Uncle Sam is Going to Suck Me Dry
Posted by Lynnae on February 13, 2008
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I almost fell off my chair when I saw how much we owe in taxes!
I broke down and did my taxes yesterday. I knew it would be a headache. We had a lot of unusual things to deal with last year. We inherited an annuity, my husband had 6 (yes, that’s SIX) jobs, and we declared my blogging a business. I knew this wasn’t going to be my typical get-done-in-an-hour 1040.
I collected all of my paperwork and receipts and sat down. Entering the 6 W-2s was a tedious, but easy. I started to get a little worried when I noticed that because of the very part time nature of some of the jobs, not many taxes had been held out, especially at the state level. And Oregon has a hefty little income tax.
I also got the business income and expenses entered in relatively quickly. I had organized my receipts ahead of time, so it was pretty painless. And TurboTax really did a good job of walking me through the steps as far as declaring business income an expenses.
But then there was the 1099 form for the annuity. Before I get into that, let me back you up to last January. My husband and I knew we were going to receive a small inheritance in the form of an annuity. When we received the paperwork to cash out the annuity, we consulted with an accountant to find out what the tax implications were. The accountant told us that we would only be responsible for taxes on the amount of interest the annuity had earned. Since that was only 1/8 of the total amount of the annuity, we figured it wouldn’t have a big impact on our taxes this year.
Fast forward to last month when we received the 1099. I opened the envelope, and I saw that the ENTIRE amount of the annuity is marked as taxable. I had my husband call Citibank (yes, my favorite bank) to get an explanation. It turns out the original money that was invested in the annuity was rolled over from an IRA….and hadn’t been taxed yet.
So despite the fact that we’ve had the lowest income that we’ve had in years, and despite the fact that my husband was unemployed part of last year, we owe more taxes this year than we ever had before. We even got hit with a penalty for not holding out enough taxes!
There are a couple of things I have learned from this situation.
Do the Research Yourself
I’ll be the first to admit I don’t know much about taxes, retirement plans, inheritance law, or investing. When my father-in-law passed away, we knew that half of the annuity would pass straight to my husband, and the other half would go straight to his sister. We knew that we wanted to use the money to pay down our debts. And all of that money looked like it would accomplish a lot toward our debt.
The forms we received from the annuity company advised us to consult an accountant before cashing out, so that’s what we did. And we obviously got bad information. I’m hesitant to completely blame the accountant, because my husband and I were not informed as to what information we would need. After consulting a tax expert, I found out that the accountant would have been right about the amount of taxes we owed if the original money invested in the annuity was after tax dollars. And we now know it wasn’t.
Had we been a little better informed and educated, we probably would have thought to have asked where the original money came from. We would have understood more about different kinds of retirement funds and the tax implications. And most of all, we would not have put 100% of our trust in what the accountant said. Everyone makes mistakes, including accountants. It’s best to study things for yourself, before consulting the experts. That way you at least know what questions to ask.
Keep Good, Organized Records Before You Die
It would have been a lot easier to figure out what kind of money had gone into the annuity if we had some kind of paper trail. Unfortunately, we only had access to a few years of tax returns, various bills, the original annuity application (which didn’t mention what kind of account the money came from), and a whole bunch of other random papers.
To my father-in-law’s credit, all of his papers were in one place, so we didn’t have to go searching through his entire house. Still, a briefcase full of papers in no particular order is a tough thing to sort through when you’re mourning the death of a loved one. I think I’m going to be putting together some neatly organized files, in case anything ever happens to me. Because if I were to get very sick or worse today, my husband would have a hard time making sense of my "organized mess". I know where everything is, but my "system" probably doesn’t make sense to anyone else.
If You Make a Commitment, You Will Be Tested
Last year I made a commitment not to incur any new debt. I also shredded my credit cards and vowed to never use credit cards again. Now we have a tax bill that is threatening to wipe out every bit of emergency fund we have and then some. How will we deal with it?
First, we’re thankful that we have the emergency fund we do. It’s almost enough to cover our taxes, and I think we can come up with the difference between now and April 15. It’s scary to go back to having no cushion, but at least we won’t be going further into debt.
Second, I’m going to pray and trust God. God knows my heart. He knows I don’t like debt and that I’m working hard to get out. And I believe He wants me out of debt. Do I believe God will swoop down from the sky and write me a check for the amount of our taxes? Probably not (though I wouldn’t complain). I do need to be mindful of the opportunities God sends my way to make a little extra income, though. And I believe there will be opportunities.
Finally, I’m looking forward to seeing my faith increase more. 10 years from now, I’m sure I’ll look back and marvel at how our needs were met in some great way, like they were a few years ago. And that will provide me with greater faith for the next trying situation that comes our way.
Have you ever been hit with an unexpected large financial expense? How did you handle it?
Photo by OhioProgressive.
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23 Responses to “Uncle Sam is Going to Suck Me Dry”
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I am not a financial expert. I'm just a wife and mom doing the best I can to live a frugal life and get out of debt. Like any human, I make mistakes. I write this blog out of my own experiences, and nothing I write should be taken as expert advice. If you need financial advice, please consult a professional.
