That time of year, again

by Finn

We are well into that least favorite time of year for many of us: tax time.

While some may already be done, others are yet to start.

Do you have any tips to share? Potential gotchas?

Tax time is also a good opportunity to review financial decisions, and make adjustments. What have you learned from this tax season? What worked, and didn’t work, financially over the past year?

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112 thoughts on “That time of year, again

  1. I did our taxes at the end of January because we always get a big refund (I know, I know, I should adjust our holdings). I’m usually just waiting for our stock stuff in order to file. So I e-filed and then we got another tax doc in the mail (we had cashed in an old life insurance policy that my MIL had bought for my DH when he was a baby last year and I had forgotten about it). Minor annoyance but I had to file an amended tax return by mail and send in $150. So maybe wait until mid-February to do your taxes.

  2. We extend and file in Oct, which means I spend most of the year fretting about taxes and collecting things, talking to the accountant and various entities that owe us stuff, worrying about how much we owe and then how much our accountant made us over-pay in April when we extended, waiting for the refund of the overpayment, etc. December is nice with no tax stuff.

  3. I just had a long talk w/ DD about this on Saturday morning, as I was writing out checks for her and her brother, who both owe small amounts for state and federal. It was a taxes/check writing/budgeting discussion. Also a vacation discussion, as I had to sign for DS to allow our accountant to e-file for him, since he remains out the country. “From now on, you two need to consider tax time when you’re making spring vacation plans.”

    My tips, which I shared w/ DD. None of these is terribly high-tech or complicated:

    1. Keep a “Current Year – Taxes” file in a prominent location and put every single tax-related document into that file the moment you open it.

    2. Keep electronic files for any receipts that come in via email.

    3. Start early. I get a client organizer doc from my accountant in December. I fill it out and return it, along w/ whatever docs I have, in early Jan. After that, we just wait for straggling 1099s. Our taxes are usually completed by the end of Feb.

    4. Keep receipts/tax docs for 7 years. Duh. My accountant sends our receipts back w/ our return copy, all neatly clipped and labeled in the same way I gave them to her. She gives them to me in a huge brown folder, on which I write the current year, then file with the others. If I’m audited–and I have been–I can find the requisite receipt without issue.

    5. Keep taxes in mind when planning springtime vacations. I’m early enough that this isn’t an issue. DS and I should have thought about this before he planned to be away now. For now, I cause his taxes to be done, but he really should start taking a look at this kind of thing.

    Tips I should follow but haven’t been good about:

    1. Tracking all the 1099 receipts on a spreadsheet as they come in. I have to divide these into categories (travel, meals, professional journals, postage/office supplies, books, etc) and then tally up the total for each category. If I did that as they came in rather than waiting for December, it would be easier in December. Not sure why I insist on shoving all the receipts into a box and then going through them all each December.

  4. I am done with our taxes. I use TurboTax as our taxes are pretty straightforward. I wish there was an option for a non-cheerleader version of TurboTax. The “you’re doing great!” screens just annoy me as it’s just one more screen to click through.

  5. “I am done with our taxes. I use TurboTax as our taxes are pretty straightforward. I wish there was an option for a non-cheerleader version of TurboTax. The “you’re doing great!” screens just annoy me as it’s just one more screen to click through.”

    We are the same, and I agree. I find some of the cheerleading to be condescending as well. But they also have a vested interest in making doing your taxes look very hard so that you will upgrade to their premium packages.

    Our taxes are very straightforward as well. Nothing out of the ordinary – W2 jobs and the normal deductions of middle-aged homeowners with fairly little in the way of taxable investments. The state return seems more complex to me than the Federal as we have some state-only deductions & credits that are easy to overlook.

  6. Timely, as we just did ours yesterday, with just one or two stragglers (e.g., figuring out what we have to do about DD’s job, as I haven’t seen a form yet). For the first time in years, it was a good day, as we are significantly over-withheld (i.e., five figures). Every year, we always owe the feds a little and get something back from the state, so we usually owe a net -$1-2K. But last year we owed the feds something like $10K — I don’t know how we managed to scrape past the “owe penalties” threshold.

    So we apparently over-corrected for that. I had been pointing out to DH for years that he was under-withheld (I’d rather pay out of our monthly checks than deal with estimated taxes), and I got tired of waiting and just decided to fix it myself, so I upped my withholding. Meanwhile, at the same time DH wrote the big check for our 2014 taxes, he wrote another one for estimated taxes for 2015. And then I forgot about both of those things by December and upped my withholding from my end-of-year distribution. So, hey, happy ending.

    Related note: Is the deadline for opening a Roth IRA December 31 or April 15? And can you open up a Roth IRA if you have wages, even if you are a dependent on someone else’s tax return? Since DD now has a paying job, I’d like to open a Roth for her, but I have been waiting for this not-here-yet tax form to (a) make sure it’s real wages and not a “stipend” or something (she is an aide at Hebrew School) and (b) see what the actual total is. But I also don’t know if we can even do this since we’re claiming her as a dependent.

  7. My only tip – if you have an HSA, categorize receipts as you get them and make sure you keep all of them. It’s a pain to track every single prescription.

    Any advice on this? Turns out my health insurer has been allocating expenses to one twin instead of the other even though they supposedly have unique insurance numbers. The doctor’s office seems to have its records straight but when it gets to the insurer, it sometimes gets lumped under one kid. Since we have a family insurance plan/deductible, does this matter? A bit annoying they can’t keep my kids straight.

  8. We filed in February. And of course, DH’s and my employer send the ACA 1095 forms way later (mine came this weekend). Luckily they aren’t required for filing because the amount we pay towards healthcare coverage is a line item on the W2, so I just put them with the documents.

