2016 Tax Refund...Wife asked, "Is it legal?!?!"

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duuuuuude
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2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by duuuuuude » Tue Feb 28, 2017 1:40 am

So, I just completed 2016 taxes for my family (spouse and 2 kids).

After e-filing, I told my wife our expected refund and she asked "Is it legal?!?!" I was quite honored and I'll explain why! It was a very educational moment for both of us in terms of being tax-efficient and "properly" saving for retirement.

It all stems from reading about the Boglehead collective financial situations the past year and a half and applying some of the principles to our lives.

So first off, thanks to everyone for their knowledge!

We had previously never contributed to a 403b/401ks. We only did Roth IRAs (well, I've always done so since 18, and wife just started last 4 years). So S11k/year saved towards retirement max). The rest went into a 1% online savings account.

After learning about pre-tax savings and finding out my employer has a plan ID with Vanguard (each year, we're always sold products by an insurance company that kicks some money to our employer), I decided to max out my 403b the last 3 months of 2016 (we have way more than we need in a savings/emergency fund)...and wife put aside $5k in her 403b (she's way more risk averse). So, collectively, we put aside $23k for 2016 out of a possible $36k. Not bad for a start...

Well, the 403b contribution certainly brought our taxable income way down! In addition to our mortgage, child credits, and day care credits, we ended up qualifying for almost the max Traditional IRA deduction for the first time. We decided to recharacterize our 2016 contributions to a Traditional IRA to take an increased refund now (wife is more conservative with holding money vs. investing money) vs. withdrawing tax free later. We ended up putting the remainder of the $5500 into our existing Roths.

Anyway, I also ran the numbers if we had not contributed to our 403b. It would have resulted in no 403b retirement savings for 2016, and we would have netted about $700ish as a refund (Fed and State). Granted, we would have had another $23k in savings, but it would have also been taxed at 25%, so it would have really been $17,250.

By simply contributing to our 403b (which was not even maxed out), we ended up with $23k to start a 403b retirement account, and another $9000 (Fed and State) as a refund back to our pockets. The $9k is equivalent to keeping an extra $750/month in our pockets! And did I mention that we now have a legit supplemental retirement account?!?!

However, at the end of the whole thing, our lifestyle didn't really change at all even when we had super little checks the last 3 months. We just opened some new 403b accounts, directed money to go there, and learned the power of pre-tax dollars!

I think my wife and I are slowly understanding the "whole picture" of how personal finance works. It's not just about having the biggest paycheck possible each month, but being able to see the bigger picture, yields a better return. We've always been good savers (no debt except mortgage), but just always squirreled extra money into a savings account and perhaps the most tax-inefficient manner possible. It's also taught us how to really compromise with regard to how we approach money. I think it's been for the better. We come from completely opposite ends of how to grow our money.

We're both teachers and after this little experiment, we feel so "rich"!

I keep thinking, had we only understood this and started doing this at the beginning of our careers....

But at least we've started! We're looking to put away more into the 403b for 2017 and my wife is even looking to max it out!

Thanks Bogleheads!

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BL
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Re: 2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by BL » Tue Feb 28, 2017 1:45 am

Congratulations!

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White Coat Investor
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Re: 2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by White Coat Investor » Tue Feb 28, 2017 1:47 am

Cool story. Thanks for sharing.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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celia
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Re: 2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by celia » Tue Feb 28, 2017 2:39 am

duuuuuude wrote:After e-filing, I told my wife our expected refund and she asked "Is it legal?!?!"
A joint tax return was submitted and you didn't let your wife see the return before filing? What if she had questions or noticed something you didn't?

Since she is also liable for the accuracy of the return, please let her look at a copy before you submit it in the future.
By simply contributing to our 403b (which was not even maxed out), we ended up with $23k to start a 403b retirement account, and another $9000 (Fed and State) as a refund back to our pockets. The $9k is equivalent to keeping an extra $750/month in our pockets!
Now when you withhold for the whole year, your refund will be even bigger for 2017! But you know, I'm sure, that the tax refund is really YOUR money since you over-withheld from your paychecks. So don't forget to update the amount with your employer(s).

AND... Remember, you don't get to "keep" that tax money. The taxes are just being deferred until you withdraw from the account in retirement. So you need to save most of it for the long term.

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obafgkm
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Re: 2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by obafgkm » Tue Feb 28, 2017 5:49 am

duuuuuude wrote:After e-filing, I told my wife our expected refund and she asked "Is it legal?!?!"
celia wrote:A joint tax return was submitted and you didn't let your wife see the return before filing? What if she had questions or noticed something you didn't?

