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My wife and I filed jointly for the first time and ended up getting a $4k refund. When I was single I adjusted my witholdings so I'd end up owing ~$800 each year, but when I look back I didnt accomplish anything since I found it cumbersome to minimize my balance in my checking account. From a practical point of view is there really a benefit in adjusting witholding to try and break even or owe a little so that you can invest the money during the year? I would see the benefit if all my direct deposits/bill payments were directly from my investment accounts(Vanguard Funds) but that sounds too good to be true. Is the most efficient way really to, on a monthly basis, manually transfer any excess checking money after bills into Vanguard or other investment account?

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In theory yes. I think the bigger issue is what happens to that interest free loan when it is repaid in April. People ... (more)

wizwor (Mar. 28, 2013 @ 11:52p) |

I think they (we) suffer from managing finances poorly, of which withholding too much is a symptom

debtblag (Apr. 03, 2013 @ 11:10a) |

Thank you for citing your source.

BingBlangBlaow (Apr. 03, 2013 @ 12:17p) |


You are looking it backward. Pay yourself first and deposit all your pay into Vanguard then take out enough to live on.

https://personal.vanguard.com/us/whatweoffer/accountservices/sav...

Depends on the opportunity costs. People don't like to give Uncle Sam an interest free loan. but if the alternative is to keep that $3-4k difference in a savings account making .01% interest then it doesn't matter so much.

This doesn't apply to the typical FW Finance reader, but the typical middle class non-FWF taxpayer is revolving a balance on an 18 to 25% credit card and maybe paying off a car loan at about 10%. Some of them are paying off expensive student loans. This person could really benefit by adding $333 to their monthly payment instead of letting the government hold it for them.

I only borrow money at 0% interest rate, not loan it.

I would imagine 95% of the FWF community is savvy enough to do the same.

If you want to loan the gov't free money to loan to the banks for free so they can loan it to the rest of us for free via 0% BTs, then I owe you a "thank you" for my free money

lastgaspjr said:   This doesn't apply to the typical FW Finance reader, but the typical middle class non-FWF taxpayer is revolving a balance on an 18 to 25% credit card and maybe paying off a car loan at about 10%. Some of them are paying off expensive student loans. This person could really benefit by adding $333 to their monthly payment instead of letting the government hold it for them.
is that really middle-class?
or just behavior @ median income level?

just asking out of curiosity.

In theory, yes, but in practice more people got into financial trouble at tax time in the days before withholding was implemented.

larrymoencurly said:   In theory, yes, but in practice more people got into financial trouble at tax time in the days before withholding was implemented.They gave him a nobel for inventing that??

Another reason to owe a little at the end of the year is income tax fraud. If you're due a 4k refund and some scammer files using your ssn and takes your refund, good luck prying that money back from the IRS. If on the other hand you owe at the end of the year, you just pay your tax bill.

hendrixx007 said:   When I was single I adjusted my witholdings so I'd end up owing ~$800 each year, but when I look back I didnt accomplish anything since I found it cumbersome to minimize my balance in my checking account. I'm not sure how balancing your checkbook has anything to do with planning to owe tax at the end of the year?

If you don't have the discipline to save the $4k over the course of the year yourself, try automating the process--increase your 401(k) contribution or set up automatic ACH to an investment account on paydays.

I can make my income work better for me than Uncle Sam can. If I own him taxes at the end of the year, big deal. I can earn points by paying them.

Haven't quite figured out the individual trust yet. Working on it.

axiom said:   I can make my income work better for me than Uncle Sam can. If I own him taxes at the end of the year, big deal. I can earn points by paying them.

Haven't quite figured out the individual trust yet. Working on it.


How dare you say that..evil you are, I say!. You are causing children to go hungry by hoarding money in your own bank account, let the government put it to good use rather than waste away in your own personal savings account, or worse yet in an investment account. You evil capitalist you....


/jk

...and to answer the question of the thread...my personal view is..yes they do. I have several friends who pay extra penalties through the year all because they didn't have an extra one or two hundred dollars that month. Now even if they had it...they may still have wasted it on something else, but who knows.