    Because of our large return, I adjusted my holdings to get ~$100 more a month. DH’s will remain the same because we upped his 401k contribution. I was sad to learn that I didn’t jump through enough hoops to get my company’s match for 2015. I would have liked the extra boost to my 403b.

    What we’ve done this past year and has really helped us is use You Need a Budget. We’ve been paying attention to every dollar, and found that our debt is decreasing faster than initially planned. This makes us very happy. We’ve also been able to better track monthly spending, adjusting where needed.

    Now we are debating on if we should re-fi into a 15 year mortgage…

  9. We pay quarterly taxes, which I really like. Very few surprises. I purposefully over-save just a smidgen, which is like doing higher withholds, but we get to earn the interest on the money rather than the government. Then, when we get the final amount owed, I write the last Q4 check, transfer all remaining $$ to zero out the account, and start over for the next year.

    We have an accountant, because all of our stuff is not straightforward, and he’s great. I also keep an on-going tax file, and just dump everything into it as we go – receipts, copies of property tax bills, etc.

  10. @ Rhode – don’t refinance unless you can get a significantly lower interest rate, because the closing costs are still ridiculously high, you’ll start over again with payments being all interest/little principal, and the higher required monthly payment will give you less month to month flexibility. Just throw extra principal at the mortgage and pay it off in 15 years.

  11. I use turbotax because I do some family returns as well. The three adult child homeowners, however, have chosen to do it themselves. I think that they a) prefer privacy b) think that if they are adult enough to have a mortgage they should be able to take care of their own taxes. My family clients are always having trouble getting 1099’s or the health insurance details together, so I end up making a pdf of what we have in hand on April 1 and emailing it to them – they can do what they want after that.

    I have a physical “shoebox” with unorganized receipts, efiles for emails and pdfs, but I find a useful tool is simply to keep a list on a spreadsheet with various tabs. I don’t actually enter the amount, but record the date and nature of the deductible expense (business, personal, charity), destination for mileage, or consulting income. I can find almost all of the numbers electronically from credit card and check register, but this is more of a reminder list and helps me not to forget anything.

    Since MAGI on the 2015 tax return will affect two monthly medicare premiums going forward, my main yearly task for the foreseeable future is to time income recognition (I keep a few loss stocks in the portfolio, and I can still make deductible IRA contributions) so that we stay below the income threshhold for additional premiums. So if it is inevitable that one year we will go over because of gains or something else I can’t control, I accelerate more income into that year so that we fall back the next. The worst outcome is to be 2K above the cutoff year after year. I am also keeping an eye on AMT, which we seem to have aged out of.

  12. We won’t get our K1 until after April 1, so there’s no point in starting the taxes before then. I keep a folder where all tax related documents go during the year. Our return is ridiculously complicated ( we file in over 10 states and have about a dozen federal schedules) so one Saturday I will sit down with a box of Oreos and go at it. Being a tax attorney, I just can’t justify paying an accountant to take this off my hands.

  13. We have multiple K-1s and always go on extension (although not in 10 states!). This also gives us an extra 6 months to fund DH’s SEP for the prior year, so his 2015 SEP will get funded in October 2016 this year.

  14. “@ Rhode – don’t refinance unless you can get a significantly lower interest rate, because the closing costs are still ridiculously high, you’ll start over again with payments being all interest/little principal, and the higher required monthly payment will give you less month to month flexibility. Just throw extra principal at the mortgage and pay it off in 15 years.”

    This is exactly what we are doing. The closing costs to refi were ridiculous & would have taken a long time to make up as the interest rate was not that much lower. Easier to just make an additional principal payment each month. We’ve knocked our balance down more quickly than I expected with this approach.

  15. LfB – You can fund her Roth IRA with your own money, I assume that is what you mean, up to the amount that is earned income. You can open up an account for her as a minor. It can be opened by April 15 for a prior year. Fidelity has no minimum balance requirement, but if you want to buy mutual fund shares there is usually a minimum buy in amount.

    As to whether what the hebrew school paid her qualifies as earned income, that I can’t tell you. If they didn’t withhold any SS and you insist they send her a 1099MISC for the Roth set up, she will end up having to pay self employment tax. Weigh that consideration if the amounts are small.

    A main reason to set up a Roth for kids is not so much for retirement funding, but for down payment assistance. They can empty out all the contributions without penalty or tax ten or fifteen years down the road, leaving the earnings behind to grow until retirement.

  16. “you’ll start over again with payments being all interest/little principal,”

    Not really. You start over again, but you’re starting at Year 16. So if you are currently on Year 10 of a 30-year, you’re jumping ahead 6 years and paying *more* interest. Otherwise, I agree: it still makes sense only if you get a big enough delta in rate to offset the closing costs. Last week I saw rates of 2.75%-2.875% for a 15-year.

    @Meme — thanks. Just heard from the guy that they don’t issue forms (kids don’t make anywhere near the reporting threshold — it’s @$80/month max for @9-10 mos. — so they treat it like babysitting money and don’t bother). So much for my idea!

  17. Lark – what do you mean by a significantly lower interest rate? We have an offer from our credit union for a “low closing cost” mortgage with a rate ~1% lower than we’re paying now. I have to do a comparison if we add the extra monthly cost to our mortgage payment now what would happen…

  18. I’m done with the physical (computer) part of our taxes…except for one K-1 which always comes in at the end of March. The income amount is a nit, little impact on taxes, but I want the filing to be accurate just in case. So we wait. We’re getting more back than I expected/wanted so I adjusted my withholding already.
    I second the physical shoebox/folder with current year taxes. Makes it so much easier.

