Death and Taxes

Update: I electronically filed our tax returns tonight. We will be getting a $2603.00 refund for federal taxes, and a $130.00 refund for state taxes. Woo Hoo! Time to invest, reduce debt, and pad my emergency fund!

Only two things are certain in life: death and taxes, or so they say. Hopefully the first one will be a while off, but tax season is immediately upon me. Tax season got off to a slow start for me this year, since I did not receive any of my three W-2 forms on time. And so began the great W-2 hunt of 2008 (well, 2007 technically).

The Radio Shack W-2 took the longest to track down, but it finally arrived after repeated efforts to contact human resources. Tracking down my W-2 from the community college was as easy as making a phone call to the payroll department and changing my address on file. The University of California fortunately posts its employees' W-2's on its "At Your Service" self-serve payroll website; so all I had to do for that one was log in and print it out. And finally, as of a couple of days ago, I have all of the information necessary to complete my wife's and my 2007 income taxes.

Actually I have become quite an expert in doing complicated taxes due to the fact that my wife has investments from her family, the dividends of which are being used to help pay off her student loans. My own taxes used to be as simple as doing the short form just a few years ago, but since getting married and since becoming an investor myself, I have had to learn the ins and outs of tax concepts such as capital gains, etc.

I am actually quite optimistic about this year's taxes for two reasons. First, I actually made quite a bit less money this past year than the year before, due to the lack of abundant teaching work in the area. And second, increased my tax withholdings to help prepare for the usual large tax bill that my wife and I have received for the past couple of years. The first item does not concern me so much, since I have been able to do more with less, so to speak, by regularly investing a portion of that smaller income. So despite the decrease in income, I have been very successful in putting aside money for retirement.

So the practical upshot of these considerations is that my wife and I should actually be getting a tax refund from the IRS this year instead of owing taxes. Should this happen as predicted, the question then becomes one of what to do with our tax money. There are three ideas on the table: we can put the money in the Roth IRA, we can use the money to pad an emergency fund, or we can use the money to pay off some of our small credit card debt. I am currently leaning towards padding an emergency fund, since we do not have an emergency fund currently established.

I know that the proverbial order-of-operations is supposed to be to set up an emergency fund, pay off debt, and then take care of the retirement fund (since the interest rate on the debt usually outweighs the potential returns on investments). However, I do not believe that these categories are mutually exclusive. Dividing up the money accomplishes the same goal overall, and one gets the satisfaction of seeing his/her investments grow while the debt is being paid off. So perhaps I have answered my own question: I will likely split up the refund into three equal chunks and place the money towards each of the three goals.

I plan to complete our taxes either tonight or tomorrow, and I will post a tax update when the taxes are completed and filed.