Taxes question
 

As a pastor, I am self-employed and so I pay all my own taxes, nothing is withheld. I also pay both halves of Social Security. So, I know just how much my total tax bill costs. It is kind of ovewhelming to sit back and see what you pay.

Anyway, there have been a couple people lately (on this board, another, and in my live conversations) who have talked about the large income tax returns they will soon be receiving.

My question is, why?

Here's my thinking. I'd like to hear if I am wrong, of if I do understand things correctly. You see, I'd rather pay in on April 15, than receive a return of a $1,000 or more dollars. If I do it correctly, I am a couple hundred $$ one way or the others.

Anyway, my thinking is this. It is my money - whether I have it on payday or get it back later. If I get a rebate, it isn't really a rebate - it is simply returning to me what is already mine.

What is more, if I come up short and the IRS discovers that I missed a payment or some such, I am charged incredible interest on the money that I owe.

Yet, when the government uses my $$ all year, and at the end of the year gives me my money back, how come they don't pay me any interest?

If I want a rebat, wouldn't it be wiser to get the fewest deductions possible, then take a percentage of every paycheck and put it in some sort of intereste bearing account - then, when I'd normally get a tax return, I'll have even more money there, as the intereste will also be mine?

Am I screwed up, or does everybody like the feel of IRS using KY Jelly? Or is there something else I am missing?

Peace of the Lord be with you.

Re: Taxes question
 

You pretty much summed up my feelings.

Re: Taxes question
 

Just make sure you get your estimates correct or you could lose all that income you make with your investments with penalties and interest from Uncle Sam.

Re: Taxes question
 

I think the reason a lot of people do that is because of the lack of self control. Basically, they would spend that money and then when the taxes are due, wouldn't be able to pay.

Re: Taxes question
 

Yes. your estimates better be accurate, but a couple years of overpayment allows you to get it figured out.

Maybe some people need to learn a little discipline.

Peace of the Lord be with you.

Re: Taxes question
 

I pretty much agree with you Rev. I would rather have through the year than get a big refund. I do 10-99 work aside from my full time job and usually have to pay in anyway.

Re: Taxes question
 

Why would it be any better to overpay for a couple of years than to get a refund back at the end of the year. Do you get interest credits for overpayments?

Re: Taxes question
 

In our current state of affairs its hard to save money. Claiming 0 on a W-2 is an easy method to save money for a lump sum at the beginning of the new year. Not only that, but since we get credits and deductions on tuition payments and loan interest, it inflates our refund even higher that what might of been a $1000 or less refund.

Re: Taxes question
 

I worked 16 years in this industry, and you'd be surprised Rev.

You are not screwed up.:tu

Re: Taxes question
 

If you pay your own taxes and don't want to have to come up with a large some on April 15, the first couple years you are doing it, you overpay - till you get it figured out. You get a refund or you apply your overpayment to the next year's taxes. The government does not pay you any interest.

If you have a good accountant help you figure out your estimated payments as you are going along, you don't need to overpay.

Last year (2008) we had an unexpected expense that turned out to be deductible - so we overpaid like $750 in federal taxes as it messed up our estimated payment. That was an incredible amount, at least to my tastes. I was applied to our first payment toward 2009 taxes. I hade one year that I underpaid badly (at least to my attitude), it was like $400 combined between federal and state. I have an account I put money in, just for that - in case. BUT, it is gaining interest for me. And if I don't need it, shazam - I take it out and use it - or put it in the boys' college funds.

Peace of the Lord be with you.

Re: Taxes question
 

So you income tax return is you savings plan? You don't get any interest!

Why don't you open an account and just put $20, $25, $30, or you name your amount in it each pay period. Throw out the deposit slips. Don't keep a ledger. Don't even look at it. When you want it at the beginning of the year, there it will be. PLUS INTEREST!!!

Peace of the Lord be with you.

Re: Taxes question
 

The OP summed up my feelings. I need to take a little more out of my check though...I end up owing quite a bit each year. I'd rather break even!

Re: Taxes question
 

Rev,

I'm with you on this. My goal is to always be near even, or to owe a bit come tax time. Why give the govt. an interest free loan?