  19. @ Rhode – the principal you owe remains the same, whether you refinance or not. So the question is, would a lower interest rate save you enough $$ on your interest payments over the life of the loan, such that it’s worth paying the closing costs of refinancing?

    What that actual number is I don’t know – depends on how much you’re financing and what the quote for closing costs is (including all ridiculous fees they throw on), and whether you’re currently deducting interest payments & how that affects your taxes.

  20. Denver – I just mean that if you haven’t done your taxes, and it’s April 1, you shouldn’t be leaving the country for 2 weeks. And this year, I should have thought ahead and had DS sign the e-filing form for the accountant before he left the country from Feb –> June.

  21. I should have thought ahead and had DS sign the e-filing form for the accountant before he left the country from Feb –> June.

    Does he have trust income or something that requires an accountant vs. turbotax?

  22. Rhett – he has a mother who requires an accountant vs turbotax. :)

    Next year, the kid needs to do his own taxes. He can use Turbotax. Were he around this year, I’d have had him start now. I completely forgot about it before he left.

  23. I also filed yesterday. We are getting a refund, but I always over withhold to give us a little cushion for stock sales. I made the mistake of totaling up what we spent on taxes, including sales tax, FICA, property taxes, etc. I would have rather not known.

    For those living in states with no state income tax, deducting sales tax is made relatively easier by using a product like Mint. Our checking accounts and credit cards all go in there, so I can download all transactions for the year, identify those that had sales tax, and back into the number. My actual spend is thousands higher than the IRS estimate, so worth the time and effort.

  24. For years we have had an accountant do our taxes. Last year, for a number of reasons, my husband decided to do them himself. It was time consuming, stressful and horrible. This year, he very happily collected everything up and mailed it all to the accountant last week.

  25. I forgot to mention: I dodged a bullet on the IRA rollovers into my current 401(k). We started plugging in the tax forms the two companies sent, and boom, the second rollover comes up as taxable, at a cost of @ $20K — because there is apparently some rule that you can do only one IRA rollover a year. Luckily, the two companies had checked different boxes on the form — I assume because only one was a rollover from an IRA (the other was transferring money from a 401(k) that was still in my former employer’s plan; my other real “rollover” was the year before). So there’s a lucky escape from a world of hurt and annoyance. (Knock on wood — I’m still waiting for some other shoe to drop).

  26. LfB, thanks for the rollover comment. I’ve had various employers and so wind up with various 401(k)’s and need to think about rollover rules like that. My plan is/was to roll them all over into my IRA eventually, for record-keeping simplicity.

    Our main tax question is figuring out how close we’ll become to the Roth IRA contribution threshold in future years.

  27. Our taxes are very straightforward and Turbotax is all we need. The older kids do their own taxes, and I walked youngest DS through his return a few weeks ago. He will be good to go next year on his own with the free Turbotax product. Also opened a Roth IRA for him, but was unable to finalize it completely online; evidently Vanguard could not confirm that DS existed, so needed to talk to him to verify. It’s much easier to open an IRA for a minor than a college student. (And when I opened the first one years ago, I didn’t worry too much about whether DS had actually earned the $1000 that Vanguard required to set up an account.)

    Youngest DS is getting a refund on his federal taxes because, despite having been counseled by his tax lawyer mom, he failed to check off the “exempt from withholding” box on his W-4 form last summer. When I managed the payroll for our summer swim club, I told all of the lifeguards to check with their parents and claim exemption from withholding if they were eligible because it’s a nuisance to have to file a return to get a check for $200. But they didn’t always comply. So that would be my advice — make sure that your eligible kids claim exemption from withholding.

  28. Lfb – I recall when you discussed the rollover plan a while back on this site that those of us in the business mentioned the “trap for the unwary” one rollover a year to you – glad to see that it worked out even if inadvertently. The reason for that rule is that people were abusing the 60 day rule for rollovers of IRA balances paid out directly. They would set up multiple IRAs, say (A,B, C, D) with 100K balances. Then they would empty A on Jan 1 and close it, and put the money to use. Then set up E, empty and close B on day 57 and deposit 100K into E as rollover from A, set up F, you get the idea. So they were withdrawing 100K on a permanent rolling basis without tax consequences or penalties.

  29. Simple tip that I mostly followed in 2015: When you donate to Goodwill, take a picture on your phone of the car load of stuff, then take a picture of the receipt that they give you. Our Goodwill gives you something on thermal paper, and all they ever do is click once each for every category (household, clothing, child, etc.). Immediately email the picture of donated items and picture of the receipt to yourself, with the subject line Taxes 2016. Move it to that folder.

    Do the same email receipts when you donate to your friends’ and family’s charity walk-a-thons.

  30. WCE –

    This does not apply to rolling over multiple 401ks in the same year into an IRA. Only IRA to IRA rollovers.

  31. Milo,
    I go one step further. I only bother getting the receipt once each year, then use that as the support for the dozen or so actual donation runs I make. I took a picture of the carload a few times, but then the rest was a huge guesstimate. We have been purging a lot of stuff and I just used an average of $1 per item. For a low audit risk return, it’s just not worth the bother (IMO) to try to itemize each and every item of gently used clothing or “household items.”

  32. @Meme — Wow, I have no recollection of that at all (tho I am sure you gave it). I blame the ADD. :-) My mind just doesn’t work that deviously — it wouldn’t occur to me that there was a rule to prohibit a clever workaround I never conceived of.

  33. Denver – I just mean that if you haven’t done your taxes, and it’s April 1, you shouldn’t be leaving the country for 2 weeks. And this year, I should have thought ahead and had DS sign the e-filing form for the accountant before he left the country from Feb –> June.

    Just sign it for him. it’s not like the IRS is going to analyze his signature.

