Quick tax question

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UncleBogle
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Quick tax question

Post by UncleBogle » Sat Sep 01, 2018 6:43 am

My daughter had worked over the summer, and she did not check the box to have her exempt from federal withholding. She made less than $3000, and I wanted to submit the correct tax form for the refund on what she paid. Do I just submit a 1040EZ ? Thanks.

livesoft
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Re: Quick tax question

Post by livesoft » Sat Sep 01, 2018 6:52 am

Not enough info. Show your daughter this and let her decide: https://www.irs.gov/taxtopics/tc352
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RickBoglehead
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Re: Quick tax question

Post by RickBoglehead » Sat Sep 01, 2018 8:07 am

You won't be submitting any form until she files her 2018 taxes, and then gets a refund.

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FiveK
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Re: Quick tax question

Post by FiveK » Sat Sep 01, 2018 11:18 am

Seems there will be only one form for 2018 - no more 1040EZ vs. 1040A vs. 1040.

See https://www.irs.gov/pub/irs-dft/f1040--dft.pdf.

TravelforFun
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Re: Quick tax question

Post by TravelforFun » Sat Sep 01, 2018 11:22 am

Don't forget to open a Roth IRA and put $3,000 in it for her or add $3,000 to her existing Roth account. She'll thank you for your foresight later.

TravelforFun

UncleBogle
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Re: Quick tax question

Post by UncleBogle » Sun Sep 02, 2018 8:34 am

TravelforFun wrote: โ†‘
Sat Sep 01, 2018 11:22 am
Don't forget to open a Roth IRA and put $3,000 in it for her or add $3,000 to her existing Roth account. She'll thank you for your foresight later.

TravelforFun
Absolutely! I did that for all of my kids. I just wish my folks did that for me...๐Ÿ˜Š

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dodecahedron
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Re: Quick tax question

Post by dodecahedron » Sun Sep 02, 2018 8:55 am

UncleBogle wrote: โ†‘
Sat Sep 01, 2018 6:43 am
My daughter had worked over the summer, and she did not check the box to have her exempt from federal withholding. She made less than $3000, and I wanted to submit the correct tax form for the refund on what she paid. Do I ???? just submit a 1040EZ ? Thanks.
Red ????? added by dodecahedron. I question your choice of pronouns.

Agree that 1040EZ is a dinosaur for 2018 and beyond. And she will need to wait until after she receives her W-2 in January 2019 before her return can be filed.

But, in my opinion barring unusual circumstances, if your daughter is capable of gainful employment, SHE not you ought to be the one filing the tax return reporting her income. It will be her name and SSN going on the return, NOT yours. (Yes, if she is under 18 or mentally incapacitated at any age, a parent or guardian can sign the return on her behalf, but my experience is that most teens with simple W-2 income are perfectly capable of understanding and signing their own tax returns. It is an excellent educational experience. I work with way too many college students who tell me that they have never even looked at the returns their parents have filed on their behalves. I would recommend working through the instructions together with your daughter after she gets her W-2 and making sure that both of you understand every line before SHE signs the return--or clicks the efile button, as the case may be.)

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HueyLD
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Re: Quick tax question

Post by HueyLD » Sun Sep 02, 2018 9:29 am

+1 for the above comment. Yes, it does work based on my own experience also.

UncleBogle
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Re: Quick tax question

Post by UncleBogle » Sun Sep 02, 2018 7:43 pm

dodecahedron wrote: โ†‘
Sun Sep 02, 2018 8:55 am
UncleBogle wrote: โ†‘
Sat Sep 01, 2018 6:43 am
My daughter had worked over the summer, and she did not check the box to have her exempt from federal withholding. She made less than $3000, and I wanted to submit the correct tax form for the refund on what she paid. Do I ???? just submit a 1040EZ ? Thanks.
Red ????? added by dodecahedron. I question your choice of pronouns.

Agree that 1040EZ is a dinosaur for 2018 and beyond. And she will need to wait until after she receives her W-2 in January 2019 before her return can be filed.

But, in my opinion barring unusual circumstances, if your daughter is capable of gainful employment, SHE not you ought to be the one filing the tax return reporting her income. It will be her name and SSN going on the return, NOT yours. (Yes, if she is under 18 or mentally incapacitated at any age, a parent or guardian can sign the return on her behalf, but my experience is that most teens with simple W-2 income are perfectly capable of understanding and signing their own tax returns. It is an excellent educational experience. I work with way too many college students who tell me that they have never even looked at the returns their parents have filed on their behalves. I would recommend working through the instructions together with your daughter after she gets her W-2 and making sure that both of you understand every line before SHE signs the return--or clicks the efile button, as the case may be.)
She is 14, and I am helping her. We will be filing it together. I just needed to know what form to use, as I have an accountant do our home/business taxes.

clydewolf
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Re: Quick tax question

Post by clydewolf » Mon Sep 03, 2018 9:38 am

"Absolutely! I did that for all of my kids. I just wish my folks did that for me...๐Ÿ˜Š"

Roth IRAs were not available until 1998. The maximum contribution in 1998 was $2,000.
Most likely when you were a teen the Roth option was not available.