Re: Taxes question
 

I can certainly see the need for intense scrutiny of your taxes as someone who is self-employed. The tax system is complicated and unforgiving and I can emphasize with anyone who is, or has had difficulties with the IRS.
For myself it's pretty easy to figure my deductions and come close to the correct number at the end of the year. I prefer to be on the positive side for various reasons and find the penalty to be negligible.
I also think some use the refund as discretionary income that may be difficulty justifying paycheck to paycheck. That might mean some may have some extra cigars on order at this time of year. But hey..................at least they're not being charged on a CC that might not be paid right away.

Re: Taxes question
 

A lot of it also depends on how stable your income is. If you have wide swings, it's a little harder to gauge.

Last year we paid a substantial amount. I had a large capital gain in '08 that was unexpected, and had to cough up some money.

Then my wife and I both took early retirement offers, and our income for '09 dropped considerably. As a result, we have a good refund coming this year.

So for two years, I blew what I had estimated our liability to be.

Hopefully this year I can hit it closer so I don't have either a big payment or a big refund due. But the wife is making noise about going back to work, so who knows? ;)

Re: Taxes question
 

I Know What You're Saying, Reverend, & I Agree With You, But In My Eyes It's Like A "Bonus".:tu

Re: Taxes question
 

I'm with you Todd, I don't get it either. Regardless as to self employed or working for a company - it's still giving your money away for free. I know a guy who gets between 5,000 and 6,000 a year as a tax return???? I begged him to give it to me during the year and I would give him his $5.000 in Jan. My goal +/- $250. There are a few items like capitol gains from my little mutual funds that are hard to control. The last 8 years have been just about the same in that $500 swing.

Re: Taxes question
 

Amen

And again I say Amen!

Re: Taxes question
 

Pros of your method.... I get a whopping 2$ interest over the course of the year in my savings accounts. Excuse me while I buy a cheeseburger.

Cons of your method. I have access to the money throughout the entire year.

And your method is assuming I have a steady paycheck, which I don't. I worked 6 months last year. Went to school the other 6 months. The 6 months I was working, I was saving for a wedding, to which we had to file jointly this tax return, which was another unknown of how things were going to pan out with our return. Needless to say, it was easier to claim 0. :rolleyes:

Re: Taxes question
 

Don't think I'm referring to you. In college I did the same thing, as I live paycheck to paycheck. I'm speaking of the guys (and/or gals and/or couples) who brag about the $5-$10K refund check.

$5k at simple intrest in a savings account is a bit more than a cheeseburger. Put into a money market is even more. A CD (that allows you to add throughout the year) even more. And, put it in a mutual fund is even more.

Peace of the Lord be with you.

Re: Taxes question
 

We're talking more like 2k$ with our refund before education credits. Find me a CD with greater than 2% APY for a 6 month low yield and I'll applaud. ;)

Fact remains Savings Account interest rates suck(even moreso for College Savings Accounts like what we both hold) and putting money in a CD after a year's worth of savings won't mature for another 6 months to however long. So the money comes far later and the interest again isn't going to be anything worth celebrating over.

I can fully appreciate not trusting 'the man' and keeping your money close to you, but doing it purely for the 'interest' is a null factor in my mind.

With the ease of online banking, money transfers and seeing that nice lump sum sitting in an account untouched, the ease of ability to spontaneously purchase something will create the possibility and probability of more negative impact on the average person's 'withholdings account' than the positives will ever gain.
:2

Re: Taxes question
 

Good Points, Jordan, Considering The Current Economic Situation!:tu

Re: Taxes question
 

We are taxed too much and the government spends our money recklessly. I see both sides of the argument though.

Re: Taxes question
 

I have thought this back and forth for years. The main thing for me is like Jordan pointed out. Even if I was to put the adjusted income increase in an intrest bearing account the amount of interest would be negligible. And even then I wouldn't be able to touch it for a number of months to collect that interest.

The real problem lies when those who adjust their W4 now increase their lifestyle instead of putting it away. And that is the majority of our population. If you were to increase their salary they would find a way to spend that "new" money. Then if an emergency or they have to pay more for insurance, a new baby, etc comes along, they don't have that "savings" on which to fall back on.

Where it makes sense most to me is someone who has a large amount of debt. Say over 10k worth of debt. If that person can get back more throughout the year and pay down that debt, then it works out well. Just my thoughts on the matter.

Re: Taxes question
 

There is one problem.

If you are counting on your return, you still have no given date when the money is available to you.

