Category Archives: joel

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:

http://www.irs.gov/pub/irs-pdf/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

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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 federaltax refund 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 2nd 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)

Confused about taxesLike 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 Calculationsw-2-wage-and-tax-statement

[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

Choosing Thankfulness

My partner’s gone this week.  Work traveler…

BIG FAT SAD FACE

However…when I tend to bathe in cookies, ice cream, late night movie marathons, pity party’s, and other self-indulgences while he’s away…I am choosing thankfulness this week.  Maybe it’s my new obsession with Instagram…or the 100 Happy Days challenge I’m doing ON Instagram…but however it happened, God is gracing me with peace and thankfulness this week.

Husband and I up at 5am Monday morning so he can catch his flight? Peace.  He gets to the airport to find out his flight is cancelled and instead goes to work over an hour early? Peace.  Husband and I up at 5am Tuesday morning so he can catch his rescheduled flight? Peace (though, I was not so much ‘up at 5am’ this particular morning…).  Once again he gets to the airport to find out his flight is cancelled…Peace.  God reveals to me that all of our prayers for ‘safe travels’ and ‘protection’ could have been answered through him missing rush hour traffic two mornings in a row.  Or flying two mornings when there were storms…or who knows how God ‘protects’ us – we don’t even know all of the things that we miss!

Checking out at Target with the kids behind another customer who’s credit card isn’t getting read and it’s taking forever at the same time I should have them home in bed? Peace.  My 4 month old literally crying the entire way home? Peace.  My almost 4 year old telling me she had to go potty as soon as I pulled out of the gas station parking lot (to check on the 4 month old and try to assess why he was still crying…)? Peace.

We’ve still got 2 days to miss him and lots more opportunities for stress and sadness and selfishness…But thank you God for unexpected days home together, plans still working out for Joel’s work needed done in Mexico, kids who sing to the baby when he’s crying, over-tired cuddles, going to sleep right away, Grandma’s who help out, Kids Eat Free night at Chik-Fil-A, and a God who is teaching and molding in every situation

 

Faithfulness

About a month ago, a good friend asked me what I would identify as the greatest area of faithfulness in my life.  What a powerful question.

I first thought of our recent birth experience with Olson – and what a redemptive story that has been for us.  But as I got to contemplating more, I knew that there was another area that God has been so incredibly, miraculously faithful in.

For it to not have come to mind immediately does not diminish the power of God’s faithfulness, but is a testimony to how wholly and wonderfully faithful He is, that my entire life is so encompassed and settled with His faithfulness.

It is providential, miraculous, redemptive, restorative, beautiful, truly amazing and a gift that compares to nothing but the saving grace of Jesus Christ.

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This husband for me and father for our children has filled in me a gap that was wider, deeper, and larger than I think I will ever be aware of.  God’s providential plan for our marriage is more amazing than I will ever comprehend.  To say that we’ve been married for 6 years today, is unbelievable in many ways.

1. I cannot believe that we’ve already been married 6 years!  It’s exciting to feel like we’re gaining some ground and experience and longevity to this most precious relationship.

2. On the other hand, I cannot believe we’ve ONLY been married 6 years!  Joel is my best friend; lover of heart, mind, body, and soul; the perfect mate that compliments every part of me.

I can honestly say that if this was our last day to enjoy this wonderful marriage together, that I could live in true thankfulness.  That our life together and marriage has been completely full, satisfying, rewarding, and redemptive.  That God’s faithfulness has been written all over our life together, and that if we were to be parted, I know with complete confidence that God’s faithfulness would continue

The best DADDY ever

We are SO BLESSED.

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Olson Emmanuel 009

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Obviously, he can do anything and no feat is too great for this strong, loving daddy!

To top it all off, on his first day back to work, he left us surprise notes for when our day started

(he feeds my love language well: SURPRISES, that’s a love language, right?)

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We love you, Joel and are so thankful you are our (husband) and DADDY!