Being in Control of your Tax Refund

Welcome back. Congratulations on getting your taxes done. Now what??? By popular demand (100% of commenters asked a variant of this question) I am following up my 3 part series on Federal Income Taxes with some information that might help you with that frustrating question: How many withholdings should I claim on that W-4 document dealy that my employer makes me fill out?

I could end the blog post here by answering “it depends”. But I’m guessing that you would question the usefulness of this blog post, so let’s try to dig in to something that is actually useful for you.

Tip #1: If you still have your most recent taxes handy, use this tool from your friends at the IRS:

Click to access fw4.pdf

I hope it’s pretty self-explanatory. Do it right after you get your tax return done, while the terminology and such are fresh on your mind!

Tip #2: If you got a big check last year, and don’t expect major life changes (birth of a child, significant change to income, etc.), add a withholding and see how it affects your paycheck. This is a simple, safe change. And then you can do some simple math to see how it will affect you.

Example:

Old federal income tax taken out, $51

New federal income tax taken out, $31

CONGRATULATIONS! You just got a $20 per paycheck raise by adding a withholding.

Number of checks left this year: 21 (in this example, you get paid twice a month and you’ve received 3 checks so far in 2015)

Reduction of taxes taken out = ($51 – $31) * 21 = $420

So you’ll get $420 more in your pocket throughout the year. Now look at the Federal Refund you’re expecting from your 2014 taxes…$2920! Again, assuming no major changes, that $420 can be taken from $2920 and you can still expect about $2500 next February. Not too scary, right? You still would enjoy seeing a $2500 check, I’m sure. You aren’t going to have a risk of owing when taxes roll around. But what you CAN do now is set up that Money Market Account and set up an automatic transfer of that extra $20, twice a month. And $2500 is still a pretty big FREE LOAN to the government, I’d encourage you to add another withholding or two.

Would you write a $200 check every time you go to the grocery store, even if you only spent $125? Well, the grocery store will give you back that money sometime next year, if you can prove how much of your money that they have. I’m guessing you wouldn’t be too excited about that.

Another reason to reduce your refund – we spend our hard earned money differently than “extra” money. If it goes from your paycheck to your bank account, you’re going to think hard about how you save or spend it. If it has this illusion of a “bonus” once a year, you might tend to be more careless or frivolous with it. If you have to watch your savings account get slashed when you buy that new Apple widget that you don’t need, you might choose to hang on to your money.

One of the common excuses to getting a large tax refund is that “It forces me to save…if I get that extra $50/month in my pocket, it will find a way to leak out. This way, I can count on the money being there once a year and I can intentionally use it towards [insert commendable goal here, such as paying down debt or kids’ college fund].” I empathize with what you’re saying. Day-to-day discipline is hard. And that $50/month extra in your banking account is almost invisible, so from a psychological standpoint, it doesn’t feel like you’re gaining much ground, unlike that lump sum annual deposit that makes you feel good. But apply this to a different area in your life. Instead of working out for 40 minutes, 3 days a week, you instead workout for 8 hours on a Saturday, once a month. Instead of doing something intentional for your spouse once a day, just be selfish, but plan a great getaway every couple of months where you write them a poem, take them to their favorite restaurant, do their favorite activities. Have seconds and dessert for every meal during the week but don’t eat anything on the weekend. Not only are these “plans” unhealthy, but they do nothing to develop your character or your discipline.

I encourage you to take this small step with your money this year. And really, it’s not that challenging from a discipline standpoint, if you resolve yourself with a little intentionality up front with 3 steps:

1. Reduce your tax withholding
2. Look at your first check to see how much of a raise you got
3. Set up a recurring transfer to move that money to a “safe” place

I hope that was useful and that you can enjoy some of the benefits of understanding and having more control over your tax situation and your money.

Please, let me know if you have questions, want clarification, or have a situation that I might be able to help you with.

-Joel

Recent reads #2

Check back HERE for what this 2nd edition Recent Reads post is all about

Prepare to be disgusted, Planned Parenthood’s agenda spelled out very clearly.  Their abortion to adoption rate is 201 to 1.  That stat made me gasp and cringe.

Can we remain faithful to Truth and the gospel with the changing culture and emergent Millenial generation?