Anyway, that's my thought.

Personally I try to get it so I am within in $1k of either side of that trade. Now if I could just get the companies I work with the send me the 1099's prior to March 15th...

Just remembered a poll that showed the IRS was American's favorite federal government department, I think it was in the 70%+ range. Which other department gives you a check to spend each spring.

The true question is what is the lost opportunity. Even if one were able to find something with a 10% return, the $3,000 is not available the whole year, it is gradually collected over the year. So, the return is even smaller than that.

On the other hand, if someone does indeed able to generate a great return, they are probably not getting $3,000 refund anyway, and probably are only paying 10-15% in taxes... i.e. Capital gains vs Income.

What is a 0% BT? Just wondering.

bjy20716 said:   What is a 0% BT? Just wondering.

0% interest balance transfer.
We use it to get money from credit cards with no/minimal borrowing cost.

jclau001 said:   Another reason to owe a little at the end of the year is income tax fraud. If you're due a 4k refund and some scammer files using your ssn and takes your refund, good luck prying that money back from the IRS. If on the other hand you owe at the end of the year, you just pay your tax bill.

The scammers generally know what to do and file for crazy deductions... so even though you personally may legitimately owe the IRS money when they file a fraudulent tax return they'll get back a huge refund. The fraud rings have been successful getting back 1 million dollar+ tax refunds which is why it is so lucrative... much easier than robbing a bank.

All of us fatwallet frequenters can debate lost opportunity cost but the real issue for most American's is they are likely to spend more than they take home. In that instance the artificial scarcity created by over withholding is a good idea to make them live more within their means most of the year. Their refund might be their only emergency fund. IMHO over withholding is a good strategy for those with good financial intentions but that tend of over spend.

acroBios said:   All of us fatwallet frequenters can debate lost opportunity cost but the real issue for most American's is they are likely to spend more than they take home. In that instance the artificial scarcity created by over withholding is a good idea to make them live more within their means most of the year. Their refund might be their only emergency fund. IMHO over withholding is a good strategy for those with good financial intentions but that tend of over spend.

Yeah but there is an entire industries designed to take that tax refund money as soon as the check clears. Car dealers, electronics stores, furniture stores, etc.

A fool and his money are soon parted.

brettdoyle said:   jclau001 said:   Another reason to owe a little at the end of the year is income tax fraud. If you're due a 4k refund and some scammer files using your ssn and takes your refund, good luck prying that money back from the IRS. If on the other hand you owe at the end of the year, you just pay your tax bill.

The scammers generally know what to do and file for crazy deductions... so even though you personally may legitimately owe the IRS money when they file a fraudulent tax return they'll get back a huge refund. The fraud rings have been successful getting back 1 million dollar+ tax refunds which is why it is so lucrative... much easier than robbing a bank.

I imagine that matters little if you actually owe IRS some money. Sure, IRS sent a bunch of money to a fraudster, but it's not your money and once you file a correct return and pay whatever amount you owe, you are in the clear.
If on the other hand you are due a refund and IRS has already sent the check somewhere, it's probably pretty unlikely they'll send any money to you as well, at least not all that easily.

I'm confused because there are penalties if you withhold too much right?

scottybweyy said:   I'm confused because there are penalties if you withhold too much right?

Do you mean the underpayment penalty (withholding too little)?

There is a buffer amount that you can underpay without issue. Other ways to avoid the penalty include paying at least as much as the previous year's tax requirement (good for years with income jumps).
The IRS website has more details:

http://www.irs.gov/taxtopics/tc306.html
http://www.irs.gov/publications/p505/ch04.html

scottybweyy said:   I'm confused because there are penalties if you withhold too much right?

Only for withholding too little ... severe over withholding may draw scrutiny, but I have overpaid $25K+ as a 4Q estimated payment when it benefits me to do so.

jclau001 said:   Another reason to owe a little at the end of the year is income tax fraud. If you're due a 4k refund and some scammer files using your ssn and takes your refund, good luck prying that money back from the IRS. If on the other hand you owe at the end of the year, you just pay your tax bill.

