Am I Crazy??? [Excess W-4 withholding, got large tax refund]

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GoldenGoose
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Am I Crazy??? [Excess W-4 withholding, got large tax refund]

Post by GoldenGoose » Sat Apr 07, 2018 10:59 am

First, let me put my flame suit on.

OK, a little background. Some years ago, I forgot exactly when, I filed taxes and found out that I would have incurred penalties for underpayments. The cause was that I got some cap gain and I didn't pay estimate taxes (I didn't know how). Out of that concern, I specified some additional withholding on my W4 to make sure that I would not be penalized due to underpayments. Then I forgot about that.

In 2017, I got an "unexpected" refund of $10K for 2016. I contemplated about adjusting my W4 but my inertia got the best of me. This year, I just finished filing my taxes and realized an, ahem, "unexpected" refund of $20K!!! What the ... With Trump's new tax laws, at this rate, I think next year my refund could be $40K.

I know, most people would say, "why are you giving free loans to Uncle Sam?" but the realization of the "new found" money does have its euphoria. I did not ever think about this year's refund at all until now after tax time. Given the fact that I know the downsides, the up sides of my situation is that without that money in the bank (and in my mind) last year and up until now, I am more conservative in our household expenditures (I tried). Otherwise I would have been a bit more careless about spending. I think my situation is similar to paying off the house (peace of mind) or keep the mortgage and invest.

Am I crazy?

Marketman
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Re: Am I Crazy???

Post by Marketman » Sat Apr 07, 2018 11:04 am

You are not crazy but you would be better off doing your taxes correctly (easier said than done) and investing the balance for the long term. Overpaying is just an interest free loan.

goblue100
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Re: Am I Crazy???

Post by goblue100 » Sat Apr 07, 2018 11:07 am

I don't know about crazy, but giving the government an interest free $1500 to $3000 a month loan isn't financially smart. But you seem to know the ins and outs of the consequences of your decision, so why do you need us to point it out to you? :)

If you don't want the money in your account so you cut back on spending, set up an auto draft and send it to Vanguard every month.
Last edited by goblue100 on Sat Apr 07, 2018 11:09 am, edited 1 time in total.
Some people are immune to good advice. - Saul Goodman

bikechuck
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Re: Am I Crazy???

Post by bikechuck » Sat Apr 07, 2018 11:08 am

GoldenGoose wrote:
Sat Apr 07, 2018 10:59 am
Am I crazy?
Yes,

Rather than making an interest free loan to Uncle Sam consider investing this money in a no penalty cd with Ally or building a CD ladder with CDs of your choice of a duration that makes sense to you depending on your need to access the funds. Sit back, relax and build some wealth with minimal to no effort. Rinse and repeat and over time you will be tens of thousands ahead at the amounts that you are dealing with.

mhalley
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Re: Am I Crazy???

Post by mhalley » Sat Apr 07, 2018 11:08 am

What would you do if I came up to you and asked you for a 40k loan at zero % interest? If you won’t do it for me, why would you do it for Uncle Sam?

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Svensk Anga
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Re: Am I Crazy???

Post by Svensk Anga » Sat Apr 07, 2018 11:49 am

And your Uncle Sam need not pay back your zero interest loan in a timely fashion. If someone had filed a fraudulent return in your name, your refund could get delayed for some time while things are sorted out.

neilpilot
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Re: Am I Crazy???

Post by neilpilot » Sat Apr 07, 2018 12:00 pm

Way back in the late 70s, early 80s I helped my then CPA brother-in-law during tax season. This was before individuals used PCs and internet to complete tax forms. I remember a client who had a $6-8k refund, and advised him to lower his withholding. At that point bank CD interest was 7-10% and mortgage rates were double digit.

The next year his withholding was a few hundred $s within his actual tax bill, but we then lost him as a client. His wife said that they were getting a much better refund before I had him lower his withholding. :oops:

JoeRetire
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Re: Am I Crazy???

