Monday, March 4, 2019

Money Life Lately: Net Worth Zero and Tax Time

Chloe "Tess" wallet (affiliate link)

I'm approximately a month and a half away from a significant financial milestone: "Net worth zero", where my total assets, including what's locked away in my 401(k) and my Roth IRA, will be equal to the balance of my student loan debt. At nearly four years since law school graduation, it's taken me longer than K and most of my close law school friends to get to this point (most of them are so good about aggressive repayment that, if they worked in biglaw that whole time, they were close to paying off their loans in full by then) because I took a year off to clerk, which, due to the timing; the ~7% interest rate on my student loans; and my inability to refinance while I was still relying on income-based repayment to manage payments during the clerkship, created a nearly two-year delay in my student loan repayment schedule. That was despite my best efforts to be good about money during my first relatively brief stint in the private sector. I'm super-excited about getting to net worth zero! It'll feel great to finally be "worthless".

Tax Time: Back to Turbotax 

Whenever it comes time to do my taxes each year, I'm always reminded about just how bad I am at anything to do with tax. I took the introductory tax class in law school, which discusses personal income tax no less, and while I was typically a top 10 to 12% student at almost everything else in law school, I was solidly rock bottom in that particular class. My sheer incompetence in that subject was distressing, and absolutely boggled my mind. I worked hard to study for that exam, possibly harder than for almost anything else! How is it even possible?! I came away from the experience convinced that the way words are used in the Internal Revenue Code does not resemble the actual English language. I'm probably just bitter. I swear though, words actually don't mean what you expect when you read the provisions of the tax code, even more so than in any other federal statute I'm familiar with. While the interpretation of any statutory text can be surprisingly complex, it's only in the tax code that things I think sound like one thing might actually mean the opposite, particularly when the tax code explains how to do some math.

In any case, having a legal education can be surprisingly unhelpful for things you'd think all lawyers might naturally have a comparative advantage at because of the nature of their job. I'm definitely no better at interpreting or navigating my health or dental insurance plans than anyone else (now there's a context in which the way words are used in key documents barely resembles English). I'm not necessarily better at negotiating anything. It seems that I'm also much worse than your average American when it comes to understanding my taxes. If you're able to use just about any other software or self-preparation method for your taxes besides Turbotax, I'm convinced that you can probably count yourself more knowledgeable and capable than I am.

Around this time last year, I had contemplated "breaking up" with Turbotax because I was so tired of  dealing with whatever new glitch they came up with each year. Some years, there were persistent problems with downloading and installing the necessary software updates. They can be sneaky about trying to tack on extra products and fees. One commonly recurring issue for some customers is that, even if tax preparation for one state comes free with most purchases of the software, e-filing in many states (though not New York, where e-filing is the only option) might cost an extra fee. More than once, including last year, there was some glitch that meant I needed to do an odd, nonintuitive workaround to save a PDF of my tax forms. Last year's PDF-saving glitch was persistent enough that I was actually thinking of going ahead and e-filing with Turbotax without obtaining a copy of my forms. I was even researching how much it cost to obtain copies of one's old tax returns from the IRS, in the inevitable event that I needed to look at my forms again later on.

This is how I feel the entire time I'm preparing my taxes, including while using Turbotax.

This year, I was ready to try other options, including CreditKarma, which offers a free tax preparation feature. I couldn't try it last year because it couldn't handle filing state taxes in multiple states in one year, but now that I no longer needed that feature, I was hoping CreditKarma would work for me. Because well, it's free. Alas, I am so bad at doing my taxes that I quickly hit a wall in CreditKarma. I guess I'm completely dependent on the "personal income tax for dummies" level of handholding that Turbotax does. I was supposed to look at another company next, but I couldn't even figure out if H&R Block would allow a person to start trying them out through their website before paying (Turbotax's website allows that and will even show you your expected refund or bill before charging, though of course, you have to pay to file or obtain a copy of the forms), so that was off the table. I ended up slinking right back to Turbotax.

I started with Turbotax's website because it was potentially cheaper than buying the software. I'd used their website successfully once in a previous year when I was a law student and my income fell below their IRS "Free File" program cutoff (if your Adjusted Gross Income or AGI is under $66,000, you'll have quite a few free software options through this government program, though Turbotax's AGI cutoff is currently $34,000). To my dismay, I found that something about their website user interface this year, probably just cosmetic differences from the desktop software, simply didn't click with my brain, I just couldn't figure it out and use it once I hit the point where I needed to report my backdoor Roth IRA contribution. Alas, I was right back to purchasing the Turbotax desktop software (affiliate link to Mac download version, and as one can see from the reviews every year, I'm not the only one who encounters various infuriating troubles using it).

This delightful early 2000s user interface, which is really rather clunky when you think about it, is apparently what I need in a tax preparation software. 

But... that wasn't on my 1099-R. I've never gotten a "Qualified 2017 Disaster Distribution", nor any other disaster-related distribution.

Like with almost every other year, this year's glitch (I can't remember if there was a single year I've used it where there wasn't at least one majorly annoying problem) was quite a doozy. Each year I've needed to report a backdoor Roth IRA contribution (which requires entering the information from the Form 1099-R reflecting that money was taken out of a traditional IRA for conversion to a Roth IRA, and reporting that the conversion to the Roth IRA happened, so that one shouldn't be taxed on the "distribution" of money from the traditional IRA - but don't quote me on that, I could easily be misunderstanding), I've found the process complicated and difficult, even in "personal income tax for dummies" Turbotax. This year felt even less intuitive than the last.

Before even getting to the part where I was supposed to indicate that I'd done the conversion to a Roth IRA, while I was entering my 1099-R, I got the prompt above about having reported a "Qualified 2017 Disaster Distribution" that I had not, in fact, reported. Trying to research this problem, which I thought was a glitch, got me nowhere. (It turns out I was able to leave it blank and move on to the next steps without any issues.) And I still can't figure out why it took four or five different tries to get my Form 8606 to indicate that I'd done the conversion to a Roth IRA, or why it worked the last time, because I hadn't actually done anything different, checked a different box, or entered a number in a different place, in the software.

But hey, I should look on the bright side. At least there weren't any problem with saving a PDF of my completed tax forms this year! Oh, and thanks to the new tax laws, I did owe a fairly sizable bill to the IRS, even though, in past years, I'd typically be expecting a refund. At least it wasn't really a surprise in my case. I was fully expecting this because most NYC-based attorneys in biglaw and biglaw-ish are not well-served by the changes to the state and local tax ("SALT") deduction. I had been getting bigger paychecks all year because the payroll company was withholding less, I assume due to other changes in the tax law, but I knew I'd be paying the piper eventually. My effective tax rate has gone up by approximately 2%.

Have you done your taxes yet? Has your tax bill significantly changed from the year before? Was it a surprise? Does anyone else, er, feel my pain with being really bad at tax preparation, even with the help of software? I'm definitely not proud of how difficult I find this process every year, I really feel like I should be better at it. And I swear I'm not a Turbotax shill, I really quite resent how dependent I am on it. I've even been told that H&R Block is better about explaining how and why to do things instead of just asking "personal income tax for dummies" step-by-step questions that might turn out poorly worded and nonintuitive enough to cause errors that are difficult to untangle (which complicates the reporting of those backdoor Roth IRA contributions, in my case). But with my history of failing to figure out other software, I wasn't going to pay for it before I got to test it out.

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