I am dealing with this issue myself... sort of

Filed my taxes last year, was getting a refund of approx 3k. Check never arrived.

Lost story short, someone else grabbed my check and cashed it. IRS mailed it to the correct address (they later mailed me a copy of the check, including my address on the front, and someone else's signature on the back).

Multiple letters back and forth, multiple phone calls to them, and 1 year later I still haven't gotten my $3k. It does seem I'm almost there tho. I am supposed to get my new check in approx 3 weeks. Hopefully someone doesn't steal it again.

The IRS is paying me approx $125 in interest, since they (or the scammer) have had my $3k for over a year.

lastgaspjr said:   This doesn't apply to the typical FW Finance reader, but the typical middle class non-FWF taxpayer is revolving a balance on an 18 to 25% credit card and maybe paying off a car loan at about 10%.
The credit card portion of what you say is a myth. It propagates because the press likes to use the mean instead of the median to make things sound more scary, and scary stories make them more money.

The average (mean) credit card balance carried over every month is about $7,500. But the average (median - 50th percentile) is only about $3,000. The mean is so much higher because a mean gets skewed disproportionately by high values. e.g. If there are five 6-year olds and one 90-year old in a playground, their mean age is 20, even though the vast majority are only 6 years old. Likewise, the mean credit card balance is high not because Americans are terrible at managing their debt, but because a few Americans are really terrible at managing their debt. I think the statistic was something like 15% of credit card holders carry a balance of over $10,000 every month.

About 75% of Americans have a credit card, and about 40% of those people (30% of all Americans) don't carry a balance. So 55% of Americans either don't have a credit card or pay theirs off in full every month, meaning the majority of Americans are like FWFers and carry zero credit card debt.

rufflesinc said:   larrymoencurly said:   In theory, yes, but in practice more people got into financial trouble at tax time in the days before withholding was implemented.They gave him a nobel for inventing that??I think Milton Friedman got it for his Permanent Income Hypothesis, which includes the money-dropping helicoptor theory that for some reason is now associated more with Fed chairman Ben Bernanke.

axiom said:   I can make my income work better for me than Uncle Sam can.Offers no proof. More importantly, offers no proof that the average person can do that.

scubasteve said:   jclau001 said:   Another reason to owe a little at the end of the year is income tax fraud. If you're due a 4k refund and some scammer files using your ssn and takes your refund, good luck prying that money back from the IRS. If on the other hand you owe at the end of the year, you just pay your tax bill.

I am dealing with this issue myself... sort of

Filed my taxes last year, was getting a refund of approx 3k. Check never arrived.

Lost story short, someone else grabbed my check and cashed it. IRS mailed it to the correct address (they later mailed me a copy of the check, including my address on the front, and someone else's signature on the back).

Multiple letters back and forth, multiple phone calls to them, and 1 year later I still haven't gotten my $3k. It does seem I'm almost there tho. I am supposed to get my new check in approx 3 weeks. Hopefully someone doesn't steal it again.

The IRS is paying me approx $125 in interest, since they (or the scammer) have had my $3k for over a year.


Another reason for direct deposit.

beatme said:   scottybweyy said:   I'm confused because there are penalties if you withhold too much right?

Do you mean the underpayment penalty (withholding too little)?

There is a buffer amount that you can underpay without issue. Other ways to avoid the penalty include paying at least as much as the previous year's tax requirement (good for years with income jumps).
The IRS website has more details:

http://www.irs.gov/taxtopics/tc306.html
http://www.irs.gov/publications/p505/ch04.html


Yes I misspoke. This might make sense for me as I usually have around a $1000 refund a year but I've been hesitant to push it with my W-4. I guess I could have an extra $150 cashflow a month if I play my cards right and plan to owe a small amount at the end of the year. I will look into my state tax implications as well.

kb2120 said:   scottybweyy said:   I'm confused because there are penalties if you withhold too much right?