Post by JoeRetire » Sat Apr 07, 2018 12:00 pm

GoldenGoose wrote:
Sat Apr 07, 2018 10:59 am
In 2017, I got an "unexpected" refund of $10K for 2016. I contemplated about adjusting my W4 but my inertia got the best of me. This year, I just finished filing my taxes and realized an, ahem, "unexpected" refund of $20K!!! What the ... With Trump's new tax laws, at this rate, I think next year my refund could be $40K.

the realization of the "new found" money does have its euphoria.
the up sides of my situation is that without that money in the bank (and in my mind) last year and up until now, I am more conservative in our household expenditures (I tried). Otherwise I would have been a bit more careless about spending.

Am I crazy?
I wouldn't use the word "crazy". If you aren't capable of budgeting and planning correctly, and if this is the only way for you to save any money, then perhaps it makes sense.

It isn't at all what I'd advise anyone in my family to do (not that they always listen to me anyway).
I think my situation is similar to paying off the house (peace of mind) or keep the mortgage and invest.
I don't understand how these are similar. But we each find our own ways to have peace of mind.

student
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Re: Am I Crazy???

Post by student » Sat Apr 07, 2018 12:47 pm

I would not say this is crazy. It is of course not optimal but if this is a way for you not to spend the money, it is ok.
Last edited by student on Sat Apr 07, 2018 2:42 pm, edited 1 time in total.

Mudpuppy
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Re: Am I Crazy???

Post by Mudpuppy » Sat Apr 07, 2018 2:16 pm

I think it would be better to readjust your W4 withholdings every tax season so you aren't giving Uncle Sam an interest-free loan every year. Then increase your retirement contributions at work every paycheck instead. If you're already maxing your work retirement contributions, set up an automatic withdrawal a few days after your paycheck goes in to fund an IRA, taxable account, high yield savings account, pay down debt, etc.

That will still force you to "pay yourself first" and maintain discipline with monthly spending, but you will actually be putting the money to work every month (earning interest, invested in the market, paying down debt, etc).

Mudpuppy
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Re: Am I Crazy???

Post by Mudpuppy » Sat Apr 07, 2018 2:20 pm

Svensk Anga wrote:
Sat Apr 07, 2018 11:49 am
And your Uncle Sam need not pay back your zero interest loan in a timely fashion. If someone had filed a fraudulent return in your name, your refund could get delayed for some time while things are sorted out.
It doesn't even require an actual fraudulent return, just the IRS suspicion that fraud may have occurred. The IRS flagged my actual return last year as potentially fraudulent. Even though I called them and proved that I was me and my return was from me in May (as soon as I received the letters in the mail), I didn't get my refund until August. It also took 4 hours on the phone between proving that I was me in May and finding out what was holding up the refund in July. At my hourly rate, that pretty much eliminated my refund due to man-hours I lost having to take care of this.

quantAndHold
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Re: Am I Crazy???

Post by quantAndHold » Sat Apr 07, 2018 2:25 pm

Lots and lots of people use tax refunds as their piggy bank. So no, not crazy. Just not optimal.

SQRT
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Re: Am I Crazy???

Post by SQRT » Sat Apr 07, 2018 5:58 pm

GoldenGoose wrote:
Sat Apr 07, 2018 10:59 am


Am I crazy?
You dont really give us enough information, but I doubt it.

staythecourse
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Re: Am I Crazy???

Post by staythecourse » Sat Apr 07, 2018 6:03 pm

Why is that crazy? Not efficient, but better then what 90% of Americans do IF you take that money and dump it into savings. Not efficient, but not crazy. Hey, that might be your mechanism of dealing with any possible behavioral finance mistakes.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

invst65
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Re: Am I Crazy???

Post by invst65 » Sat Apr 07, 2018 6:22 pm

Svensk Anga wrote:
Sat Apr 07, 2018 11:49 am
If someone had filed a fraudulent return in your name, your refund could get delayed for some time while things are sorted out.
This is an excellent reason to not have the government owing you a refund. You might think it will never happen to you but it happened to a co-worker of mine and he had to invest a lot of time and jump through a lot of hoops to finally get his refund after nearly two years.