UncleBogle
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Re: Quick tax question

Post by UncleBogle » Mon Sep 03, 2018 6:53 pm

clydewolf wrote: โ†‘
Mon Sep 03, 2018 9:38 am
"Absolutely! I did that for all of my kids. I just wish my folks did that for me...๐Ÿ˜Š"

Roth IRAs were not available until 1998. The maximum contribution in 1998 was $2,000.
Most likely when you were a teen the Roth option was not available.
No, but a traditional IRA was. I only knew about IRAs when I was in my mid 20's and started contributing at that time. I wish I had contributed all of my summer job money up until that. That would have been nice. That's why I'm teaching my kids early.

Spirit Rider
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Re: Quick tax question

Post by Spirit Rider » Mon Sep 03, 2018 7:10 pm

UncleBogle wrote: โ†‘
Mon Sep 03, 2018 6:53 pm
clydewolf wrote: โ†‘
Mon Sep 03, 2018 9:38 am
"Absolutely! I did that for all of my kids. I just wish my folks did that for me...๐Ÿ˜Š"
Roth IRAs were not available until 1998. The maximum contribution in 1998 was $2,000.
Most likely when you were a teen the Roth option was not available.
No, but a traditional IRA was. I only knew about IRAs when I was in my mid 20's and started contributing at that time. I wish I had contributed all of my summer job money up until that. That would have been nice. That's why I'm teaching my kids early.
It would have then as now, been very unwise to make non-deductible traditional IRA contributions.

What makes Roth IRA contributions so valuable since 1998 for teenagers. Is that very few of them have any tax liability to begin with.

UncleBogle
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Re: Quick tax question

Post by UncleBogle » Mon Sep 03, 2018 8:10 pm

Spirit Rider wrote: โ†‘
Mon Sep 03, 2018 7:10 pm
UncleBogle wrote: โ†‘
Mon Sep 03, 2018 6:53 pm
clydewolf wrote: โ†‘
Mon Sep 03, 2018 9:38 am
"Absolutely! I did that for all of my kids. I just wish my folks did that for me...๐Ÿ˜Š"
Roth IRAs were not available until 1998. The maximum contribution in 1998 was $2,000.
Most likely when you were a teen the Roth option was not available.
No, but a traditional IRA was. I only knew about IRAs when I was in my mid 20's and started contributing at that time. I wish I had contributed all of my summer job money up until that. That would have been nice. That's why I'm teaching my kids early.
It would have then as now, been very unwise to make non-deductible traditional IRA contributions.

What makes Roth IRA contributions so valuable since 1998 for teenagers. Is that very few of them have any tax liability to begin with.
I will have to respectfully disagree. Other than my early teen years, I actually made a very nice salary in my summer jobs (I worked as a computer programmer for the financial industry in the mid 80's, and got paid very well - I had to pay taxes). I made much more in my early 20's - at 23, I was making 42k).

Taking a tax-deduction would have lowered my tax burden. The money placed in the IRA would have grown tax free for over 40+ years, which should well offset any tax burden in the future, when withdrawals would be made. Instead, I purchased equities in a taxable account, which was fine, but I was taxed on the gains (albeit, long term capital gains), which reduced future compounding. I would have much rather had this money grow tax free.

But let's say I had no tax liability. As a fun exercise to test out the worst case scenario, I used an online calculator to see what would have happened if I invested a $1000 back in 1985 in a non-deductible IRA. Would it really have been so bad ?

Considering a 3-fund allocation at a yearly average interest of 7% for 40 years, this would yield $15,000 dollars. Even if taxes were 35% at the time of withdrawal, that would still leave $9750, an 875% return on the $1000 invested. A taxable account would not have been able to grow as much, as each year the gains would be munched away.

Sure, the tax deduction is a definite plus, but unless my calculations are off, why would this have been "very unwise", as you suggested ?

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FiveK
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Re: Quick tax question

Post by FiveK » Mon Sep 03, 2018 8:21 pm

UncleBogle wrote: โ†‘
Mon Sep 03, 2018 8:10 pm
Considering a 3-fund allocation at a yearly average interest of 7% for 40 years, this would yield $15,000 dollars. Even if taxes were 35% at the time of withdrawal, that would still leave $9750, an 875% return on the $1000 invested. A taxable account would not have been able to grow as much, as each year the gains would be munched away.
$1000 invested taxably for 40 years, with 2%/yr taxed at 15% and 5%/yr growth (2% + 5% = the same 7% assumed above) taxed at 15% when withdrawn, would be $12,000 instead of $9750.

Different assumptions will provide different results.

UncleBogle
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Re: Quick tax question

Post by UncleBogle » Mon Sep 03, 2018 9:04 pm

FiveK wrote: โ†‘
Mon Sep 03, 2018 8:21 pm
UncleBogle wrote: โ†‘
Mon Sep 03, 2018 8:10 pm
Considering a 3-fund allocation at a yearly average interest of 7% for 40 years, this would yield $15,000 dollars. Even if taxes were 35% at the time of withdrawal, that would still leave $9750, an 875% return on the $1000 invested. A taxable account would not have been able to grow as much, as each year the gains would be munched away.
$1000 invested taxably for 40 years, with 2%/yr taxed at 15% and 5%/yr growth (2% + 5% = the same 7% assumed above) taxed at 15% when withdrawn, would be $12,000 instead of $9750.