Since she is also liable for the accuracy of the return, please let her look at a copy before you submit it in the future.
I agree. When a joint return is e-filed, legally both spouses are "signing" their signatures and attesting the return is true. No different if the spouses are filing on paper by mail. One would not forge their spouse's signature on a paper return.

Nowizard
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Re: 2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by Nowizard » Tue Feb 28, 2017 6:13 am

And the story may get better. We e-filed on February 21, and the refund hit our bank account on February 24!

Tim

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runner9
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Re: 2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by runner9 » Tue Feb 28, 2017 8:42 am

I agree, forecast out the rest of 2017 and if similar change your W4 withholding.

That's not government money you're getting as a refund, it's your own money you've been loaning to the government for free.

Rotarman
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Re: 2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by Rotarman » Tue Feb 28, 2017 8:50 am

celia wrote:
duuuuuude wrote:After e-filing, I told my wife our expected refund and she asked "Is it legal?!?!"
A joint tax return was submitted and you didn't let your wife see the return before filing? What if she had questions or noticed something you didn't?

Since she is also liable for the accuracy of the return, please let her look at a copy before you submit it in the future.
I also file taxes this way, even when we weren't married. I'm not too worried about her litigating me, and she has no desire to get in the weeds on the tax forms. In any case, congrats OP!

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Re: 2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by Grt2bOutdoors » Tue Feb 28, 2017 8:51 am

Semi-congratulations is in order, had you adjusted your tax withholdings you would had use of your own money upfront each month. Instead, you gave the US government an interest free loan this past year. Try to figure out what your withholdings should be, the name of the game is to break even at tax time, neither owing or receiving, only then do you have the ability to create a supplemental retirement program.
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jebmke
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Re: 2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by jebmke » Tue Feb 28, 2017 9:18 am

Rotarman wrote:
I also file taxes this way, even when we weren't married. I'm not too worried about her litigating me, and she has no desire to get in the weeds on the tax forms.
Mine doesn't either. But we still go over it. We have a standard practice. In January we take 15 minutes (that is all it takes) to go over income for the prior year (by 4 source categories), spending (3 categories) and assets. It really only takes a few minutes.

Then in September when the tax return is virtually done, I go over the highlights (mainly reconciling the much lower income on the return than she saw in January). This recon was actually triggered by one of the first times we did this -- she said "this number [pointing to AGI] is a lot lower than the one you showed me in January."
When you discover that you are riding a dead horse, the best strategy is to dismount.

bloom2708
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Re: 2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by bloom2708 » Tue Feb 28, 2017 9:24 am

+1 for going through a W-4 planning tool.

A big refund is nice, but it means you withheld too much tax with each and every paycheck.

Once you are in a rhythm, set it up so you target a small refund ($500). That way you don't have to pay at filing time but don't give the government a nice loan.

Congrats on the changes!
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dodecahedron
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Re: 2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by dodecahedron » Tue Feb 28, 2017 9:37 am

jebmke wrote:
Rotarman wrote:
I also file taxes this way, even when we weren't married. I'm not too worried about her litigating me, and she has no desire to get in the weeds on the tax forms.
Mine doesn't either. But we still go over it. We have a standard practice. In January we take 15 minutes (that is all it takes) to go over income for the prior year (by 4 source categories), spending (3 categories) and assets. It really only takes a few minutes.

Then in September when the tax return is virtually done, I go over the highlights (mainly reconciling the much lower income on the return than she saw in January). This recon was actually triggered by one of the first times we did this -- she said "this number [pointing to AGI] is a lot lower than the one you showed me in January."
I agree strongly with jebmke. When you clicked the button to submit your joint return, you were making a joint declaration "under penalty of perjury" that both spouses had examined the return prior to filing it. With the exception of situations where one spouse is unable to do this (e.g., due to circumstances such as a cognitive disability or serving in a combat zone, in which case the filing spouse should have a POA to file a joint return), I feel very strongly that both spouses should in fact examine the return. It does not have to take a lot of time and, aside from the legalities, it is always valuable to have a second set of eyes on a tax form, because tax returns are complex.

Even if your wife does not listen very carefully as you try to explain where the numbers on your return came from, she is getting exposed to language and concepts that may be helpful to her down the road. Keep in mind that something could suddenly happen to you at any time (your disability or death) that could force her to "get into the weeds" or at least to hire someone to do it for her. At the very least, she would need to be able to "kick the tires" on evaluating whether a tax pro is handling her taxes appropriately.

