The Tax Man Cometh

For the 2008 tax season, I made the mistake of buying Turbo Tax too early and missing out on subsequent price cuts and sales. This year I decided to be patient and just as I expected, Costco issued a $10 off coupon that's effective between 1/27 - 1/24/10. My taxes are relatively straight forward so I purchased Turbo Tax Deluxe (Federal and State) for $39.99. I spent a good part of Saturday morning estimating my tax liability for 2009.

I was a bit worried about my 2009 taxes in light of the fact that I got a significant windfall on New Year's Eve. The most I've ever paid in taxes was back in 2007 when I temporarily halted my 401k contributions and sold off a bunch of my stocks to pay down a significant chunk of my debts. In 2007 I had to pay $653 in Federal taxes and $489 in State taxes.

I thought my taxes in 2007 were pretty bad. Do you want to venture to guess how much I approximately owe this year?

Wait for it.... wait for it...



$916 for Federal taxes and $2,359 on State taxes. Oy! If you consider the amount of tax that had already been taken out, I'll be paying an obscene amount (IMHO) this year. I never ever thought I would pay this much tax.

I'm not complaining, mind you. I've always believed in a progressive tax system. In my opinion, taxation should be based on one's discretionary income and ability to pay. I also actually agree with Justice Oliver Wendell Homes that you pay for the privilege of living in a civilized society by paying taxes. There's absolutely no excuse for cheating on taxes and I'm prepared to pay my fair share.

Besides, I already suspected that I would I owe about $3,679, so I mentally took that amount off the top of my windfall from the get-go. There are no disappointments or surprises here.

Actually, I did learn something new while estimating my taxes. I sold my company stocks for a $305.97 loss earlier this year. In a separate transaction, I sold the stock for a realized gain of $405.91 for which I was hoping to take an offset of my $306 capital loss. Unfortunately, I am subject to the wash-sale rule and can only take a part of the capital loss.

A wash-sale rule occurs when you sell a stock for a loss and acquire the same stock (or a substantially identical stock) 30 days before and after the sale. The rule was established by the IRS from preventing taxpayers from creating a tax loss while still holding a position in the same stock (and thereby avoiding capital gain taxes). It is irrelevant whether you intended to harvest a loss or not.

Anyhow, I can only claim $168.31 of my loss in my tax returns this year. The $137.66 loss that I'm prohibited from taking this year can be used to reduce my cost basis for the stocks that I acquired during the 60-day period, though. I guess if I'm really motivated (or bored), I'll read the IRS Publication 550 - "Investment Income and Expenses" to learn more.