I guess it's history now with the Trump administration but the ACA,when it had the tax provision, was another reason. As I understood it, the only way they could collect the "Obamacare tax" for not having insurance was to take it out of your refund. So never be due a refund and it sounded like that problem was solved.

michaeljc70
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Re: Am I Crazy???

Post by michaeljc70 » Sat Apr 07, 2018 6:31 pm

To be honest, in this low interest rate environment, I wouldn't worry terribly about it. But I try to not owe or get back much. My MM pays so little interest I don't think it is worth the time I put in to record it in Quicken. I guess it also depends on your NW. If you are starting out and have a small amount of investments, it would definitely be better to be DCA into investments with that money (if you are eventually saving it).

mortfree
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Re: Am I Crazy???

Post by mortfree » Sat Apr 07, 2018 7:20 pm

neilpilot wrote:
Sat Apr 07, 2018 12:00 pm
Way back in the late 70s, early 80s I helped my then CPA brother-in-law during tax season. This was before individuals used PCs and internet to complete tax forms. I remember a client who had a $6-8k refund, and advised him to lower his withholding. At that point bank CD interest was 7-10% and mortgage rates were double digit.

The next year his withholding was a few hundred $s within his actual tax bill, but we then lost him as a client. His wife said that they were getting a much better refund before I had him lower his withholding. :oops:
Now THAT is CrAzY.

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KlingKlang
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Re: Am I Crazy???

Post by KlingKlang » Sat Apr 07, 2018 7:36 pm

mortfree wrote:
Sat Apr 07, 2018 7:20 pm
neilpilot wrote:
Sat Apr 07, 2018 12:00 pm
Way back in the late 70s, early 80s I helped my then CPA brother-in-law during tax season. This was before individuals used PCs and internet to complete tax forms. I remember a client who had a $6-8k refund, and advised him to lower his withholding. At that point bank CD interest was 7-10% and mortgage rates were double digit.

The next year his withholding was a few hundred $s within his actual tax bill, but we then lost him as a client. His wife said that they were getting a much better refund before I had him lower his withholding. :oops:
Now THAT is CrAzY.
Had exactly the same thing happen with my parents. My father would calculate his withholding carefully, but if they owed a few dollars on their return my mother would go ballistic over "Having to pay taxes when all of her friends were getting refunds!".
P.S. My mother did no work inside or outside of the home.

deikel
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Re: Am I Crazy???

Post by deikel » Sun Apr 08, 2018 12:02 pm

Not crazy

If this helps you putting money aside, its one way to go about.

However, there is a smarter way to go about and you would probably not pay an advisor 2% of this money to figure out this great saving scheme, so why would you pay that money to Uncle Sam ?

Re Trump taxes, I would suggest you rather wait before you celebrate next years taxes, you might be unpleasantly surprised when all is said and done about these tax breaks...a whole lot of people will not save a penny.
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immidiatly and destroy any copy or remembrance of it.

RadAudit
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Re: Am I Crazy???

Post by RadAudit » Sun Apr 08, 2018 6:27 pm

GoldenGoose wrote:
Sat Apr 07, 2018 10:59 am
Am I crazy?
I have a friend who deliberately withholds a large amount just so he can get a big return. I'm fairly sure he is not crazy. Not too good at math; but, not crazy.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The Calvary isn't coming, kids. You are on your own.

Independent George
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Re: Am I Crazy???

Post by Independent George » Sun Apr 08, 2018 11:42 pm

GoldenGoose wrote:
Sat Apr 07, 2018 10:59 am
I know, most people would say, "why are you giving free loans to Uncle Sam?" but the realization of the "new found" money does have its euphoria. I did not ever think about this year's refund at all until now after tax time. Given the fact that I know the downsides, the up sides of my situation is that without that money in the bank (and in my mind) last year and up until now, I am more conservative in our household expenditures (I tried). Otherwise I would have been a bit more careless about spending. I think my situation is similar to paying off the house (peace of mind) or keep the mortgage and invest.