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He just finished with me and now he headed over to you. It sucks being single with no dependents. He just loves to pick on us! Good luck on getting the tax bill taken care of.
Too bad about the tax troubles. Live and learn!
Congrats on the GRS guest post as well!
Mike
Sorry to hear that you owe taxes! We haven’t done ours yet and I am hoping we either owe nothing or just a small bit. I have everything organized already-I agree that can make the process a little easier.
We are currently in the middle of one of those unexpected huge financial pitfalls-my husband’s truck which he NEEDS to for work decided to completely stop working yesterday. We haven’t even heard an estimate yet, but I know it will knock our socks off. Emergency funds and a lack of debt can make these things so much easier to handle.
Take Care
LJ
This sucks. Is there any way to complain to/about the original accountant? He probably should have asked you where the money came from (and he might have done) and there’s an outside possibility that you’re entitled to some cash from him.
If God does swoop down from the sky and write you a cheque, be sure to take a photo for me
. Otherwise, I think you’re right, you’ll manage and something will probably turn up.
I had the same thought as Plonkee. While I understand the sentiment of not looking for someone else to blame, in this case it may be warranted. I am an accountant myself, and would say that you did your due diligence when you consulted with an accountant. Not being a tax professional, you can’t be expected to know all the questions that need to be asked. The accountant should have. And if you didn’t know the answer at the time, he should have insisted that you find out before giving you advice. Just like any other professional, the accountant is held to a higher standard when administering advice in their field of expertise. The fact that you acted on his advice and now find yourself in trouble is known as “detrimental reliance.”
It looks like you may have already spoken with the IRS, but if not, I’d encourage you to do so. Let them know the circumstances, particularly that you DID speak with a professional about the tax implications and what you were told. (Especially if you have any documentation of having done so: a letter, or even a consulting bill.) Knowing that you at least tried to be proactive in approaching the situation correctly, they may agree to waive penalties and interest. I wouldn’t necessarily hold my breath, but it’s worth a try.
My marital status changed to “married” this year and my husband wasn’t withholding enough from his paychecks, so we were hit with a nice IRS bill, too. Luckily, the state refund we will get will almost cover the amount we owe the feds.
ps- Last night, my husband and I adjusted his allowances!
Bummer! Taxes are no fun. I dislike them in the extreme because being self-employed I have to deal with them more than the average guy or gal.
You probably already know about my 2008 tax story. I just found out last Friday that I owe another $1,200 on top of what I’ve already paid. Yay.
Can you tell how excited I am?
I really just hate IRS taxes - I’ve already told you my sad story. I don’t mind supporting our government - I just wish they would be more frugal in their spending. We all try to be careful, shouldn’t they do the same?
On a brighter note, I know God will help you through this! Hang in there sister!
That is so disappointing! The other thing is that the rules often change every 10 years or so.
I hate that–we dealt with a similar situation when my grandfather passed away and other similar when we had to cash in our Mutual fund due to unexpected expenses.
Ouch! Sorry to hear about the tax news, Lynnae. That’s a huge unexpected bill to deal with; I know it’ll all work out somehow, but I’d be seriously upset myself.
Wow. I have been putting off doing mine. On top of the business, I had to cash out my 401k to survive the summer. They withheld taxes but I am still going to get hit with the penalty. Bless you for at least getting them done early and don’t forget that if you can’t pay them all right now, the IRS does take payments. I think it’s form 9135 but that’s off the top of my head so it could be wrong.
You may be able to avoid the penalty. I can’t think of the form off the top of my brain at the moment, but you can show that your income was different from 06 and/or that the income was received at unequal intervals through the year. The penalty may be reduced or eliminated. I’ll get back to you with the form number tomorrow.
Form 2210. I don’t know if TurboTax can do it. It’s a bit tedious. E-mail me if you have any questions about it.
I am putting together a “Survivors folder for both of us. It will have the following:
Insurance Info
House Mortgage info
Will, regular and living
walkthrough instructions
All of the bank accounts
Not a fun topic to discuss, but i can’t imaging my wife digging through everything while weeping those tears of joy…I mean sadness!
Did my taxes the other day and wish I hadn’t. If you don’t have kids and have your own business be prepared to pay the piper! I hate self-employment tax, just doesn’t seem fair.
I don’t know how much your husband made with his 6 (!) jobs, but if he is over the threshold for social security (about 95,000) he is entitled to a refund of his 8% FICA taxes.
Anyone else think its outrageous that we are paying 15% of our salaries towards a system that will not even be solvent when we reach retirement age?
It took half of the month but he finally came around to my house, not only does he add insult to injury by taking all my money being single, but when the it all went south for me and I had to take my 401k to have a roof over my head, eat,
and drive from job interview ect… the prick now tells me that he wants a little over one third of my money that I now don’t have to retire on, hate the goverment more that ever thanks for a place to vent…..dan l.