Our words are powerful, and not always in a positive way

This sermon gripped me and then confused me.  What do you think about how to be loving and how to be bold?

Be careful when checking books out at the library to review their content before letting Junior choose which picture books he takes home.  He could bring home this story.

And then there’s this.  Which isn’t something I read, but it is still making me laugh!

What have you been reading lately?  Please post links in the comments for all of us to learn a little bit more about the subjects you think are fascinating.

What we’ve been reading lately

We do lots of reading in our house and it is HARD to fit it in with 3 little minions in various levels of destruction over their bodies, our bodies, and our possessions 🙂

BUT, we wanted to document some of the great articles we come across that are inspiring, enlightening, convicting, depressing, worthwhile and IMPORTANT for our generation!  Some are funny and light-hearted too, but the older we get, the more we realize we don’t have that much space for just funny and light-hearted.  There are a lot of battles out there that we are involved in and we aren’t going to sit passively by.

Anyways, we could continue to sit passively by if we didn’t know what was going on!  But we do! We have the power of finding news videos and articles about nearly anything we want to! Even though media isn’t 100% trustworthy, it’s a place to start, right?!

So, below will be links to topics and articles that I have read lately and thought interesting enough to share.  Some of these can also be found on our Facebook page, if you follow us on there.

Lecrae breaks the silence and publicly confesses a past abortion

19 week old baby survives the womb for moments

My first sermon listened to by John Piper – he is DYNAMIC!

Indiana may be voting to pass a bill to allow baby boxes – a safe haven for abandoned children – much like the box used in the new documentary The Drop Box:

The One Another’s of scripture.  A tool I used when I worked in a women’s crisis shelter and a common tool I used when in school for counseling and as a counselor.  A necessary tool for us as believers in Jesus Christ and His word!

Parenting is a spiritual battle.  Be armed, on guard, ready, and willing to fight.

Speaking of spiritual battles, Benjamin Netanyahu’s speech to Congress from recently

So I guess none of that was funny or light-hearted, but I promise, some times it is 🙂

What have you been reading lately? We’re always looking for suggestions!

Shattered (into) Pieces

For 6+ months, the 4 year old has been in charge of unloading the dishwasher each day. We started slowly with the silverware.  Then added stacking all the plates and cups onto the counter and now have progressed to then getting onto the counter to put them away in the cupboard ONE AT A TIME.

See, as a veteran dishwasher unloader, I have learned the the safest and best tactics for unloading, stacking, and putting away the fragile dishes.  As a mama, I am imparting this wisdom onto our kids, as per my job description (see Deuteronomy 6:5-9).

However, as a fellow sinner, the 4 year old took it upon herself to do it her own way today, which she honestly believed was ok.  Not just ok but safe.  Not just safe but BEST. Taking a handful of bowls and placing them on the 2nd shelf of the cupboard…and you all know what came next.  The crash.

As I enter the scene, looking something similar to this,

source

 

You’d think I would be meditating on the verse that Lydia just text me, “Dear children, let us not love with words or speech but with actions and in truth” – 1 John 3:18

But no, I was grieving my beautiful green bowls that lay in pieces all over the counter on top of the other clean dishes and all over the ground where my 1 year old was headed as he crawled.  I yelled.  I banned the children from the kitchen. I mourned, silenty. I cleaned and swept and threw away the bowls.  I put away dishes and swept again and double checked so no tiny toe would be cut by a minuscule shard of what once was a pretty green bowl.   I boiled a little.  And I realized that I handled that situation really poorly.

And God brought to mind His spin on this whole situation.  Isn’t it just like us to make such a mess of ourselves, our situations, and our lives when we, in a brief moment of proud confidence and selfish ambition, try to do it our own way?  The way we think is ok? And safe? And BEST?  And look at how quickly we can make it all a mess. A mess that we are incapable of cleaning up ourselves.  A mess that God so lovingly uses for us, in spite of us and out of love for us.

God does this

source

 

out of our mess.  Out of our shattered pieces His light most certainly will shine through.