Am I crazy?
You're not crazy - the euphoria is a real feeling, and the low interest rates we're getting is means you're really not giving up all that much money. That said, there's no reason why you couldn't duplicate the feeling while still reducing your taxes withheld and getting paid interest on that money in the process. You can segregate your accounts, and set up an automatic transfer into a different savings account on the same date as your paycheck. As long as you don't check that separate account balance, it shouldn't affect your current spending.

As a sidenote, if you expect to sell any more stocks in the future, you are expected to mail a form 1040-ES and attach a check for the expected tax on the gain. As far as I know, there is no option to e-file an estimated tax payment.

https://www.irs.gov/faqs/estimated-tax/ ... utions-etc
https://www.irs.gov/businesses/small-bu ... ated-taxes

inbox788
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Re: Am I Crazy???

Post by inbox788 » Mon Apr 09, 2018 3:32 pm

For me, it's been feast or famine. I've either received or paid big differences after doing taxes, sometimes paying underpayment penalties. Mostly this has to do with variables like capital gains taxes. It's been unpredictable given random sales dates and amounts. And I've had increasing amounts of dividends that were negligible, but staring to become significant. Anyway, I should be getting a large refund this year, but I'm going to simply apply it to next years taxes and hope it covers the capital gains from some anticipated stock sales. And how did I get into this situation? Last year, I underpaid and had to deal with penalties, so for this recent tax year, I overcompensated and overpaid. I could probably do a better job projecting and estimating tax liabilities, but that would entail basically doing quarterly tax returns, and I'd rather forgo some interest to not have to do that.

music_man
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Re: Am I Crazy??? [Excess W-4 withholding, got large tax refund]

Post by music_man » Mon Apr 09, 2018 4:06 pm

I wouldn't call it crazy, but definitely sub-optimal. $20k a year means $1666, monthly cash flow you aren't seeing until the end of the year. To me that would be pretty significant amount to be used for either other necessary expenses or savings. The only way I would justify that for myself is if I felt I was so undisciplined (I'm not) about spending it throughout the year that it made more sense to to let the government hold onto that money for me.

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Ice-9
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Re: Am I Crazy???

Post by Ice-9 » Mon Apr 09, 2018 4:20 pm

Independent George wrote:
Sun Apr 08, 2018 11:42 pm
GoldenGoose wrote:
Sat Apr 07, 2018 10:59 am
I know, most people would say, "why are you giving free loans to Uncle Sam?" but the realization of the "new found" money does have its euphoria. I did not ever think about this year's refund at all until now after tax time. Given the fact that I know the downsides, the up sides of my situation is that without that money in the bank (and in my mind) last year and up until now, I am more conservative in our household expenditures (I tried). Otherwise I would have been a bit more careless about spending. I think my situation is similar to paying off the house (peace of mind) or keep the mortgage and invest.

Am I crazy?
You're not crazy - the euphoria is a real feeling, and the low interest rates we're getting is means you're really not giving up all that much money. That said, there's no reason why you couldn't duplicate the feeling while still reducing your taxes withheld and getting paid interest on that money in the process. You can segregate your accounts, and set up an automatic transfer into a different savings account on the same date as your paycheck. As long as you don't check that separate account balance, it shouldn't affect your current spending.

As a sidenote, if you expect to sell any more stocks in the future, you are expected to mail a form 1040-ES and attach a check for the expected tax on the gain. As far as I know, there is no option to e-file an estimated tax payment.

https://www.irs.gov/faqs/estimated-tax/ ... utions-etc
https://www.irs.gov/businesses/small-bu ... ated-taxes
THIS.

If you...
(1) don't withhold so much
(2) have the amount that's added to each paycheck going forward automatically withdrawn from your regular bank account to an online bank account like Ally paying 1.45% or another bank paying higher

...then you can similarly look at the account balance every April 15th and feel euphoric, but 1.45% moreso. And if an emergency happened during the year between tax days, you'd still have the money available. Win-win for you! :sharebeer

ThriftyPhD
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Re: Am I Crazy???

