From Sierra: It’s April and you know what that means. It’s pay up time.

Brett and I are astounded by how much we had to fork out and  just experienced the sudden shock of the tax bomb. For me I about threw up when my CPA called me up the other day confirming how much I owe.  My parents simply said “welcome to the real world honey”. Oh, thanks dad. Granted I did put enough money aside for this, however, I didn’t  anticipate it would be quite as hefty.

In 2010 I graduated to a higher tax bracket; meaning I made enough money to lose more money. How the heck does that work? Okay enough of my bickering. Time for a solution (comments are MORE than welcome in this post).

From Brett: HOLY S!#%. That’s all I have to say.

My taxes also came as a gut bomb, errrr, I mean tax bomb a few weeks ago. My taxes work a little different because I operate my own vessel, therefore I have more write-offs. Which make filing my taxes all the more mysterious because I have so many deductions.

Nonetheless, when I saw that hefty bold-lettered, dirty rotten, no-good (o.k. you get the point) amount from my CPA, I too was in shock. For the relatively small amount I made last year I am still in disbelief how much I owe. It seems kind of wrong taking away so much from so little. I can’t help but think that I am to blame for being so naive and not managing my money better.

There are ways to mitigate this cost and Sierra offers some helpful tips below to soften the blow:

How to avoid Collision

Here are some tips on how to lessen your tax expense for next year. I am mainly talking to myself right now, but if you are entering the fishing industry for the first time and are not prepared on how to handle your big check at the end of the fishing season, or whatever you do as a ‘private contractor’, then you might want to listen up.

Remember, YOU are responsible for your own taxes.

1. Save receipts!!! [Brett: this is HUGE and provides proof of all my deductions like airfare, parts, Xtra Tuffs, rain gear, fishing permit, etc.]

2. Diversification. Don’t be scared of the word. It just means invest your money in more than one class of  assets (such as stocks, bonds, businesses and other types of investments).

Retirement. Invest your money in a ROTH IRA or 401k plan, thus reducing your immediate return but lowering your tax bill. Money invested in a 401k plan is taxed when it is withdrawn, which means the income you put into the account is not taxed this year. A ROTH works inversely; you are taxed on the money invested now but not when it is taken out. However, in the long run, one can quadruple your investment.

Invest in tax free bonds. Earning here is tax exempt (unless you pull that money out). Remember these investments are for the long haul. Better start building up that now rather than later.

Start a business or invest in one. It’s not that hard. Get a federal identification number as a self employed business person and you can write off a lot of your already had expenses.

3. Get Advice. Find yourself a trustworthy financial adviser or an investment professional, someone who knows the market and understands where to invest and save on taxes.

4. Save towards Investing. ‘Nuff said.

5. Open a tax account. Since you don’t have an employer taking out taxes for you, open a separate account for taxes and put a fixed percentage away for tax season.  You don’t see it, you don’t have it. Better to figure high than not high enough.

I hope this helps you. I know it’s helped me just writing this out and trying to piece the puzzle together myself. I come from a generation of instant gratification in the financial world. I am learning quickly that it can bite you in the long run if you are not careful and don’t know how to manage your finances properly. Delayed satisfaction will pay off in the future. So don’t go out and buy that fancy new truck before putting aside money for taxes.

To give you a basic break down of how you will be taxed this year, see table:

*2011 Tax Facts:

*Your taxable income is the money you earn minus your deductions. Then you are taxed at a marginal rate depending on what you make. For example you are in the 15% tax bracket if you earn $20,000. So the first $8,374 is taxed 10% and the remaining $11,626 is taxed in the 15% range. If $60,000 you are in the 25% tax bracket.

*Also don’t forget as a private contractor/self employed individual you pay your own social security tax of 15.3% (which FYI, only 92.3% of your income is taxed here). Normally about 7.5% is taken out by your employer and the other 7.5% is from the employee. Since you are seen as both employee and employer you pay the 15.3% Social Security tax up front.

This might be a mouthful and slightly discouraging news for many of you but valuable none the less. Better learn this now before it’s too late and you end up playing catch up or pinching pennies to survive the tax bomb.

Even though it makes me slightly nauseated thinking about, it’s nice to know where my hard earned fishing money is going. Bottom line you are responsible for your own taxes so play it smart now and you’ll come out above in the end.

The Real Alaska highly encourages comments and a great Alaskan discussion!