  34. Our taxes are not done because we have to file an extension. It is due to one small partnership that barely generates any income, but we have to wait for the paperwork that arrives in the fall. This is the last year because the partnership is finally over, and my husband is thrilled because the information didn’t arrive until Oct 14 in 2015. I yelled, and complained to KPMG (preparer), and JP Morgan (partnership) but that financial information was not available until the very last minute. My accountant was accommodating, but it was stressful and I am glad it is finally over.

  35. My primary tax issue is paying in multiple states and then having to get refunds for the hours I was actually working from home. I noticed that one states sends the letter asking for documentation in an envelope that makes it look like junk mail*.

    * I also noticed AARP send out a mailing in the same style of envelope they send out W-2s. I thought that was both clever and devious.

  36. My job is to gather miscellaneous documents, either electronically or scanned paper ones. Then we dump them all on our accountant.
    Good news: We paid off our mortgage last year!
    Bad news: The mortgage company closed out our online account so I have to make calls to get all the documents mailed and then scanned. WTF?

  37. My tip is to stay away from states such as NY that have rank in the top 5 or top 10 for the highest tax rates – sales, income, property, etc. You name it, and you will have a winner and pay the price. I choose to live here because my family is here, and it makes sense for my profession. I love it here, but think twice about these types of states because adding up every possible tax is very depressing.

  38. MBT – thanks for the comment about estimating your own sales tax vs. the IRS estimate. WA State doesn’t have income tax – just sales tax – and I’ve always used the IRS estimate to deduct it from our federal taxes. DH uses Quicken to track our expenses. I’ll have to see if I can estimate how much sales tax we paid and compare it to the IRS estimate. It makes sense that the IRS estimate would work in the IRS’ favor, not mine.

  39. Two things I miss about NJ – no car tax and free inspections. Now, those things are far outweighed by the things I don’t miss, like sky high property taxes, but still. And every year they manage to make my car worth more money. I know it’s not, they know it’s not, but they adjust the formula so I pay more anyway. And then every 2 years I have to pay $100 to have a lovely guy at Firestone tell me my car is safe to be on the road.

    The nice part is the car tax I pay yearly to my city is deductible on my federal taxes.

  40. Just to a) give you hope for the future and b) make you depressed now, I added up all of our taxes, fed, SS, state, property, sales tax, and we pay 17% of our real gross income (not AGI – addback tax exempt interest, SS haircut, HSA, IRA contributions). Only 10% of our income is wages or other forms of earned income.

  41. “And then every 2 years I have to pay $100 to have a lovely guy at Firestone tell me my car is safe to be on the road.”

    It’s only $16, as required by state law, but that just means most places will simply refuse to do it on weekends, as it takes about an hour and is not worth their time. (My preferred mechanic is closed on weekends.) And it’s an annual inspection.

  42. We turbotax. Just the hassle of dealing with the paperwork puts me in a bad mood, not to mention being reminded of how much we actually pay. This year I’ll be extra grumpy being reminded that we don’t get the child tax credit. I had to bite my tongue so much about people making comments on how great our new baby will be as a tax deduction, because admitting that we make too much would be awkward at best.

  43. Rio, the child-tax phaseout/credit for multiple kids is one of the reasons I’m reluctant to work more. You’re only losing it for one kid so far…

  44. Rio – when the average person talks about a new kid as a tax deduction, they’re usually just thinking about the $4,000 EXEMPTION that everyone gets, including you. The child tax credit is beyond most people…if they know about it at all. While most of us here would be comfortable doing our own taxes with e.g. turbotax, there are tons more people out there who don’t want anything to do with that, hence HR Block.

  45. @ Rhode – I had another thought on refinancing your house. My financial advise to someone in your stage of life would be to be aggressively setting aside money for purchases for which the interest can’t be deducted from taxes (like a car, if you are in a city where having one is necessary). The sooner you can get into the cycle of save up for a car, pay cash, save up for the next one, pay cash, etc. the better off you’ll be, because you won’t have to finance cars. Over the next 30 years, that will probably be a bigger savings to you than refinancing your house. Also, it’s a way of always having a good cash cushion on hand in the event of an emergency.

  46. I’m having a strange life imitating blog moment, considering the two posts before this one. One of my friends with serious heart disease has reached out to me and my daughter for help in supporting her teen daughter now, and in case of her mother’s death. (She may pull through; a heart transplant is a possibility.) We’re all longtime friends, on and off through the years. Her daughter is having a difficult time, and all we’ve been asked is to “be there”. All we can do is assure her mom that we will. Life is sure tough sometimes, and we all need friends to be there for us during those times. … Of course, all I need is another mercurial teenage girl around to challenge my sanity. :)

  47. Evil Twin – I can only wish you the best. A tough situation for all involved.

    I also had life imitating blog moment this weekend. At church a parishioner suffered what I assume was cardiac arrest. It was a very calm and quiet 15 minutes while cpr and then the AED was performed prior to EMS showing up. The good news is that those AEDs work.

  48. “But last year we owed the feds something like $10K — I don’t know how we managed to scrape past the “owe penalties” threshold.”

    I believe one way is to have your withholding for the year be more than your previous year’s total amount due.

  49. “Is the deadline for opening a Roth IRA December 31 or April 15? And can you open up a Roth IRA if you have wages, even if you are a dependent on someone else’s tax return?”

    I believe the answer to both questions is, “yes.” Last April, DW took DS to Schwab to open a Roth.

    I’m pretty sure you have until April 15 to contribute to a Roth IRA. Not as sure, but I believe that deadline is not extended if you file for an extension of filing your 1040.

    “Just heard from the guy that they don’t issue forms (kids don’t make anywhere near the reporting threshold — it’s @$80/month max for @9-10 mos. — so they treat it like babysitting money and don’t bother). So much for my idea!”

