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I’ve Been Overpaying My Taxes!

As a personal finance blogger I’m almost too ashamed to admit that I’ve been overpaying on my taxes the past two years, and almost did so again this year. When I say “overpay” I’m not referring to having too much in taxes withheld and then simply receiving a tax refund at the end of the year, I’m talking about money that I can never get back. This probably gives me a good reason to start using a tax professional, but alas I’m still too stubborn. Not to mention I’m hoping that I’ve finally worked out all the kinks in my taxes and moving forward I won’t screw them up. Tax planning is akin to financial planning, and other than earning more income it is probably the most important thing you can do for financial betterment. Take for instance those that fall within the 25% tax bracket, their income above a certain threshold is being taxed at an astounding 25% which  is much higher than most actually need to pay. There are deductions. credits, and tax deferred investments that will help you pay the tax man quite a bit less. It was until last week that I thought I had all of these legal loopholes figured out, but it turns out I couldn’t have been more wrong.

To give a high level background, I’m a married man with a day job outside of blogging, but I’m also fortunate enough to bring in a few extra dollars with blogging revenue the past few years. Despite my best efforts at tax planning the past three years I’ve managed to owe the government about $3,000 (federal and state)  in taxes each year, which has bothered me each and every year! I know the financial planning enthusiasts will tell you that it’s best not to receive large refunds from the government because it’s essentially an interest free loan, but let’s face it, nobody likes paying the government a large amount of money either! Between moving, changing jobs, and some additional blog income, this year was especially difficult in planning my tax bill. I thought I had it nailed down but I actually sold and then bought a house within a couple months that coincidentally allowed me to avoid paying real estate taxes this year. I live in a state that does not pro-rate taxes based on the time lived in a home, rather only at the point that the bill is due and you actually own the home at that time. I’m not complaining about paying less in real estate taxes, but I am saying that is the reason I own a bit more than I expected.

So here’s the catch in my story, I actually figured out a way to avoid my $3,000 tax bill this year, and I did it just in time! First, there are a dozen different types of IRA’s and 401k’s, so many that it’s hard to keep up with which one’s I might be eligible for. I already max out my 401k at work, but I wanted to go a step further and contribute to another tax deferred account, but because of various reasons I’ve never been able to contribute to any others. While making a last ditch attempt at Google’ing a remedy for my tax bill I came across an SEP IRA article. SEP stands for Simplified Employee Pension, and it’s a great tax deferred retirement vehicle for people that are self-employed. The best part, and the rule that most applies to my situation, is that the plan is great for people who are employed and have an employer sponsored 401k, but have a side business as well. In fact, it’s just about the only option for people in my situation. There aren’t many rules and limitations for a SEP IRA, you get to contribute up to 25% of your net income up to $51,000. While I don’t qualify to put in a contribution anywhere close to the maximum, I did get to put enough away to avoid my entire tax bill I thought I owed and get a small refund to boot! Of course I had to sock away a larger sum of money than I owed the government, but in this case at least I get to deposit it into my own retirement account! The only unfortunate circumstance that arose from this whole thing is that I now realized I paid about $6,000 too much in taxes over the past couple years and it’s money that I have no chance of getting back. I say that because it’s not like I made an error on my tax forms, rather I simply didn’t know to start a SEP IRA a couple years back. I also cheated myself out of building up my retirement funds, and the gains I could’ve realized the past few years to boot…which I might add, would’ve been subject to one heck of a upswing in the market last year.

I suppose the moral of the story here is that you should seek out a tax professional! However, if you’re as stubborn as I am and insist on doing your own taxes and planning then you need to be as thorough as humanly possible. Spend some extra time researching your options as it could save you literally thousands of dollars.


  1. The tax man commeth. I have been reading tons of stuff on blogs about SEP IRA’s, its a great vehicle for small business owners. I rather pay it to my future self than to give it away. Nice move.

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