Chadnudj
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Re: 2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by Chadnudj » Tue Feb 28, 2017 10:31 am

celia wrote: Now when you withhold for the whole year, your refund will be even bigger for 2017! But you know, I'm sure, that the tax refund is really YOUR money since you over-withheld from your paychecks. So don't forget to update the amount with your employer(s).
While celia is, of course, right, I will note that many of us PREFER to have money over-withheld from our paychecks for taxes to ensure a refund, as a form of forced savings (I, at least, am far more likely to blow $200 a month extra a month -- representing the roughly $2400 a year refund I think I'll receive this year -- or some large portion thereof than save it; but by getting that back as a large lump sum refund I always use it smartly towards our financial goals), or behavioral economics, or because we'd just rather get money back than have to find money to pay any under-withheld amount (one year I had to pay $400, and I absolutely HATED it).

In other words, there is no "right" answer here. You probably could reduce your withholding somewhat to make that expected refund a bit smaller (say $2k rather than $9k) and get the best of both worlds (a refund AND a little more each month in your paycheck), but if you're comfortable with how it works now and doing smart things with your refund, continue on ahead.

neilpilot
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Re: 2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by neilpilot » Tue Feb 28, 2017 11:24 am

Chadnudj wrote:I will note that many of us PREFER to have money over-withheld from our paychecks for taxes to ensure a refund, as a form of forced savings
I, for one, would prefer to own the maximum amount allowed without being subject to penalty, and in practice withhold to target a small amount OWED to the IRS at the end of the year. With the current low interest rates, it may not matter very much.

Way back in the 1970s, when bank interest had soared to 15%+, I was assisting my CPA brother-in-law doing simple tax returns by hand, before personal tax software was invented. At that time, I had a client who had previously received very large refunds, and who I had increase his withholding significantly on my recommendation. That 3rd year he owed a small amount, and his wife said that would be the last year I did their taxes, since they used to get a really large refund. I offered to hold a portion of his money for the next year, interest free, in lieu of increased withholding. Of course, they though that would be a really bad deal. Point is, they just didn't get it.

Far too many clients don't care how much money they really pay in taxes, so long as they get a end-of-year refund. A bit like buying a car and looking at the size of the payment, not the actual cost.

LateStarter1975
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Re: 2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by LateStarter1975 » Tue Feb 28, 2017 11:28 am

Chadnudj wrote:
celia wrote: Now when you withhold for the whole year, your refund will be even bigger for 2017! But you know, I'm sure, that the tax refund is really YOUR money since you over-withheld from your paychecks. So don't forget to update the amount with your employer(s).
While celia is, of course, right, I will note that many of us PREFER to have money over-withheld from our paychecks for taxes to ensure a refund, as a form of forced savings (I, at least, am far more likely to blow $200 a month extra a month -- representing the roughly $2400 a year refund I think I'll receive this year -- or some large portion thereof than save it; but by getting that back as a large lump sum refund I always use it smartly towards our financial goals), or behavioral economics, or because we'd just rather get money back than have to find money to pay any under-withheld amount (one year I had to pay $400, and I absolutely HATED it).

In other words, there is no "right" answer here. You probably could reduce your withholding somewhat to make that expected refund a bit smaller (say $2k rather than $9k) and get the best of both worlds (a refund AND a little more each month in your paycheck), but if you're comfortable with how it works now and doing smart things with your refund, continue on ahead.


+1. This explains the other behavioral aspect of personal finance that has nothing to do with math. Yes, it's better math to change your W-4 and get no return but the reality is that some people will not be able to save the extra $200 monthly if it comes with every paycheck compared to getting it as a bulk at tax time and using it for some savings then.
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kaudrey
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Re: 2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by kaudrey » Tue Feb 28, 2017 4:39 pm

Great job!

Now, for this year, your goal should be to adjust your withholdings so that you don't owe any taxes for 2017 but don't get a refund either! That's right, you want this number to be $0!!!

Why give the gov't a free loan?

I did our taxes last weekend. This year I came closest than ever to that magic $0. We owe the IRS $177, and are getting $66 back from the state. I don't think I'll ever get that close again (as we have quite a few variables). But it's a goal!

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Re: 2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by NotWhoYouThink » Tue Feb 28, 2017 4:56 pm

Far too many clients don't care how much money they really pay in taxes, so long as they get a end-of-year refund. A bit like buying a car and looking at the size of the payment, not the actual cost.
And that's why at the top of the page on Turbo Tax it always shows you how big your refund is (or how much you owe) instead of what your total tax obligation for the year is. It drives me crazy! Also, get off my lawn!

lack_ey
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Re: 2016 Tax Refund...Wife asked, "Is it legal?!?!"

Post by lack_ey » Tue Feb 28, 2017 5:02 pm

I hope you also explained that the tax is deferred on those accounts, not eliminated entirely. It is very useful because later you may have a lower tax rate and in the meantime you get tax-free compounding, but if she is that hands off then maybe that point wasn't fully comprehended.

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