Only for withholding too little ... severe over withholding may draw scrutiny, but I have overpaid $25K+ as a 4Q estimated payment when it benefits me to do so.


Correct. Did you get any scrutiny for doing this?

Solandri said:   ...meaning the majority of Americans are like FWFers...

Blasphemy!

scottybweyy said:   kb2120 said:   scottybweyy said:   I'm confused because there are penalties if you withhold too much right?

Only for withholding too little ... severe over withholding may draw scrutiny, but I have overpaid $25K+ as a 4Q estimated payment when it benefits me to do so.


Correct. Did you get any scrutiny for doing this?


Last year's tax return... none as of yet.

Solandri said:   Likewise, the mean credit card balance is high not because Americans are terrible at managing their debt, but because a few Americans are really terrible at managing their debt.

Oh, that makes more sense. I thought the mean was skewed by a few Americans with big AOR-generated balances at 0%

http://www.irs.gov/taxtopics/tc306.html

Topic 306 - Penalty for Underpayment of Estimated Tax

The United States income tax is a pay-as-you-go tax, which means that tax must be paid as you earn or receive your income during the year. You can either do this through withholding or by making estimated tax payments. If you do not pay your tax through withholding, or do not pay enough tax that way, you might also have to pay estimated taxes. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.

Generally, estimated tax payments should be made in four equal amounts to avoid a penalty. However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. Use Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to see if you owe a penalty for underpaying your estimated tax.

The penalty may be waived if:

The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

My refund is about $1000 each year. Not really worth filing the paperwork with HR to change it (since for some reason I can't do it online at my employer even though we use ADP for everything) for such an amount. However, if I were getting $3k or $4k or whatever then the whole thing changes.

The biggest "opportunity cost" for the mindless masses is the loss of awareness of how much the govt is stealing from them each year. If the so-called middle class had to write a check for $xx,xxx they might be more interested in what happens to that $xx,xxx. This, of course, is by design and the main reason for withholding.

hendrixx007 said:   My wife and I filed jointly for the first time and ended up getting a $4k refund. When I was single I adjusted my witholdings so I'd end up owing ~$800 each year, but when I look back I didnt accomplish anything since I found it cumbersome to minimize my balance in my checking account. From a practical point of view is there really a benefit in adjusting witholding to try and break even or owe a little so that you can invest the money during the year? I would see the benefit if all my direct deposits/bill payments were directly from my investment accounts(Vanguard Funds) but that sounds too good to be true. Is the most efficient way really to, on a monthly basis, manually transfer any excess checking money after bills into Vanguard or other investment account?
In theory yes. I think the bigger issue is what happens to that interest free loan when it is repaid in April. People see it as found money and spend it thoughtlessly.

I think they (we) suffer from managing finances poorly, of which withholding too much is a symptom

Solandri said:   lastgaspjr said:   This doesn't apply to the typical FW Finance reader, but the typical middle class non-FWF taxpayer is revolving a balance on an 18 to 25% credit card and maybe paying off a car loan at about 10%.
The credit card portion of what you say is a myth. It propagates because the press likes to use the mean instead of the median to make things sound more scary, and scary stories make them more money.

The average (mean) credit card balance carried over every month is about $7,500. But the average (median - 50th percentile) is only about $3,000. The mean is so much higher because a mean gets skewed disproportionately by high values. e.g. If there are five 6-year olds and one 90-year old in a playground, their mean age is 20, even though the vast majority are only 6 years old. Likewise, the mean credit card balance is high not because Americans are terrible at managing their debt, but because a few Americans are really terrible at managing their debt. I think the statistic was something like 15% of credit card holders carry a balance of over $10,000 every month.

About 75% of Americans have a credit card, and about 40% of those people (30% of all Americans) don't carry a balance. So 55% of Americans either don't have a credit card or pay theirs off in full every month, meaning the majority of Americans are like FWFers and carry zero credit card debt.
Thank you for citing your source.



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