If there is an emergency in your income needs in September, you have squat till you get your rebate, February at the earliest??? There are states right now that are withholding sending back the refunds because they don't have the money. You want your money with those agencies?

OK, so the interest is negligible. I still like the adage, "It's my money, I'll use it when I want to."

Maybe will power is the problem. If the government is your willpower, your savior, your retirement, there are bigger problems. For that matter, stick it under a mattress - you don't have the interest, but at least you know it is safe.

Personal responsibility? Or nanny state to help us save?

I have a 15 & and a 13 year old. I give them a negligible allowance to teach them fiscal responsibility. !0% goes to the work of the Lord, right off the top. The rest is theirs to spend as they see fit. We buy everything for them. However, sometimes they want the name brand - I put what I'll buy next to the name brand - and then give them the $$ for the one I'll buy plus the amount that is the governor's cut for taxes - if they want the name brand, they have to come up with the rest. Sometimes they do... Oftentimes they don't. These are young boys, and there is a convenience store with candy, soda, ice cream, etc... right on the corner. It is a huge temptation, to which they sometimes succomb.

Here's the kicker. One took that $8.00 a month allowance and after offerings to God, and little things here and there, and some money saved from birthday gifts, was able to buy an Ibanez electric guitar and amp (I bought some headphones for him to wear when playing at certain times). The older one saved up for the rod and reel combo he had his eyes one and a pair of waders (didn't like the ones I handed down to him).

Willpower to save? It is a choice.

I do no banking online. I refuse to do it. I know it is easier, but it is also a temptation. I don't like it because it allows too many access points that can be compromised, it is an identity theft issue. I don't normally order online either, unless I use a fill as you use it credit card.

Someone changes their W-4 now, with the decision they are going to put $XX.00 away every pay period isn't going to have a problem. Yes, it takes some disciplined willpower. But everyday we each have responsibilities and must be disciplined. Hundreds of choices each day. I could give in to a bunch of things that would ruin my life just as surely as spending what I am supposed to be saving.

I guess it really boils down to this simple issue with me, I like having access to what is mine, when I need/want to have access to it. And I'm not going to entrust what is mine to a bunch of idiots in Washington and/or Madison who cannot live within their own means.

:2

Peace of the Lord be with you.

Re: Taxes question
 

Just for a point of reference, Florida has no State tax.

Also, if you have an emergency in September as your example above, you have 2 options. One, you can keep that large amount in a liquid account and use it when needed. Two, is to put it on credit, then pay off when the return comes in.

I agree wholeheartedly on the fact that many people need to learn fiscal resposibilty, but is that best learned through receiving that amount throughout the year vs a lump sum? Maybe, maybe not.

Re: Taxes question
 

If you can, lower the amount of taxes taken out of your check and increase your 401(K) deposits by a similar amount. This is the best possible scenario for anyone who can do it. The long term reward will be well worth the short term scarifies.

I also tend to think the "refund" craze applies more to younger people, myself included. When I was in college I looked forward to that money every year. I also used to be an employee vs. being the owner. Running a business will certainly change your thinking about taxes and money. Now, I don't even have a clue what a refund is. All I do is write checks that take my breath away.

Re: Taxes question
 

I did receive a pretty sizable return this year. I bought a place in 2008 and last year was the first I've paid interest all year, so my deductions are quite a bit larger than previously. I was thinking that I should start witholding less and have my money throughout the year instead of as one lump sum, so I did the math.

Let's say I reduce my witholding to cover my refund amount this year, about $4700 - figure that at $400 a month extra cash. I put that money, every cent, into a savings account. Now, I don't know about you guys, but my savings account is earning 0.5% interest right now. So, by the end of the year, I have 4811.015 in my savings account. How is this worth it to me? If I put it into a money market, maybe I earn 2%, at that point I've got an extra $44 at the end of the year. Personally, I would need to be guaranteed at least 4-5% return on that money to make it worth changing, which means I'm likely investing in some sort of mutual fund, with all the associated fees, additional taxes, etc.

Maybe it's worth it, but I can make a single deposit in February when I get my refund and not worry about it every month for a tiny difference in the amount of income i am earning.

Basically, what I'm getting at, is you're absolutely right - the government is making millions off the interest it's earning on money we've all paid in witholding. But the potential benefit to us of changing the behavior is so negligible, I just don't see it changing.