INK WAD, or "Double Income No Kids With a Dog," may be a humorous acronym, but it comes with surprises during tax season. As our tax situation has become increasingly complex, we've relied on different accountants to help us navigate the process. I want to share some of the lessons we've learned, but keep in mind that they are specific to our situation and may not apply to everyone.
- W4 Calculator - One important tool to use if you have a W2 is the W4 Calculator. The biggest reason for this is that if you get it wrong and owe taxes, you'll be penalized. In our case, we've been hit with penalties of over $1,000, which is a burden we'd rather not bear. So be sure to fill out the calculator accurately each year and adjust your "additional withholding" (line 4c) accordingly.
- Long Term Capital Gains Loss (1099)- Long-term capital gains losses can only be roughly accounted for up to $3,000 per year and carried forward up to $7,000 annually.
- Mortgage Interest (1098) - If you own a home valued at over $750K, your mortgage interest (1098) is capped at $25,700. This is the second major reason you could owe taxes if you misjudge your withholdings in the W4 calculator.
- Donations - When it comes to donations, you can account for up to 60% of your Adjusted Gross Income (AGI). This is important to keep in mind if you plan to be philanthropic or open your own non-profit. If that's the case, you might want to consider a Donor Advised Fund (DAF)
- Roth IRA withdrawals - With Roth IRA withdrawals, if you're withdrawing the principal or contributions, these are tax-free. However, I don't recommend taking money out of your retirement account early, but depending on your financial situation, it may be a helpful tool.
- LLCs - If you have any passive or active income, LLCs can be a useful way to write off related expenses and protect yourself from liability.
- Health Savings Accounts (HSAs) - Finally, Health Savings Accounts (HSAs) are an easy way to put $100 per month towards any related medical expenses (such as dental premiums, over-the-counter meds, out-of-pocket insurance expenses, etc.).
Please note that this advice is not comprehensive, and I strongly recommend consulting an accounting professional. I hope these tips will help you avoid the mistakes we've made in the past.