFECTIVE tax rate would be 14.78%.

Again, I will remind you that I know very, very little about taxes, but I think I have this right. Please, if you have corrections or observations, I’d love to read them. Leave a comment!

A few quick notes:

1. Taxable Income is (generally speaking) gross income minus deductions.

2. $70,000 is just a random number that I chose for my example.

3. One of my goals for 2008 will be to reduce my taxable income.

4. My wife and I have been thinking about opening a 403b for her, through her work. By doing so, we could reduce taxable income for 2008 - but NOT by as much as I thought. One of the selling points - mentioned several times by one particular financial salesman - has been the ‘fact’ that our taxes would be reduced ‘by 25%’. Clearly, that isn’t the absolute truth. Our taxes will be reduced, but the EFFECTIVE rate of reduction will be much less than 25%.

5. Our tax system is very, very, very difficult to understand. I would prefer a flat-tax or a national sales tax - if only for the sake of simplicity.

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