Post by ThriftyPhD » Mon Apr 09, 2018 4:30 pm

Independent George wrote:
Sun Apr 08, 2018 11:42 pm
As a sidenote, if you expect to sell any more stocks in the future, you are expected to mail a form 1040-ES and attach a check for the expected tax on the gain. As far as I know, there is no option to e-file an estimated tax payment.

https://www.irs.gov/faqs/estimated-tax/ ... utions-etc
https://www.irs.gov/businesses/small-bu ... ated-taxes
https://directpay.irs.gov/directpay/pay ... ution=e2s1

Reason for Payment: Estimated Tax

inbox788
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Re: Am I Crazy???

Post by inbox788 » Mon Apr 09, 2018 4:38 pm

Independent George wrote:
Sun Apr 08, 2018 11:42 pm
As far as I know, there is no option to e-file an estimated tax payment.
FWIW, I've made estimated payments using IRS Direct Pay.

https://www.irs.gov/payments/available- ... direct-pay

Gill
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Re: Am I Crazy??? [Excess W-4 withholding, got large tax refund]

Post by Gill » Mon Apr 09, 2018 4:46 pm

I wouldn’t want to call unnecessary attention to my return by having a huge refund.
Gill

bayview
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Re: Am I Crazy??? [Excess W-4 withholding, got large tax refund]

Post by bayview » Mon Apr 09, 2018 7:39 pm

Do what you like with these 0% refunds, but please don't post on other threads griping about low rates of returns on your investments. :D
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

GoldenGoose
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Re: Am I Crazy??? [Excess W-4 withholding, got large tax refund]

Post by GoldenGoose » Tue Apr 10, 2018 6:40 am

I thought I'd get thoroughly roasted for this post. Thanks for the kind words. Oh well. I looked at this as money saved. I could be earning interest on that refund but then based on my experience, the more you have the more you spend. I do miss the good old college days where I hardly spent any money at all on a monthly basis. Only if I could have kept that kind of spending habits I'd have retired young by now. I'd be a millionaire.

Now i have to look into my w4.

Crisium
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Re: Am I Crazy??? [Excess W-4 withholding, got large tax refund]

Post by Crisium » Tue Apr 10, 2018 7:12 am

This is understandable. Ideally you'd have that money in at least a 1% savings account though, as you are aware.

And this is why setting up automatic savings is important for most people. People are adaptable. In my experience, most people save less than 10% of their income no matter what - whether they get a fat refund, a skinny refund, or owe taxes. And if they get a refund, it gets spent in short order. With the exception of people near the poverty line who have little flexibility, I'm certain most of these people would self-adjust if they just automated 10% or more of their savings (and if they adjust their withholding to get 0% return, then maybe automatic even more savings). I believe MMM talks a lot about the importance of automating it.

Bacchus01
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Re: Am I Crazy??? [Excess W-4 withholding, got large tax refund]

Post by Bacchus01 » Tue Apr 10, 2018 7:13 am

Nothing crazy. Lots of sane, rational, responsible people do exactly the same thing on purpose. There’s nothing wrong with it, but there are better options.

I do exactly the opposite. I calculate the max I can underwithhold without paying a penalty and then file as late as possible. I also WAY under withhold early in the year while cranking that up in Q4 of each year.

What’s all that worth? I have no idea, but I would put it at thousands per year for about 10 minutes of work each quarter.

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samsoes
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Re: Am I Crazy???

Post by samsoes » Tue Apr 10, 2018 7:59 am

inbox788 wrote:
Mon Apr 09, 2018 4:38 pm
Independent George wrote:
Sun Apr 08, 2018 11:42 pm
As far as I know, there is no option to e-file an estimated tax payment.
FWIW, I've made estimated payments using IRS Direct Pay.

https://www.irs.gov/payments/available- ... direct-pay
I've also made estimated Federal taxes through my EFTPS.gov account. Quite simple and efficient.
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