Income Tax Returns

[Reign in Acai]

The thing is you can't suck money out of 401k on a whim. I believe there's only three conditions.

Life threatening
To keep your home (step away from being destitute)
Or to borrow for a new home

All of which you have 3 years(?) to pay back.

 

[Krilons Resa]

Yeah, I just read a bit on it on Wikipedia. I dont like the sound of people telling me what I can and cant do with my money. Fuck them.

 

[Krilons Resa]

Also, say you have an account that has 5% interest rate and you have say, $5,000 in it. Does that mean that by year end, you should have $5,250? Is that how it works?

 

[Dark One]

Also, say you have an account that has 5% interest rate and you have say, $5,000 in it. Does that mean that by year end, you should have $5,250? Is that how it works?

It depends on how often the interest is calculated (compounded monthly, quarterly, semi-annually, annually, etc.). The more often it's calculated, the greater the interest income.

Example 1:

$5,000 deposit @ 5% interest compounded annually:

Interest income = $250, total = $5,250 after 1 year

Example 2:

$5,000 deposit @ 5% interest compounded quarterly:

Quarter 1 interest income = $5,000 x .05/4 = $62.50, total after quarter 1 = $5062.50

Quarter 2 interest income = $5,062.50 x .05/4 = $63.28, total after quarter 2 = $5062.50 + $63.28 = $5,125.78

Quarter 3 interest income = $5,125.78 x .05/4 = $64.07, total after quarter 3 = $5,125.78 + 64.07 = $5,189.85

Quarter 4 interest income = $5,189.85 x .05/4 = $64.87, total after quarter 4 = $5,189.85 + $64.87 = $5,254.72


By investing in an account where the interest compounds quarterly instead of annually, you just made yourself an extra $4.72 for nothing!

Anyway, obviously, the greater the principal, the greater the interest discrepancies.

Jason

 

[Dark One]

I have some money in CDs, but it's really just a place for me to hold mid-term savings. If the goal is to save money for retirement and you have access to a 401k, I would highly, HIGHLY recommend contributing to that first. The advantages are just so enormous compared to a taxable CD.

Let me clarify that I absolutely agree with you and Zod here.... *if* the goal is long term investing and you have the money to set aside to invest in 401(k)'s, IRA's, mutual funds, stocks, etc. If your funds are limited and you're simply looking for better short term returns than a checking account, then you may as well go with CD's, Money Markets, etc. as a "better than nothing if that money is going to sit around anyway" type of investment.

If I weren't concerned about needing to have immediate access to my funds and had the extra income to spare, I'd be all over the higher return investments. I saved up for a down payment on a house in 2003 for the three preceding years and basically doubled the amount of money I started with in 2000 investing in company stock and other diversified funds. If I'm able to, I'll get back into them again as soon as the opportunity presents itself.

Jason

 

[General Zod]

Excellently stated. The only thing I would add (or rather, re-emphasize) is that if you're posting on this board, you're probably pretty young relative to retirement age, and the short-term ups and downs of the stock market are totally meaningless when it comes to long-term savings. So even if you hit that rare year or five when the market goes down, that'll be more than made up for over the next 20 years.

The other thing about investing young, is the money you contribute now, is the money you will reap the greatest benefit from, because it will compound over the greatest period of time.

Zod

 

[Conspicuously Absent]

I put in 40 euros a month into a Bausparvertrag here (Building Savings Fund/plan or something like that), and a lot of employers throw in some cash as well. The longer its in there, the bigger the percent the government throws in at the end (the interest is only on your contribution and comes from the bank). So in 10-15 years when that becomes an issue, that'll be a pretty hefty pile of cash. It can only be used to build a house, buy a house, or build land to build a house. But its still pretty handy to have.

 

[Tide In Mind Out]

I'm only getting 86 dollars back. I calculated it myself first and then tried the free TurboTax thing. Succccccckkk.

 

[Climb Thar Hill]

Someone help me understand this....

I know a few people who this past year worked the whole year and are either getting very little back or owing (my good friend is getting back $100 but owes $92)

Where as previous years where they worked part time or considerably less than this past year they got decent returns.

Wtf is up with that?!

 

[Reign in Acai]

The more you make, the more they take.

 

[Climb Thar Hill]

Well yeah...but shouldn't you get a decent return if they raped you all year rather than owing?

 

[Hell Mike]

Someone help me understand this....

I know a few people who this past year worked the whole year and are either getting very little back or owing (my good friend is getting back $100 but owes $92)

Where as previous years where they worked part time or considerably less than this past year they got decent returns.

Wtf is up with that?!

I suppose they paid tax based on a full year's pay those years and got back the difference? That's how it works here at least, happened to me a couple of times.

 

[Dark One]

What it mainly boils down to is what their number of allowances (exemptions) were on each paycheck and whether or not that number of allowances are what they should be. (These are the number of allowances you write on your W-4 form at work).