 Each time he said, “My grace is all you need. My power works best in weakness.” So now I am glad to boast about my weaknesses, so that the power of Christ can work through me. ¹⁰ That’s why I take pleasure in my weaknesses, and in the insults, hardships, persecutions, and troubles that I suffer for Christ. For when I am weak, then I am strong.

– 2 Corinthians 12:9-11

Books of 2014

Another year, another shelf on the bookcase covered with some new favorites.

(image)

 

Wife After God by Unveiled Wife (blog) Jennifer Smith (blogger) – she has such a raw and intense story about marriage expectations being shattered.  She also has a new book releasing this spring!  A simple and worthwhile read for any wife and anyone planning to become a wife some day!

The Hiding Place by Corrie Ten Boom – Classic must read.  Full of perspective and evidences of God’s grace and protection in the worst places in history.

Love the Least (A lot) by Michael Spielman – It’s like a documentary in book version.  Full of pro-life information, stats, and cultural references.

Meet Mrs. Smith: My Adventures with Six Kids, One Rockstar Husband, and a Heart to Fight Poverty by Anna Smith – Easy and fun read, I read this in the middle of nights on my Kindle while feeding newborn Olson

Washington’s Lady by Nancy Moser – I am a sucker for historical fiction! I loved reading about George Washington’s life, even though some was embellished, she went into great detail at the end identifying what was true, probably true, and embellished.  Highly recommend Nancy Moser’s books, especially this on!

Restoring the Joy in Your Journey: I Choose Joy! by  Candace R. Hansford, Ph.D. – I got this book after listening to this author speak at the Cincinnati homeschool convention last year.  Good book, GREAT topic.

Growing Up Duggar by Jana, Jill, Jessa, & Jinger Duggar – absolutely LOVED this book.  Soaked the entire thing up and promptly filed away much of the wisdom they shared in how they were raised as precious daughters of the King. So thankful for this family and their transparency

A Love that Multiplies by Jim Bob & Michelle Duggar – again, absolutely LOVED this Duggar book.  Full of so much parenting advice.  Can’t wait to read it again!

The Nesting Place by Myquillyn Smith a fun, easy, and inspiring decorating and DIY book

How to Control Your Emotions So They Don’t Control You: A Mom’s Guide to Overcoming  by Brooke McGlothlin – I should have written a synopsis as soon as I read this book because I don’t remember 😦

Unglued by Lysa TerKeurst – Learned so much about my emotions.  Reminded and challenged that I’m the one in charge of how I respond to them.

Interrupted by Jen Hatmaker – after reading 7 a couple times 2 years ago, Interrupted (written before 7) was kind of disappointing 😦  Not to mention that some of her authors that were inspiring to her are controversial in their theology…helped me to begin a study on false teachers and false prophets.

Bridge to Haven – Francine Rivers – We LOVE Francine Rivers around here.  But man was I disappointed with the sexually explicit and suggestive scenes in this novel.  It saddens me that she and the publisher felt it necessary to include to make this story ‘whole’.

Children: Burden or Blessing by Max Heine – 30 year old book about our cultures view towards family and children.  The history is still relevant today.  An amazing source of statistics and facts as well as insight into what scripture says about family and our role in that as God designed us.

The Best Yes by Lysa TerKeurst – Great read.  Highly recommend!

And of course, since I had a baby again last  year, parts of Babywise!

This year, I’m going to add an additional category of things I read and name the blogs and websites I spend the most time reading

The Matt Walsh Blog (he also writes for the Blaze)

The Better Mom

For the Family

What books or blogs do you recommend for me in 2015?! 

 

 

How Do Federal Income Taxes Work? (Part 3 of 3)

Thanks for joining me for the epic conclusion to my 3 part series on taxes. I’m glad that both of you stuck with me on this until the end.

To summarize (and please read the 2 earlier blogs before reading Part 3), Part 1 was about calculating “taxable income”. Part 2 was about taking this taxable income and determining how much money you’re supposed to pay the government to be a citizen of this country. Pretty simple concept, yet it can be intimidating and certainly can be complicated when you get down to the nitty gritty. But hopefully the big picture is a little clearer now.

Tax Refunds

Now I want to try to clear up a common erroneous misconception, which is your tax refund. As you know, each paycheck you get, the government takes out some amount for federal income tax, based on how much you make and how many exemptions you put on your W-4 form. The amount that is taken out for federal income taxes each pay period has zero affect on how much you actually pay in taxes.