    Can’t you still open a Roth IRA for her?

  50. With the financing deals offer, it usually doesn’t make sense not to finance a new car. We had 0.9% on the Highlander.

  51. Rhode, we re-fied to a 15 year.

    We were going to refi anyway, because rates had dropped since our last refi. The 15-year fixed rate was 3/8 of a percent lower than the 30 year rate, and we were planning to pay off in less than 30 years anyway (we’d already had a mortgage on that house for several years, and didn’t want to keep extending the payoff date to 30 years from the lastest refi).

    But Lark is correct also; a term shorter than 30 years only makes sense if it comes with a lower rate (assuming you have no pre-payment penalty, and I would never knowingly get a mortgage that has one). If there’s no difference in rate, get the 30 year mortgage, but make payments based on a 15 year amortization. If you run into a tight cash flow situation, you can ratchet that back to the minimum payment based on 30 years until that situation passes.

    Also consider how that meshes with college savings for baby Rhode; with a 15 year loan, you can have it paid off before he goes to college. If you prioritize paying down your mortgage over college savings, while you won’t have as much saved, you’ll be able to direct the cash flow that had been going to your mortgage to his college expenses. Based on how things are done now, that would make you more likely to qualify for need-based financial aid.

  52. “With the financing deals offer, it usually doesn’t make sense not to finance a new car. We had 0.9% on the Highlander.”

    Did you negotiate the price before you negotiated the loan? I’ve read advice to do so, based on the theory that the dealer has so much flexibility in negotiating, and a low-rate loan chews some of that up.

  53. DD,

    I was going to say the same thing. Lark’s advice is from a world where car loans are 9% not 0.9%.

  54. “A main reason to set up a Roth for kids is not so much for retirement funding, but for down payment assistance.”

    I’ll know better in a year, but I think it also helps with eligibility for need-based financial aid.

    Based on current rules, I’d counsel my kids to only tap their Roth for down payment if that allows them to take advantage of a good buying opportunity, e.g., cratered market is starting to move up, interest rates about to start rising. Otherwise, I’d recommend they leave the money in the Roth to grow tax-free.

    More generally with Roths, because they are great retirement savings vehicles, but with low contribution limits, I would counsel them to try really hard to contribute to those limits. Right now, DS is limited to the amount he earns, so we’re putting all of his earnings into his Roth.

  55. If paying cash meant a lower price than paying via a 0.9% loan, or even a 0% loan, I’d pay cash.

  56. More generally with Roths, because they are great retirement savings vehicles, but with low contribution limits,

    Don’t forget the Roth 401k which seems like an increasingly popular option.

  57. “We won’t get our K1 until after April 1, so there’s no point in starting the taxes before then.”

    There’s one potential benefit.

    Identity theft has apparently become a big problem for the IRS. From what I’ve read, the typical case is that some tries to file a return, only to find that an identity thief has already filed using their SSN. So it seems to me that one way to minimize your chance of such identity theft is to file early, even if that means filing an amended return after you get your K1.

  58. “Don’t forget the Roth 401k which seems like an increasingly popular option.”

    Yes, I believe many people who are ineligible to contribute to Roth IRAs due to earning too much can still contribute to Roth 401ks.

    We’ve compared before (I don’t remember if it was here or TOS) the Roth and non-Roth 401ks. The conclusion I recall is that if you assume the same tax rate when the money is earned and when it is withdrawn, and the same rate of return, the Roth 401k effectively allows you to put more into your retirement account.

    However, one gotcha to be aware of is that any money put into your Roth 401k is reported as income that year, and those contributions could easily push you into a higher tax bracket, or even into AMT territory (a married couple, both 50+, could contribute $48k/year).

    OTOH, there’s a gotcha on the other end, where non-Roth IRAs have RMDs subject to income tax.

    Roth IRAs and 401ks can also be used to reduce exposure to estate taxes.

  59. Finn–coincidentally, someone has been filing the last few years using DHs SSN. We get a letter from the IRS asking if we filed the return. Because the bogus filer files a 1040 EZ, it’s pretty obvious it’s not us. DH keeps a close watch on our credit report, and it seems like the identity theft is limited to the tax return.

  60. BenL– How does affect you? Do you file joint returns using your SSN?

    I’ve read that it can be a big problem for victims who are due refunds. The articles I’ve read said little of the effect on those not due refunds.

  61. I agree that it can make sense to finance a car when offers are 0% or close to it. My point was if I were giving advice to someone 10 – 15 years behind me in their financial life, it would be to make decisions that give you the greatest amount of financial flexibility, and to me that’s building up first a reserve of accessible cash. Paying off a mortgage early is a great goal, and it’s certainly one of mine, but refinancing wouldn’t be how I would do it. Some people need the locked in obligation to make themselves do it, though, and nothing wrong with that. Money management is more than just about the numbers.

  62. The articles I’ve read said little of the effect on those not due refunds.

    I’m not sure it matters whether you yourself are expecting a refund, so much as whether the person filing under your SSN appears to be due a refund based on your withholdings.

    Remember that crazy lady who filed under Abigail Kawananakoa’s SSN some years back and was sent something like a million dollar refund?

  63. Finn–the IRS knows it’s not us. We get a letter from them asking if we filed the 1040 EZ. We send back a letter saying no. So far no effect on our joint return.

  64. Thanks for the thoughts. I sent the comparison calculator results to DH but we haven’t talked about it. Mathematically the refi makes sense. But Lark makes a good point. The lower monthly payment we have now enables us to save more faster. Finn, your point about the payoff is right- but between now and Baby Rhode’s college days we may need to move negating the extra income gained from early mortgage payoff.