For example, I'm eligible for 2 allowances from my W-4 but usually elect not to take them (I write in "0" instead of "2" on the form) in order to have more Federal taxes withdrawn than I should. This automatically gives you a refund each year. If you want a HUGE refund, you can elect to have as much additional money taken out of each paycheck as you want and it will pile on to give you a greater refund at tax time. Of course, as Zod and Neil have been rightfully preaching, there are FAR better ways you can invest that extra money throughout the year rather then letting Uncle Sam have your interest income.

What you need to tell your friends/co-workers is to examine a new W-4 form and make sure they understand that they don't need to take the number of allowances they're eligible for if they want a bigger refund and less take home pay per paycheck. Keep in mind the above advice though - the more take home pay you have, the more extra cash you have on hand to invest.

One last thing - you can also list MORE exemptions on your paycheck then you are entitled to (for example, 6 instead of 2 or whatever) until you're hardly paying any Federal taxes at all per paycheck. You will owe a ton of money to the IRS at tax time, but you will maximize your take home pay and your investing ability.

Jason

 

[skyrefuge]

Every year, you must pay a specific amount of money in taxes. Call this 'X'. This amount varies from year to year, based on your income and other factors. It is generally paid over the course of the whole year, by money that your company automatically deducts from your paycheck.

At "tax time", you calculate how close the amount that you ended up paying (through those paycheck deductions) came to the actual amount you were supposed to pay. Call this difference 'Y'. If you paid too much in tax over the year, 'Y' is a positive number, and you get a refund. If you paid too little, 'Y' is a negative number, and you owe money.

The size of 'X' has absolutely no relationship to the value of 'Y'. Think of 'Y' as just a final adjustment to make your total tax payment for the year correct.

Say in 2006 that I made $50,000. Then assume that the government expects to get $10,000 from me in taxes over the course of the year. By the end of the year, my paycheck-deductions added up to $11,000 (because they're just an estimate). Thus, at tax time, the government owes me $1,000, which I get in the form of a refund.

Then I get a raise for 2007, and make $70,000. Because I make more, the government says I must pay more in taxes, so we'll say they expect $15,000. But along with my raise, my paycheck-deduction amount also rose, but not quite enough, so that by the end of the year, those payments total only $14,000. Thus, at tax time, I have to pay $1,000.

So in the case of your friends, in the years when they made less money, they did in fact pay less in taxes. Their company just overestimated the amount that they would owe, so they ended up getting a refund. This year, their company underestimated, so they had to pay the difference at the end of the year. But that amount (whether it's a refund or a payment) is just a small fraction of the total amount of tax that they paid for the whole year.

Neil

 

[Dark One]

Every year, you must pay a specific amount of money in taxes. Call this 'X'. This amount varies from year to year, based on your income and other factors. It is generally paid over the course of the whole year, by money that your company automatically deducts from your paycheck.

You're right, but the taxes are automatically deducted based on the number of exemptions/allowances you enter on your W-4 when you start employment. As I indicated above, you have control over this number and consequently how much gets automatically deducted from your paycheck thereafter.

Jason

 

[Climb Thar Hill]

Thanks Jason & Neil...your info really helped me understand this whole mess...now share your knowledge with me chums

 

[skyrefuge]

You're right, but the taxes are automatically deducted based on the number of exemptions/allowances you enter on your W-4 when you start employment.

Yeah, I was just attempting to give the kindergarten version, where I didn't have to use scaryconfusingmeaningless words like "exemptions" and "allowances". Though I did use "deductions" a lot.

But yeah, then your post is great "for further learning", if someone actually wants to *do* something to affect the refund/payment they might have.

Neil

 

[Dark One]

Yeah, I was just attempting to give the kindergarten version, where I didn't have to use scaryconfusingmeaningless words like "exemptions" and "allowances". Though I did use "deductions" a lot.

LOL - yeah, those words can be scary, but if you just read a W-4 form, they should make enough sense to those who aren't well versed I would think.

 

[Dark One]

Thanks Jason & Neil...your info really helped me understand this whole mess...now share your knowledge with me chums

Cool. Yeah, one thing's for sure, on the surface it can seem like a daunting task in terms of trying to understand it, but once you actually dig into it a little bit, it's really not so bad. Once you get to a point where you're worrying about families, retirement plans, investment properties, mortgage deductions, and so forth, then you're reaching more complicated points. But if you're filing as single, have held one job throughout the year and know how you want to approach your payroll federal tax deductions (invest in some manner or save for a non-interest bearing refund), the pieces quickly fall into place.

 

[Reign in Acai]

I had over 10k in deductions in 2007. If I went exempt the whole year and threw that in a CD, I'd only be making a paltry $500 at the end of a 1 yr period. Not really worth the trouble imo.