My brother was here for a visit this week, and we had an interesting conversation about mutual funds. My dad used to be a stock broker, and now works for a mutual fund company that sells actively managed funds that carry a load. Of course he believes that you're getting the value of research that you're paying for with the load and management fees. My brother got both an engineering degree and an MBA. He now works in marketing, but because of his degree has more background in finance than I do.

Anyway, when my dad left his former company, there was a big going-away dinner that my brother attended. He said that it hit him that all these guys at the dinner, who were full-service brokers, are really just salesmen. They don't have a finance degree or tons of training in portfolio analysis. The advice they give is basically fed to them by the parent company.

My brother has had more interest than me in actively investing. He got burned on penny stocks early on, then a couple of years ago he looked at his individual stock-picking efforts and decided he was better off in mutual funds. After the recent market crash, my brother said he took a look at the actively managed funds he owned that were from the company my dad works for. In his opinion, they fared just as badly as the rest of the market, and did not see a large upside during the boom years. He has since unloaded most of his actively managed fund and moved the money to low-cost index funds.

While I question his judgement in getting out at the bottom, and I have no idea how big his portfolio is or which funds he used to own, it was interesting to know he had changed his strategy to one I hear many people here using.

I finished the taxes a couple of weeks ago, but only now am getting around to blogging the results.

Gross Income: $244k
Adjusted Gross Income: $229k
Taxable Income: $157k
Total Federal Tax: $44k
Payments: $38k
Federal Tax due: $6k
Effective Federal Tax Rate: 13.94%

State Taxable income: $180k
Total State Tax: $11.6k
Payments: $12k
State Tax refund: $397
Effective State Tax Rate: 9.3%

We paid 110% of last years tax and so did not have a penality. California is holding on to refunds this year so I showed them by applying the refund to my 2009 estimated tax payments.

The difference between gross income and adjusted gross income came from self-employment tax adjustment ($5k) and IRA-SEP contribution ($14.5k). I'm not sure how it figures into the numbers on the W-2, but DH also contributed $15.5k to his 401k.

Income was as follows:
DH salary: $120k
DH bonus: $20k
DH ESPP sales: $5k
DH stock options sales: $6k
My business income: $77k
Dividends: $9k
Capital Gains: $4k
Interest: $500

DH did same-day sales on his employee stock purchase plan and stock options, so they were taxed as income. With the stock market so crazy it seemed better to take a profit immediately instead of holding the stock for a year. We paid more taxes, but didn't run the risk of losing money on the stock.

Here are our deductions:
Medical expenses: $15.7k
State income taxes: $14k
Property taxes: $6.6k
Mortgage interest: $19.6k
Charity: $500
Total Deductions: $56k

Self-employment tax was $11k.
We got hit with AMT this year -- $2k.

We recaptured $9.5k from AMT carryover, and have $9.5k credit left to carryover to next year. (In 2000 I had to pay $40k in AMT due to selling some stock options and holding the stock, and I've been slowly recapturing the credit ever since. Looks like next year or so I may finally finish recapturing it.)

For next year, to avoid penalities we have to pay $38k. DH's withholding is going to be about $13k, so our federal estimate taxes will be $6,300 per quarter.

Our state estimated taxes are $12.8k. DH's withholding comes to $4,875. I'm not sure why the payments are different amounts, but Turbo Tax said our state quarterly payments will be $2000, $2400, $1600, and $1600.

It's hard to predict what the actual 2009 taxes will be. DH's company gave big bonuses last year instead of pay raises. This year pay is frozen and there are no bonuses, so that's at least $20k less in income. My income is likely to be $5k less because we're taking a 3 week vacation. It's likely the stock options will be underwater, so no income there. It's completely unpredictable what dividends and capital gains will be. We won't have the medical deduction next year. AMT recapture will be somewhere between $5-$10k. Our taxes have gotten too complicated to get a good estimate from online calculators -- I never know what's going to happen until I run the final numbers through Turbo Tax.