13 April 2007

Taxing times

A fundamental principle of good tax planning is to avoid paying as long as possible without incurring a penalty.

The idea is to not give the government an interest free loan of your hard earned cash but to let the cash work and grow for you during the same time frame.

If you receive a large tax refund, you've either failed to learn this valuable lesson or you just happened to be in the right state at the right time and got a refund based on a budget surplus.

In my experience, most people either don't grasp this concept or don't have the discipline to be able to set the money aside and be able to write a larger than comfy cheque to the government.

In recent years, I've become a bit less concerned about letting them have that interest free loan and I've pretty much let the front loaded withholding process define whether I receive a refund or write a cheque.

One of the reasons is that I don't have a large amount of self-employment income that I want to have on hand to let me make the purchases/investments I need to grow the business these days.

So I've become a bit lazy and my only real tax puzzlements are how it is that one year, without my doing anything, I owe California and another year I don't. I've just come to accept the idea that I probably won't know which way the money's going to flow until I sit down to crunch the numbers.

When my mother died I was a bit concerned about having extra taxable income arrive in a year when I'd already had a bracket bump as a result of a healthy profit sharing amount. Besides, I wasn't in any huge rush to file paperwork since to me that sort made it all much more real.

In late 2005, I finally stopped procrastinating and filed the paperwork so that the payout would happen in early 2006. On the first pass, the insurance/annuity company failed to with hold for California. I noticed the error and since I know how much fun the folks at the Franchise Tax Board can be, I contacted the company and after a bit of telephone hell, explained that they had messed up and that I would be bouncing it all back so they could do the with holding.

The correction took a couple of months and I'm pretty sure that I had no paperwork that would have clued me in that all was not well. That said, it was all happening about the same time I was a bit consumed with trying to save boy cat Maka's life.

2007 dawns and, per usual, I did a run at the numbers based on the original paperwork and a notation I had about the percentage that should have originally been withheld for California. My calculations showed that I'd owe so I was in no rush to file before the deadline.

When I assembled my paperwork and couldn't find anything beyond the initial paperwork and my notes, I contacted the company to ask for validation and copies of any missing paperwork.

I wasn't dead keen to put my head in that lion's mouth since last year's please make this right campaign was pretty much telephone hell.

But last year is nothing compared t this year's special experience. Not only was it telephone hell the end result was beyond anything I could imagine. When they went back to fix the original mistake they didn't fix it, they compounded it by not only backing out (read not paying) the original should have gone to the feds amount but also, for bonus pain points, calculating withholding due to both fed & state only on the income growth between the initial erroneous payout and the 2nd.

If your eyes are glazing over by now and you're trying to grasp just how bad this is on a scale of 1 to 10, it's a 25. Had it all been as I thought, I would have been comfortably within the fundamental principle of good tax planning (despite another bracket bump from profit sharing) for the feds and dice toss on the California side of the house. As it is might be okay with fed, but I'm not having warm fuzzies about California.

And, oh yeah, I'm in day job deadline mode.


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