    DH and I are probably spending way too much brain energy on this.

  65. “negating the extra income gained from early mortgage payoff.”

    Ok, I hear this all the time, including from financial experts, but I don’t understand it. If you plan to pay off the mortgage with a 15-year loan, but you move say at year 5, so what? You’ve been paying off the loan more quickly, which means you have more equity, which means when you sell, you get more $$. So you buy another house the same value as the one you sold, and you put your extra $$ down, and you end up with the exact same size mortgage as the one on the house you just sold. So now you take out a 10-year mortgage (the amount of time that you had left on the first one before you had to sell), and you’re done in the same 15 years.

    The real keys are just (1) don’t keep buying a more expensive house just because you now have a bigger downpayment to qualify for one, and (2) don’t re-start a 15- or 30-year mortgage every time (or if you do, just keep paying it off at the same accelerated rate you were, and you’ll be done on your original schedule).

  66. ” So you buy another house the same value as the one you sold”

    How often does this happen?

    Given Rhode’s (and perhaps more important, baby Rhode’s) stage in life, they may need more space, or may want to move to a better school district, both moves that typically lead to a more expensive home.

    I’m guessing this happens most often when moving to a lower COL area.

    But I agree with LfB on not just restarting the 30 year cycle every time you buy a new house, or refinance your current house. IMO, it’s important to have a plan for paying off your mortgage, and that should tie in tightly with your plans to pay (or not pay) for your kids’ college and your own retirement. Just because a mortgage is a 30 year mortgage doesn’t mean you have to pay it off in 30 years.

    But as Lark said, the 30 year mortgage gives you the most financial flexibility.

  67. We unintentionally did what Finn and Lark said. We had a 30 yr fixed with PMI when we started out. As our incomes grew we were able able to get rid of the PMI. We refinanced, I think twice. When we moved, though our house price was higher than our old one, it was lower than the equivalent we would have paid if we had stayed, if that makes sense. We sold a condo DH had bought prior to marriage, that was a big chunk of down payment for second home. With a large down payment, mortgage on second home was small enough to pay off in a few years.
    Those with kids who are starting off, any extra money put away, is helpful down the road. DH struggled to pay the mortgage on his condo but that forced saving was very helpful down the road. The condo (in the home country) also had appreciated in value.

  68. I didn’t have the specific advice that Totebaggers are providing their kids on finances. My parents were no where close when I started my first real job. However, I was always at companies that emphasized savings in 401k so, if nothing else that was what I did.

  69. “Right now, DS is limited to the amount he earns, so we’re putting all of his earnings into his Roth.”

    For those who put your kids’ earnings into IRAs, are you actually using your kids’ earnings or your own funds? Are your kids managing any or all of their job income on their own, for spending money, savings, charity, or other purposes?

    I think it’s a great idea for kids to start saving for retirement early because it can make such a difference how big their nest egg grows.

  70. “Given Rhode’s (and perhaps more important, baby Rhode’s) stage in life, they may need more space, or may want to move to a better school district, both moves that typically lead to a more expensive home.”

    I agree. But I still don’t see why that undercuts the value of the “forced savings” you got from prepaying.

    Not trying to pick on Rhode. :-) I just hear financial advisors all the time saying to prepay your mortgage only if that’s the house you’re going to live in the rest of your life. Why? That equity is still my money, and I get it back when I sell and move.

    I can see not prepaying the mortgage in any number of situations (including having young kids and other higher-priority savings/liquidity needs). But I don’t see why the decision to prepay should be based on whether it’s your “forever” home. Because even if it’s not, that additional forced savings helps you put a lot more into your next home, which gets you further down the road to paying off the whole shebang, with less interest overall than if you’d paid every mortgage per the schedule.

  71. “Money management is more than just about the numbers.”

    Whether it makes sense to pay off your mortgage or not is definitely a matter of opinion. I was listening to a personal finance talk show the other day, and the host made the point that your balance sheet will show you are not “in debt” if you have the funds available elsewhere to pay off that debt.

    Many advisors think it’s unwise to pay off your mortgage, and they do have a point. It’s a good feeling to own your home outright, but it’s also good to consider how that $500k -$1+ mil tied up in your home could be working more efficiently elsewhere.

  72. @CoC: I was talking about putting my money in for her (I wasn’t going to tell her, but I thought it would be something like a graduation present). It’s @$300, but with the Magic of Compounding, that’s like $5K when she retires. :-) Plus the thing with Roths is it’s use it or lose it — she can’t have 2015’s Roth eligibility back when she has the $ to put into it.

    I have to say, DD is managing the job income pretty well. It’s $80/month, if they have class every week (so frequently less), which is a pretty appropriate amount of $$ for a $14-yr-old to learn to handle. She has a 3-week band trip this summer, and I told her when we signed up that she is responsible for lunch and fun money (I am paying enough for the rest of it, thanks very much). She did the math on how much of her pay she needs to save for that, and she has me scan in her paychecks to the bank account and then largely forgets about them — she is probably spending @ 25% of her pay.

    And of course because I’m a totebagger, this is more about the lesson than the $$. She’s a natural spender, so finding ways to trick herself into saving is going to be really important. Luckily, she is also *very* much an “out of sight, out of mind” kid, so direct deposit before she “sees” the $$ tends to work well — as long as she forgets that she has that $$ available, she does fine. :-) (DS, on the other hand, *wants* to see all of his $$, because he wants to count it and see how fast it is growing. Yes, my mom is strong in that one).

