I’ve mentioned before how complicated taxes can become as your wealth building plan gets underway. When you enter the workforce and start punching the clock every day, you have what’s known as ordinary income. That’s IRS-speak for job income.
But if you start adopting some of the practices I’ve mentioned, your income begins to change. I still get a majority of my income from my daytime job, but now I also receive rent, tax deferred MLP distributions, and qualified stock dividends. I also get paid a quarterly check for a book I wrote three years ago. I also had some other awkward sources of money.
One thing I had to dig up was how to handle the fact that I didn’t receive a 1099 INT from any of my banks. I knew I had received interest. It turns out that banks will usually only send you such a document if you earned over $10 in a given account. I didn’t make it. Nonetheless, Uncle Sam still expects you to report every penny so I simply looked up each account’s December 2013 statement and wrote down the year-to-date interest.
As a rule of thumb, I thought about every way that money came into my hands last year. It helped me remember a couple things that don’t come in the mail. I gathered a pile of electronic documents and emailed them to my CPA.
Last year, I had a tremendous tax bill. That was because I had to deal with the aftermath of nuking my 401K. While it was a hefty bill, the results were fantastic. I found a giant source of capital to create my real estate portfolio. Last year, I grossed over 50% of my daytime job in rental income. That’s a hint that things will be GREAT down the road. And need I mention that with a purposeful plan set up by Jeff Brown, ALL of that rental income is tax sheltered?
I’m eager to hear the feedback from my CPA. It’s pure speculation, but I’m guessing I’ll still be short and have to write a check to pay the difference against withheld taxes. But who knows? Thankfully this time, we won’t have to file an extension.
Happy tax season!