IRS Tax Questions Thread

[Trippy]

So I'm getting penalized on being late paying ESTIMATED taxes even though I paid my actual 100% taxes.

Which means I'm getting penalized for not being a seer?

Yes. US income tax is actually "pay as you go" meaning you are supposed to pay tax on the income you get when you get the income. Of course that could get complicated so they allow you to do it once a quarter instead, if necessary. The IRS also does give you leeway if your income came in unevenly during the year so they don't expect you to pay tax on income you might be getting later in the year. Typically what I did back in the day when I had supplemental 1099-MISC income was estimate my taxes near the end of the calendar year and make one payment, if necessary, at the deadline of the final payment period (usually Jan 15). If I was exclusively or almost exclusively getting 1099-MISC income I would do the estimation twice a year.

[schild]

My income was super uneven. I went from unemployment at the beginning to a short stint at a place that needed contract work to almost regular pay for a company that didn't pay regularly. They also bounced a check (though, this was absolutely by mistake). Anyway, estimating my taxes would have been near impossible. Ugh. Taxes.

[Trippy]

During the year it might have but you still could've done it at the end of the calendar year and then made one payment on or before January 15th. Then you would've avoided all or almost all of the penalty, assuming that's what they are penalizing you for.

[schild]

This is a pretty ridiculous penalty. They may have well have said "Hey, we want to wring you for $125 more. Arbitrary Government Tax - $125."

Meh, I don't really care, it's just goofy.

[Paelos]

All payroll taxes are collected quarterly. Therefore, if you are not on payroll, they expect you to pay in your taxes quarterly.

That's the rationale behind the law. The actual reason is that they know people are usually idiots, and won't pay 100% of their taxes on time across the board if they aren't forced to think about it all throughout the year. Also, they want to make sure they collect money in waves, not in a huge amount at once.

[schild]

:( I didn't know any of this.

[Paelos]

If you are a 1099 guy who runs his own business, you should have a CPA. It's usually worth the money unless you have revenues of less than $40,000.

[Yegolev]

It simpler: if you are paying your own taxes then just take a swing at estimating and pay something quarterly.  As long as Boss Hogg gets all his money at the end, he won't send Sheriff Coltrane after you.

[Jimbo]

Couldn't find a thread on 401k or retirement funds, but what do you all think?

I'm doing a 401k from work, because they match my deductions up to a certain point (like I put in 6% and they match 6% which is free money--sort of). Should I eventually take some of it and put it into a Roth IRA?

[Paelos]

Yes, you should do a 401k up to the match. It's hard to find another investment vehicle that offers to double your money right off the bat. If your employer doesn't match, I think it's pointless unless you prefer not dealing with your own investments, or you suck at saving.

The Roth is just money that's already taxed going into non-taxable withdrawals on the back end. I don't really like them very much, unless you are banking on tax rates increasing a lot. In my mind I'd rather front load my plan with my money and have it earn on the pre-tax income, then pay on the withdrawals. The reason being is that you are unlikely to be in a higher tax bracket when you retire (due to your withdrawal income being lower than your salary), and your rates may be lower. Example, a guy who makes $100k a year as he approaches retirement after 35 years of contributions is unlikely to draw that much a year out of his retirement fund. The amount will probably be closer to $60k, which has a different rate.

[Merusk]

Here's my thing about the Roths.  Given the current push for Austerity mindset and the idea that everything has to be paid-off I'm almost certain we're going to be seeing higher taxes, it's just a question of how much.  (We're Gen X, we get screwed for things like this all the time. It's just expected at this point.)

My worry is that my expected draw of 25-35k will be taxed so much higher in 30 years (Because retirement will be 70) than it is today, meaning I'll lose money no the back-end I could have saved on the front.  Of course if I'm wrong, the power of compounding means I've left a load of money on the table.  Frustrating!

[Hammond]

Does it make more sense to max out my yearly pre-tax contribution through the company 401k or rather split it up with a simple IRA account and the 401k? I don't think there is any advantage to doing that though other than not having all my eggs in one basket and having more flexibility in my investments? The rate of return on our 401k is extremely good and it is well managed as far as I can tell.

[Ingmar]

Any decent 401k will allow you to split your money across multiple funds anyway, so the eggs in a basket factor should not be there unless you're dealing with like an Enron type setup.