  73. I think so much of money management is psychological and knowing how you handle things. I know that financing a car can make sense if you get a really low interest rate and then invest the money. BUT, if I make a big expenditure of $35k or whatever, I naturally start restricting my spending elsewhere because I hate seeing my account #s go down. I don’t do that if instead I have a $400/mo payment. It just gets wrapped up in monthly spending. So, for me, it isn’t just comparing interest rate of low v whatever market rate I think I can get. My husband doesn’t operate the way I do and likes to just look at the rates.

  74. LfB – I do agree with your point. And the idea of a bigger down payment for the next house is enticing. If we stay 5 years with the “new” mortgage, it will be about $30k difference. That’s fairly significant because our next house will be about $150-200k more. I plan that the next home will have a 30 year mortgage to start (unless rates are low and we get an epic deal). But, our income stream should increase with time, meaning that once our feet are under us again, we can then work the refi game to pre-pay the mortgage.

    The reasons for the ridiculous amount of brain power attached to this is that
    (1) we are getting rid of grad school debt faster than I planned
    (2) we are talking about expanding the family, and with fertility treatments, that could include multiples
    (3) all options are good ones – we won’t “lose” if we refi or prepaying or just save the difference for now. Refi & prepaying gets us a larger down payment. Saving probably means a larger mortgage in the next house, but we’ll have a decent amount of liquid savings for renovations, repairs, cars, life

    It’s truly a blessing to be in this quandary. It just gives me a headache.

  75. “DH keeps a close watch on our credit report”

    You might consider putting a freeze on your credit. I said it before, but we did this after a series of companies, including our health insurer, reported data breaches. I mentioned to my family what we had done, my brother blew it off, and now he’s dealing with someone who used his information to purchase a bunch of furniture at Marlo. And Marlo is treating HIM like the criminal here. You can watch it, but you’re only going to see something after the credit line has been opened fraudulently.

    As it relates to the psychology discussed above, it makes me really not want to bother with the unfreezing and re-freezing. So if/when I need a new car for myself, right now I’d be looking in the $8k used/cash market rather than the $30k new.

  76. It is interesting to me that Cat and I, both of whom presumably don’t have to count pennies at this stage (although IIRC both of us have greatly improved financial conditions than we did earlier in life), find that shelling out cash and reducing the visible balance on hand serves as a brake on consumption. As a retiree, reducing the monthly nut a comfortable minimum has been my objective, pretty much achieved by now. But we will need new cars eventually, and we plan to buy new with cash. We also pay for our vacations or any home improvements up front with cash, and the kids get occasional transfers. I spend a lot of energy on cash flow planning to make sure that in a year or two or three there is sufficient cash on hand, and I track everything in real time. When it looks a bit lean, we cut back in small ways without a whole lot of budgeting thought, and sometimes in bigger ways. In a pinch, I can sell a bond before maturity, as I did for the unexpected HVAC replacement.

  77. Did you negotiate the price before you negotiated the loan? I’ve read advice to do so, based on the theory that the dealer has so much flexibility in negotiating, and a low-rate loan chews some of that up.

    Yes. We agreed on the price before we even mentioned how we were paying.

  78. “For those who put your kids’ earnings into IRAs, are you actually using your kids’ earnings or your own funds?”

    We’re funding the IRAs while the kids are students because their summer earnings are minimal. You can explain the concept of compounding over the 50+ years until their retirement, but it’s been much more effective when they see the dollars in their accounts.

  79. @Rhode — wow, congrats — those are all good/exciting things. FWIW, in your case, I would *not* prepay or refinance — I would figure out how much extra per month a 15-year mortgage would cost and then put that $ into extra savings. Then, when you decide to move or have more kids (or not), you have a pot of $$ you can use to pay off the loans, put toward a downpayment, take a longer maternity leave, etc. As long as you can make yourself save the $$, keeping it liquid gives you the flexibility to use it for whatever you end up needing.

  80. I agree that it can make sense to finance a car when offers are 0% or close to it. My point was if I were giving advice to someone 10 – 15 years behind me in their financial life, it would be to make decisions that give you the greatest amount of financial flexibility, and to me that’s building up first a reserve of accessible cash.

    And financing a car at a low interest rate gives you much more flexibility than paying cash.

  81. I don’t understand why, in a zero-interest rate environment, new car buyers don’t get a discount for paying in cash. I saved the funds to buy my last car, but the 0% loan was too good to pass up. I ended up with a few hundred dollars in cash on the earnings from my car fund, but perhaps it’s just not worth it to the dealers to offer incentives to cash buyers because most people finance.

  82. I don’t understand why, in a zero-interest rate environment, new car buyers don’t get a discount for paying in cash.

    Why would you get a cash discount in a zero interest rate environment?

  83. Well, by zero I meant not quite zero. Wouldn’t the pennies in interest add up over thousands of buyers?

  84. on the van, we got a discount for taking the 1.9% loan. sales manager said he was just passing on the kickback he gets from the financing arm. There was also no prepayment penalty, which I verified at the time, but I never prepaid it.

    Now I’m almost done with that “note.”

  85. Scarlett, I agree with Rhett. Dealers typically make money on loaning money*, and since nowadays with truecar and people like me out there the margins on new cars are much lower than in the past, they need that more than ever. I’ve found them pretty good about staying away from the financing conversation once I’ve said that we’ll discuss financing later if I buy from them, but they clearly want you to finance through them. They have no incentive to offer a discount for cash when lending is typically to their advantage, and leasing is really to their advantage since few people really understand lease finance.

    * they may have to contribute when the manufacturer’s financing arm offers below market loans, but market is so low now that may not be the case. In our area many credit unions are lending at 2% for 72 months; USAA loans for 1% for 36 months when you use their car buying service.

  86. I guess we are bad totebaggers in this instance – we have been increasing our mortgage outstanding from house to house. ;) The next house will be about a 40K increase in mortgage, but we may get a bunch of cash back at closing bc of the cash down payment with the P&S.

