The income tax has made more liars out of the American people than golf has.
Will Rogers
I have been doing tax returns a long time. The file cabinet says one of the first handwritten tax returns I compiled with my dad’s help was 1991 which would place me in 8th and 9th grade. I had no social security wage income until 1992. From the handwritten forms I progressed to TurboTax, TaxAct and finally FreeTaxUSA at Mrs. Dress Pockets’ suggestion where federal tax returns are free to file and state tax returns cost all of $14.
This was the second year of our official joint tax return collaboration. I chipped away at the data entry as the tax forms trickled in waiting for brokerage 1099s in mid to late February and finally summoned the energy to tackle the rental properties in early March. At a certain point I declared good enough and filed electronically. A little over 3 weeks passed and our federal tax refund was processed, a sign that I don’t quite have our joint income and tax withholding dialed in. I’d prefer not to give the government an interest free loan on our money. Ideally we’d owe under a thousand dollars and no penalty for underpayment.
One of my goals the past couple years has been to minimize interest income and maximize dividend income since qualified dividends are taxed at a lower rate. Mission accomplished in 2021 although falling interest rates helped more than putting excess cash to work in VTSAX. We don’t have anywhere near enough taxable interest and dividends to live off that passive income but we get closer if I include tax advantaged dividends.
We narrowly avoided the net investment income tax which I expect we will hit in 2022. I am guilty of letting the tax law tail wag the dog frequently telling Mrs. Dress Pockets she should earn less money to optimize paying less in taxes. My dad correctly points out that we’d still be keeping 60% of any additional income and 60% of additional income is certainly greater than zero. Touché.
| Federal Tax Stats | 2020 | 2021 |
| Interest income | $2,644 | $1,142 |
| Dividend income | $1,368 | $2,274 |
| Tax advantaged dividends (403b, 457b, Roth IRA, HSA accounts) | $33,897 | $26,131 |
| Tax free [*] backdoor Roth conversions | $26,598 | $27,384 |
| Effective tax rate (tax / taxable income) | 15.32% | 18.80% |
| Marginal tax rate (tax on last dollar earned) | 24% | 24% |
[*] Actually $1 of taxable Roth conversion income in 2020. $0 in 2021.
