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.
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.
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.
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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I'm just an average mom, trying to live a frugal life and get out of debt. I write about things that have (and haven't) worked to improve my family's financial situation. What works for me may or may not work for you, and you should always consult a financial advisor before making important financial decisions.
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