  87. I should probably note that our net worth has increased a lot during the last 15 years, so maybe not so bad after all. :)

  88. The financing division is a separate entity from the automotive side. Toyota made this very clear when I was fighting with them over the broken hatch. The extended warranty was with Toyota Financial, which also was who our financing was through, and the people at Toyota were very firm that they had nothing to do with Toyota Financial. Dealers might get a kickback for getting customers to finance through them, but they aren’t getting the interest.

  89. I have some water leaking into the garage. There’s no plumbing above that area, but there’s a dormer window that I suspect is letting it in somehow.

    Raising my homeowner’s deductible to $2k doesn’t seem like quite as good of an idea now as when I initiated it. :)

  90. We won’t know until the ceiling drywall comes off. I look up, and I see wet drywall with some black spots.

  91. When we bought our last car there was some deal for financing. If we financed the car through them, they authorized a lower payment price. (I don’t remember the exact amount at this point.) There was no pre-payment penalty for the van, and we paid it off over the next year or so to avoid too big of a hit to cash reserves at once, but also to avoid carrying the payment too long. Psychologically, I just really don’t like carrying extra monthly payments.

    I didn’t even realize it was possible to open a Roth IRA for our kids. I’m assuming that’s teens who are workforce aged? This is making me realize that I need to keep a bit more aware of what’s available for changing life stages.

  92. I’m with L – I’m increasing our mortgage to do a big reno on the first floor. I could pay cash but that doesn’t make sense with rates where they are. I also always do the car loan if the rate is low (.9% for the van). We keep our cars for about ten years. If rates were high then it would make more sense to pay down mortgage, pay cash for car, etc. We refinanced this mortgage once because we could recover the closing costs in about 9 months (I think the barometer for a refi is recovering costs in two years).

    If we move, I would likely take half of our equity in our current home and invest it and half for a new house. Now if I were closer to retirement I may want a paid off house, but right now we are solely focused on saving cash and investing. And tying it all back into the tax discussion, we get a rather large deduction on mortgage interest and real estate taxes.

  93. I am intrigued by the Roth IRA for the kids too. Have to keep that in mind when they start working.

  94. When we used an accountant to do our taxes, he mentioned in our first meeting with him that he had opened Roth IRAs for all of his kids in high school as soon as they started working.

    We did a Roth IRA the first year or two that we worked and after that we were phased out. I’ve never looked into the Roth 401K because I’d rather have the tax deduction now as I’m guessing our income in retirement will be less.

  95. I started a Roth for DSS when he was in high school and working over the summer. I put my own money into it. It’s up to about $60K now, so I hope he has seen that it’s a good idea. I expect it’ll get spent on the house down payment, but that’s okay. That’s partly why I made it a Roth in the first place.

  96. “Dealers might get a kickback for getting customers to finance through them”

    That’s what I mean by making money on financing. In fact, dealers almost always do better if they finance someone through an independent bank. The best FICOs qualify for the e.g. 0.9% deals you see on TV. Lots of folks are lower than prime, but maybe not subprime, so they can’t qualify for the best rates and dealers will get a bank they work with to finance the purchase. The dealer makes more money on those deals as they can set the interest rate above the wholesale rate the bank quotes them.

  97. GM Financial earned $231 million on $1.7 billion in revenue during the last quarter of 2015. quarter. They say growth in its finance arm can add another $1 billion in earnings between now and 2018. This is all post crisis; GM was earning more money from it’s financing arm than manufacturing autos prior to 2008. Even though GMAC was spun out into Ally Bank, GM and every auto manufacturer have a finance division that rolls right up to the parent. The profits from the financing arm are still rolling into the parent company of Toyota, BMW, GM etc., when a buyer takes a loan or a lease. Most of these loans and leases will get pooled together and securitized into a large bond issuance. Even with rates this low, there are still profits to be made from financing and securitization. They hate cash buyers, and that is the reason that it is always best to try to get to the very final price before they know if you will lease, borrow or pay in full.

  98. “GM was earning more money from it’s financing arm than manufacturing autos prior to 2008”

    I remember my Dad making that comment, and I was shocked.

  99. “I didn’t even realize it was possible to open a Roth IRA for our kids. I’m assuming that’s teens who are workforce aged?”

    The account holder needs to have earned income, but it doesn’t have to be from an employer. Babysitting, lawn service, and other self-employment income also counts.

  100. Milo, have you created an opening in your garage ceiling yet? I would suggest you do so ASAP to let any water drain and to let it start drying out. At the very least, put a few holes through the wet drywall.

  101. “I didn’t even realize it was possible to open a Roth IRA for our kids. I’m assuming that’s teens who are workforce aged?”

    We opened an IRA for DS in the April immediately following the first year he had a job. All the money he earned, through last year, is in his Roth. He has enough spending money from the combination of his allowance and gifts that he doesn’t need to tap what he’s earned, and he understands that if he kept that money in savings rather than in the IRA, colleges would expect him to spend all of it on college.

  102. WRT paying off mortgages early, financing cars, etc., realize that if you are hoping for financial aid for your kids to go to college, you are less likely to qualify for aid if you’ve held on to cash and financed those purchases.

  103. Back to Roth IRAs, another reason to open it for kids is that they are typically in a low tax bracket. For the first year he contributed, DS’ marginal tax rate on those contributions was 0%. I did his taxes assuming he put the money into a Roth, then changed it to assume he didn’t contribute, or contributed to a non-Roth, and there was no difference is his tax bill.

  104. WCE, that’s sad. I have a copy of his book somewhere; it used to be quite prominent on my desk.

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