[Trippy]

Does it make more sense to max out my yearly pre-tax contribution through the company 401k or rather split it up with a simple IRA account and the 401k? I don't think there is any advantage to doing that though other than not having all my eggs in one basket and having more flexibility in my investments? The rate of return on our 401k is extremely good and it is well managed as far as I can tell.

Who is the broker handling your 401k (Fidelity, Charles Schwab, Smith Barney, etc.), do they have a wide range of funds to allocate your money to and can you change your allocation whenever you want?

[schild]

Called the IRS. They removed the late payment penalty while I explained my ignorance. Whoop.

[Paelos]

Called the IRS. They removed the late payment penalty while I explained my ignorance. Whoop.

Good, they gave you a one-time abatement in this scenario, which is the right thing to do. They will mark your record though, so don't make that mistake for another 7 years.

[shiznitz]

Does it make more sense to max out my yearly pre-tax contribution through the company 401k or rather split it up with a simple IRA account and the 401k? I don't think there is any advantage to doing that though other than not having all my eggs in one basket and having more flexibility in my investments? The rate of return on our 401k is extremely good and it is well managed as far as I can tell.

I believe that if you contribute to a 401k at all, your IRA contributions lose tax deductability.  There may be thresholds, though.  Give as much to your 401k as you can and especially maximize any matching.  Matching will grow your value more than even the best investment returns.

As far as picking where to invest, be wary choosing short term bond and money market funds right now.  For example, my firm's most risk averse option has a management fee in excess of its return so you would actually be losing money by choosing it. Every plan has different options, though.  In general, you should never pay more that a 1% management fee on any equity fund in a 401k.  Higher than that is thievery.  Pick one or two with a good long term record and low fees and focus there.  T Rowe Price is usually a good option.  If you choose more than 4 or 5 equity funds, then they start to overlap anyway or one is buying what the other is selling.  It is called "diworesification" - diversifying to the extent that it actually hurts you.

[Hammond]

Does it make more sense to max out my yearly pre-tax contribution through the company 401k or rather split it up with a simple IRA account and the 401k? I don't think there is any advantage to doing that though other than not having all my eggs in one basket and having more flexibility in my investments? The rate of return on our 401k is extremely good and it is well managed as far as I can tell.

Who is the broker handling your 401k (Fidelity, Charles Schwab, Smith Barney, etc.), do they have a wide range of funds to allocate your money to and can you change your allocation whenever you want?

We use Millman which is a smaller outfit. As far as our options go there a wide range of funds and I can change my allocation whenever I want with no penalty. Our management fees are extremely low and I have essentially setup my threshold at medium risk.. Sounds like really just pay as much in as I can then.

[Trippy]

Yes.

[Paelos]

I believe that if you contribute to a 401k at all, your IRA contributions lose tax deductability.  There may be thresholds, though.  Give as much to your 401k as you can and especially maximize any matching.  Matching will grow your value more than even the best investment returns.

If you're covered by a retirement plan at work, you can't deduct your IRA. It doesn't have to be a 401k, it can be anything. There's a box on your W2 for them to check if you are covered by a plan.

Shiz basically echos my point about matching. It's an amazing win-win for you unless the company is investing in something that's not following the market as a whole. In terms of retirement, I like to use 20 year looks. Where was the market 20 years ago? The DOW was trading at 3437. It's now trading over 15000. That means if you're investing with the market in that 20 year period, your $25k back then is worth over $100k today. People talk about how crazy the market is, and it is in short terms, but taken over a long haul it's been very consistent in providing returns for the conservative investor.

[shiznitz]

The stock market goes through long cycles.  I like to watch the rolling 10 year return - the measure of what you would have earned if you had invested in stocks over the prior ten years, plotted monthly.  Three times the rolling 10 year return has been close to zero or lower: 1937-40, 1974-5 (1-2%), 2008-2010.  After the first two, the rolling 10 year return went to 20% 20-30 years later.  As of March 31, 2013, we are at 8% meaning that if you invested in the S&P 500 on March 31, 2003, you have earned an 8% compounded return even through the 2008 crisis.  If history is any indicator, the next 10 years will be significantly better and the ten years after that even more rewarding.  