To take it a step further, if you’re getting excited because the IRS wrote you a $5000 check at tax time, all that means is that instead of paying them (through your paycheck withholdings) the $1638 that you actually owe them (from our example above), you actually OVERPAID by paying them $6638 throughout the year. So the government just says, hey, I don’t know why you sent us all this money, but here is your $5000 back, we really only needed the $1638. So in March of 2015 you can get your $5000…OR every month in 2014, you could have given yourself a $417 RAI$E! ($5000/12 months = $416.67 per month) So essentially, your refund is basically the result of you giving the government an interest free loan, instead of you having it in your own pocket or investing it. It’s NOT LIKE WINNING THE LOTTERY to have a huge tax refund check. Some people use their tax refund as a forced savings plan. Getting a refund of $500 or so and putting that towards a weekend getaway or some spring projects is one thing. But if you want to save a few thousand bucks for your next car purchase or for a family vacation or to fund your emergency savings fund…set up an automatic transfer into a savings account! If you don’t want to see it every day or have instant access to it so you don’t accidentally (ha!) spend it…set up something like a Capital One 360 Savings Money Market Account. You can have it transfer on your payday so you won’t be tempted to spend it. So essentially, instead of having it transfer to Uncle Sam where you don’t have access to it until February or March of the next year and earning 0% on it, you transfer it to your own account in which you have access to get your money if you need it and you collect interest on it. (At the time of writing, the interest rates are low, only 0.75%, but the rates are variable and the interest rate in a bank account will never be worse than the 0% that the IRS is offering you to hold onto YOUR money!)

Summary

So in summary, taxes don’t have to be scary or confusing. There are certainly a lot of rules and situations, but I am guessing that most people have never been taught the basics. And understanding the basics can go a long ways in understanding how to adjust your W-4 (so you don’t lock your money up all year at 0% return), what effect children have on your tax liability, how you can factor in tax implications when making decisions about schooling or home improvement projects, and certainly many other advantages.

Believe it or not, I enjoy talking about and learning about taxes. If you have questions or comments or see errors, let me know. I may write a couple more posts about some other tax related items, such as how you can use a 529 college savings plan to reduce your state income tax liability (how does an instant 20% cash back rebate sound?) or how to decide between a Roth IRA (or 401k) and a Traditional IRA (or 401k). Or maybe you’re intrigued by exactly what you can do on your W-4 withholdings to control your tax refund for next year, especially if you’re interested in getting an immediate increase in your next paycheck. LET ME KNOW!

Thank you very much for reading!

-Joel

How Do Federal Income Taxes Work? (Part 2 of 3)

Welcome to Part 2 of 3 in my series to try to simplify the concept of federal income taxes. I hope you stick with this series, I’ve tried to lay it out in a way that I wish it were laid out for me 10 years ago. In Part 1, we learned how to calculate your “Taxable Income”. This is basically how you take how much total money you made in the year and reduce it down to the number that the IRS says you need to pay taxes on.

So now you’re ready to go to the “tax tables”. But the tax tables are really a massive table of calculations. I think it’s easier (and of more value for understanding taxes and thinking about ways to reduce your taxes in the future) to calculate it yourself. So instead we’ll use the tax brackets. Here are the tax brackets for 2014 for a married couple, to continue with our example:

Click here for tax brackets and other good 2014 tax details

Don’t worry, it’s not as complicated as it looks. We just calculated your (theoretical) Taxable Income of $30,300 in Part 1. The left side of the chart gives all of the ranges of income possible, we’re in the 2^nd row down, between $18,150 and $73,800. So, the first $18,150 of EVERYBODY’S taxable income goes into a bucket that’s taxed at 10% (blue piece  in chart below). The next piece of your pie of taxable income gets taxed at 15% (red). (In our example, this is the highest amount our money is taxed at. Some people get a portion of their money taxed at 25%, another portion at 28%, etc. But everybody gets the first portion taxed at 10%, next at 15%, and so on.