Different assumptions will provide different results.
Of course. And this model would not work the same way with a capital gains tax of 20% or a taxable portion being more than 2%, etc. This model would also assume that the investor would never incur a short term capital gains tax(highly unlikely). I think we are on the same page.

But I can say with certainty, that taxes would never touch the first model until withdrawal. Likewise, I highly doubt that my tax rate at retirement would be 35% (although if that were the case, I'm not sure that I would complain too much, because it would mean that I really did well! :) ). That being said, at the 22% rate (much more likely) - my model would profit by $11,700, not very far off from the $12,000 that you quoted above.

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FiveK
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Re: Quick tax question

Post by FiveK » Mon Sep 03, 2018 9:13 pm

UncleBogle wrote: โ†‘
Mon Sep 03, 2018 9:04 pm
Of course. And this model would not work the same way with a capital gains tax of 20% or a taxable portion being more than 2%, etc. This model would also assume that the investor would never incur a short term capital gains tax(highly unlikely). I think we are on the same page.
Probably so. Toward the other end of the assumption spectrum, 7%/yr ordinary interest taxed at 25% would mean $7,743 after 40 years.

Spirit Rider
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Re: Quick tax question

Post by Spirit Rider » Mon Sep 03, 2018 10:09 pm

UncleBogle wrote: โ†‘
Mon Sep 03, 2018 8:10 pm
Spirit Rider wrote: โ†‘
Mon Sep 03, 2018 7:10 pm
It would have then as now been very unwise to make non-deductible traditional IRA contributions.

What makes Roth IRA contributions so valuable since 1998 for teenagers. Is that very few of them have any tax liability to begin with it.
I will have to respectfully disagree. Other than my early teen years, I actually made a very nice salary in my summer jobs (I worked as a computer programmer for the financial industry in the mid 80's, and got paid very well - I had to pay taxes). I made much more in my early 20's - at 23, I was making 42k).

Taking a tax-deduction would have lowered my tax burden. The money placed in the IRA would have grown tax free for over 40+ years, which should well offset any tax burden in the future, when withdrawals would be made. Instead, I purchased equities in a taxable account, which was fine, but I was taxed on the gains (albeit, long term capital gains), which reduced future compounding. I would have much rather had this money grow tax free.

But let's say I had no tax liability. As a fun exercise to test out the worst case scenario, I used an online calculator to see what would have happened if I invested a $1000 back in 1985 in a non-deductible IRA. Would it really have been so bad ?

Considering a 3-fund allocation at a yearly average interest of 7% for 40 years, this would yield $15,000 dollars. Even if taxes were 35% at the time of withdrawal, that would still leave $9750, an 875% return on the $1000 invested. A taxable account would not have been able to grow as much, as each year the gains would be munched away.

Sure, the tax deduction is a definite plus, but unless my calculations are off, why would this have been "very unwise", as you suggested ?
Did you not notice that I said; "Is that very few of them have any tax liability to begin with."

Classic logical fallacy. The fact you are a rarity does not change the merit of my position. It does not change that the vast majority of teenagers do not pay any income taxes. The few that do are at most in the first two tax brackets and would still be better off with Roth contributions.

Your math is way askew. The tax drag of a high equity asset allocation of index funds is minimal. Taxable investments have always been and are far preferable to making non-deductable contributions to a traditional IRA that you can not convert to a Roth IRA or did not even exist.

I am going to leave it there, because we are getting off topic.

UncleBogle
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Re: Quick tax question

Post by UncleBogle » Mon Sep 03, 2018 10:21 pm

Spirit Rider wrote: โ†‘
Mon Sep 03, 2018 10:09 pm

Your math is way askew.
I'm not sure which math you are referring to, but using Dave Ramsey's calculator, (https://www.daveramsey.com/smartvestor/ ... calculator) using a 40 year period with $1,000 starting point at 7%, the result is $14,974.

But, I agree, this is off topic.

libralibra
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Re: Quick tax question

Post by libralibra » Tue Sep 04, 2018 12:34 pm

Spirit Rider wrote: โ†‘
Mon Sep 03, 2018 10:09 pm
Did you not notice that I said; "Is that very few of them have any tax liability to begin with."
...
Your math is way askew. The tax drag of a high equity asset allocation of index funds is minimal. Taxable investments have always been and are far preferable to making non-deductable contributions to a traditional IRA that you can not convert to a Roth IRA or did not even exist.
If there's no tax liability anyway, then a non-deductible contribution is actually better than a deductible one! But it's hard to say whether a taxable account is even better. Lot's of variables at play (the 40 year example above does not take into account the tax cost of rebalancing often, state taxes, the fact that divs used to be taxed as ordinary income, and more recently the addition of NIIT).

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