Bonds are not going to do it for you.  US interest rates are at 300 year lows (according to some bond wonk I saw on Bloomberg TV).  When interest rates rise, you WILL lose money on bonds unless the rise is very slow.  If you own a 20 year bond and rates rise 1 percentage point, the market value of that bond will drop 20%.  Please be wary of bond funds.  Protect with cash and invest in stocks.

If it matters, I work for a charitable foundation in the investments group.  We hire money managers and invest with a 50 year time horizon.  We are raising our equity allocation gradually.

[Paelos]

Or bet against the interest rate. 

I agree on rolling 10s as well. That's a good indicator of movement, and it shows how the market as a whole looks. It's very positive even though people dog Wall Street as pump and dump.

[Ghambit]

So tax season is starting up again, and I have a question.  I have this "friend" see, and he's been paying monthly on back taxes since last season.  He has credits and deductions for this year but not enough income to take advantage.  Question is, can one use back taxes to take advantage of current year credits/deductions/refunds?  e.g. if one owed $500 from 2012 to the IRS, yet had zero income in 2013, can a 2013 rebate be used for it?

[Paelos]

If you have a refund that would normally be coming to you, the government will just take it instead of cutting you a check and apply it to your bill. You don't even have to ask, they will just do it since they want your money.

However, most credits aren't refundable now, unless you mean the Earned Income Credit.

[Ghambit]

That is what I refer to; credits.  Specifically credits for no-work broke-ass students (education credits specifically); mind you, my friend has plenty that is also deductible, but useless since he's not working.  I guess what you're saying is since credits arent refundable, I cannot apply it towards what I owe from year's prior??  /sadface

[Paelos]

If you aren't getting a refund from a credit, you aren't getting anything. Therefore you can't pay your tax with it for any year.

[Abagadro]

Got a lovely letter form the IRS saying they are adjusting my 2012 taxes and I owe them a grand. It all has to do with a return of contribution from an IRA that I put on my 2011 taxes that was improperly coded as a distribution in 2012 so I ended up with a bad 1099-R in 2012 that Vanguard wouldn't correct. I filed all the right shit for a substitute 1099-R and explained it all, including citing/quoting the code. Researched the hell out of it so I know I am on solid ground.  Was this thing kicked out by a machine since there was essentially a 3rd party 1099 with no corresponding income listed on the return?  It is one of the agree/pay us or disagree/send us a statement with dox letters, so if it was some automated deal maybe a human looking at it with my explanation and documentation would agree with me.  Debating whether to go through the statement process or just cutting a check for the grand.  The amount is right on my "pain in the ass nuisance value"/"don't want to pay" tipping point.

So what say you sages of the tax world?

[Yegolev]

I got a letter last year regarding a 401k-IRA rollover.  I made copies of a statement, wrote a letter in Word, mailed it in and got a "OK, we are good" letter back.  I assume the initial letter from the IRS is automated.

Disclaimer: I'm just a regular guy, with a big ol' dick.

[Paelos]

Got a lovely letter form the IRS saying they are adjusting my 2012 taxes and I owe them a grand. It all has to do with a return of contribution from an IRA that I put on my 2011 taxes that was improperly coded as a distribution in 2012 so I ended up with a bad 1099-R in 2012 that Vanguard wouldn't correct. I filed all the right shit for a substitute 1099-R and explained it all, including citing/quoting the code. Researched the hell out of it so I know I am on solid ground.  Was this thing kicked out by a machine since there was essentially a 3rd party 1099 with no corresponding income listed on the return?  It is one of the agree/pay us or disagree/send us a statement with dox letters, so if it was some automated deal maybe a human looking at it with my explanation and documentation would agree with me.  Debating whether to go through the statement process or just cutting a check for the grand.  The amount is right on my "pain in the ass nuisance value"/"don't want to pay" tipping point.

So what say you sages of the tax world?

Yes, it's automated. Just respond to the letter with your reasons, the supporting documents, and the fact Vanguard wouldn't correct it.

[Abagadro]

After some back and forth they sent me an all clear, you don't owe anything letter. Success! Thanks guys.

[Paelos]

After some back and forth they sent me an all clear, you don't owe anything letter. Success! Thanks guys.

Excellent, only took them about 4 months. That's quick for the IRS! 

[Nebu]

After some back and forth they sent me an all clear, you don't owe anything letter. Success! Thanks guys.

Great news.  Congrats!  A grand will buy some good scotch.