So our taxable income of $30,300 turns into:

$1815 ($18,150 X 10%)

+   $1823 ($12,150 X 15%)

=   $3638

Ok, so the government says with your income and your personal situation with regards to your family and how you spend your money, you owe them $3638 in federal income taxes for the year.

But wait, there’s more! Note that for all of the deductions and exemptions, you’re reducing the amount of taxable income you have. In the end, you’re going to have some money falling into those brackets and the government is going to take their slice of your pie. BUT, at this point there is a way to reduce the taxes that you owe more quickly than reducing your taxable income: Tax Credits. These are not applied up front, but rather after you determine your taxes owed, they directly reduce what you owe. The most common and well known tax credit is the child tax credit. Basically, this is $1000 per kid 16 and under (this amount can be reduced depending on your income). Some other common credits: education credits (paying college tuition, for example), energy credits (put in geothermal, for example), retirement savings credits (if your AGI is under $60k and you’re putting money into retirement accounts), and child care credits (day care, for example).

That’s a lot of stuff, but the big picture is that once you calculate your taxes based on your income, you look for these credits and start subtracting. Since this family has a 2 year old and a 4 year old:

$3638 taxes owed

– $1000 X 2 children

= $1638 is the total amount that the federal government asks you to pay for the year. That’s it. We made it. You made $67,500 in your family and the government says that you need to share $1638 of that.

Summary

Ok, that was the big picture. Now I’m going to simplify it down to just the math and basic description.

Recap

$67,500 how much money you made

–  $3500 put into Traditional 401k retirement

–  $5500 is withdrawn for health insurance premiums and HSA

=  $58,500 Adjusted Gross Income (AGI)

–  $15,800 family of 4 exemptions X $3950

–  $12,400 standard deduction for married couples

=    $30,300 Taxable Income

Drop your Taxable Income into the appropriate buckets, first $18,150 in the 10%, the rest in 15%.

$1815 10% bucket

+    $1823 15% bucket

=    $3638 Taxes

–     $2000 Child tax credit

=    $1638 Owed to the IRS for Federal Income Taxes in 2014

OH NO! You mean I have to write a check for $1638 to the government?!? This is a disaster, Joel, my tax preparer works the numbers so that I get a check sent to me! Hold on there. The 3rd and final installment of this riveting series will bring it all together. It will include a little less math and a little more explanation, which I’m guessing you’re thankful for.

Stay tuned for Part 3 of 3!!!

-Joel

How Do Federal Income Taxes Work? (Part 1 of 3)

Like most people I know, I was never taught the basics of personal income taxes. But over the years, I’ve developed a simplified understanding of taxes. As a disclaimer, I’m far from a tax expert. You might be reading this as a far more knowledgeable tax guru. But I’m writing this to someone that has never learned how taxes work. Someone that shows up at the tax preparer’s office every year and just hopes to survive and walk out of there with a check coming their way. Someone that just puts a “2” on their W-4 and lets it ride year after year because they don’t know what it means to adjust that and how it affects their paycheck and their tax return. I hope that my simplified example and terms are helpful for you.

Part 1 – Good News: Only a Portion of your Money Gets Taxed!

The first step is not a difficult concept, but it’s critical. As an individual or a family, you’ve earned a certain about of money in the calendar year. But before you can get into tax tables and credits and determining how much money the federal government says that you owe, you need to figure out what portion of your income that you’re actually getting taxed on.

EXAMPLE Tax Calculations

[Instead of throwing theory and algebra at you, it will be clearer to use an example. In this example, we have a married couple with 2 young children.]

Start with how much you made (wages, dividends, interest, etc.)

Example:

$67,500 total household gross income

Simple enough. It doesn’t matter if you have 1 income source or 10 income sources in your family, just throw it all into bucket to see what your total income is.

In your paycheck you’ll have a variety of items that are deducted from your take home pay. Some of those items are deducted BEFORE your taxes are calculated. The Federal government will not tax you on items such as: health insurance, dental insurance, Health Savings Accounts (HSA). Also, a Traditional 401k retirement plan is federal tax-free until you withdraw it when you retire.

So in our example, throughout the year 2014:

$3500 is withdrawn for Traditional 401k retirement

$5500 is withdrawn for health insurance premiums and HSA

So the government says, really you made $67,500 – $3500 – $5500 =

$58,500 this is your Adjusted Gross Income (AGI); your starting point for taxes

But the government doesn’t tax you on all of that income. They adjust it down further using personal exemptions and deductions. Don’t let the fancy IRS words confuse you. They really just subtract a little more from your income (AGI) before they start calculating how much money you made that they’re going to tax you on.

Personal exemptions are determined by your family size. So a married couple with 2 kids (under 19 or under 24 and full-time student) would have 4 deductions of $3950 per person (2014 value):

$3950 X 4 = $15,800 in personal exemptions

There are 2 options for your deductions. The first option is to itemize. There is a whole list of “tax deductible” items (you often hear people say that you can “write something off”). The most common things for most families would be charitable donations and mortgage interest. (If you give a lot to charity, pay a lot of mortgage interest, or otherwise know that you have a lot of “write off” items, you’ll need to learn a little more about itemizing) For the sake of simplicity, we’ll take the other option, the standard deduction. For a married couple, this a flat amount determined by the IRS each year. In 2014, it will be $12,400. (So you’d have to have donations, mortgage interest, and other tax-deductible items in excess of $12,400 in order to justify adding complication to your taxes and itemizing all of your deductions in order to reduce the amount of taxes you owe.)

Now you have what you need to calculate how much money you have to tell the IRS you made last year that they should tax you for.

$58,500 AGI (Remember, this is not the same as your Gross Income)

–  $15,800 family of 4 exemptions

–  $12,400 standard deduction

= $30,300 Taxable Income

That’s it! You now know what your taxable income is. You made $67,500 but for tax purposes, the federal government says, nah, let’s just worry about $30,300 of that. We’ll tax you on that portion and go from there. The first $37,200 is free!

The next step is to move onto the dreaded “tax tables”!!! Don’t worry, I’ve got you covered in Part 2, it’s not as intimidating as we might make it out to be.

Come back in a couple of days and we’ll work through Part 2 and then a nice summary that will bring it all together!

-Joel

Resolution Letters

Happy New Year!

I can still say that right? It’s not too late into the New Year that we’re already looking forward to the next holiday, letting the freshness of the new year wear off as we browse through the Valentine’s Day themed chocolates in the seasonal aisle at the grocery…

Well, I hope not.

Because THIS YEAR is going to be great!

THIS YEAR we have the chance to try again!

THIS YEAR we can have accountability to make all those resolutions easier to achieve.

THIS YEAR we’re going to write ourselves a letter.

My friend and neighbor, Jane, gave me this idea while we were having lunch to celebrate her turning 30 (Happy Birthday, Jane!).   This year, I’m going to write down my resolutions.  And my thoughts on what went right and what went wrong with that CRAZY Christmas and holiday season we just survived.  And I’m also going to write down what God is teaching me right now and how He’s working on my heart.

For me, my letter is going to remind me all the ways I want to be accountable.  Having a mentor regularly speaking truth into my life.  Meeting with a friend to pray over our marriages.  Meeting with some ladies to pray over our precious children.  Exercising side-by-side and challenging our diets with another friend and neighbor.  And ALL of these ladies and I will be memorizing God’s word to strengthen these areas and make us more disciplined.  I want to decide on my word/theme for the year.  Should it be Humility? Honesty? or Self-Control?  I want to write in the letter all the reasons why I am needing these themes in my life and in my heart.

I am going to write this all down, in greater detail than the blog world needs, and I’m going to give it to Jane.  And she’s going to give me hers.  And at Thanksgiving, we’ll give them back to each other to read and remember.  And to be encouraged by.  And to be sobered by.  And to use as we prepare for 2016.

What will be in your letter?  Who are you going to choose to exchange it with?

The 1 year old

Another baby is 1. So, I guess, not a baby anymore.

Well, he still can act like a baby. 🙂

Have him turn 1 is so exciting, but a little bittersweet.  It is all going so quickly.  The growing, the milestones, the accomplishments, the days, and now the entire year.

I’m going to tag the post from his birth story so I can relive that glorious, God-ordained day, and you can too if you’re interested 🙂

Olson Emmanuel’s birth story

At least it’s not 40 degrees below 0 today. 🙂