Feb 22

I’ve been spending time at Money.Stackexchange as a moderator and top poster. Recently I ran into a bit of pushback on what I thought was an obvious question.
Why does my tax refund need to be as close to zero dollars as possible? Now, of course, it doesn’t have to be anything, but over the years, I’ve written about how to use the W4 to adjust your withholdings to get your refund down to a reasonable number. I maintain that if nothing else, you are lending the government money that could otherwise be used better by you.

Let’s look at two facts that motivate my approach.

This is from the IRS and references data from last year, 2014 returns. I then search for average credit card balance and find


This is where I make an assumption. It’s that those people who owe debt on their cards, at an average of 16% or higher, are among the 83% who are getting these refunds. Remember your Venn diagrams from high school? Do you think most of the 83% getting refunds also owe money on high interest cards?

Another thought, a factoid that has made the rounds many times in the last few years. According to a report by the Brookings Institute, half of US households would have trouble raising $2000 inside of 30 days for an emergency. In this case, it’s not a matter of a better return in the bank, I know rates are near zero right now, nor is it the fact that you should pay off that high interest debt. It’s that half of us don’t have a sufficient emergency fund to handle even a $2000 emergency.

With all this said, the Stack Exchange discussion led me to the Huffington Post article Big Tax Refunds Really Are Good. The author, Mark Steber, is the Chief Tax Officer at Jackson Hewitt Tax Service. One might dismiss Mark’s position as the refund is in his company’s best interest. But, why would that be? What would it take for a few marketing gurus to change their rhetoric from “we’ll get you the biggest tax refund” to “we’ll get you the lowest tax liability possible.” Let me summarize Mark’s 8 reason’s and offer my own counter points to each –

  1. Getting a $3000 check (the average return) is never a bad thing. (Yes, it’s awful. Why lend the government or anyone your money at zero interest?)
  2. 75% of us get refunds year after year, can we all be wrong? (Well, it’s over 80%, but yes, I believe that financial illiteracy is rampant, why would it surprise you to find the majority doing the wrong thing?)
  3. Interest rates at sub 1%. (Indeed, we each have our own opportunity cost. It’s disingenuous to focus on the missed back interest, how about the fact that 1 in 4 employees did not deposit enough to their 401(k) to get a company match. The average left on the table was $1336 according to Financial Engines. A match is an instant 50-100% return, that’s what’s lost.)
  4. Saving money is tough, this is used as a savings account. (I get that. Is Mark suggesting that someone who is not disciplined enough to save on their own, will suddenly be responsible with this lump sum they get in April?)
  5. Some portion of people are getting refundable tax refunds such as EITC. (This is true. Some people pay no tax but get money back do to the Earned Income Tax Credit among other credits. And of course, this is not in their control, they are not paying this money in, they have no choice. This point is a red herring, little else)
  6. Of the three alternatives: owing taxes, landing right on zero or near it, or getting a big refund, you figure out which one is best. (I have figured it out. I’ll make the best use of my money, and can plan ahead. So long as I don’t pay a penalty, I’ve planned well.)
  7. Getting money back is certainly more palatable than owing. (Mark was running low on ideas, this is a rehash of #6. No new point made here.)
  8. You earned the money. It is your money. Get and enjoy the money. (Agreed! Over my working life, I got my money every paycheck, and didn’t have to wait to get it back. I’d say it’s your money, don’t let it go.)

What is my motivation here? Only to bring to light the financial nonsense that’s offered under the guise of sage advise. The problem with this discussion is that the audience can be anyone. I focus on a broad audience, not just the top few.  Mark’s dismissal of the lost opportunity cost, focusing on the low current rates, implies that he ignores all the other scenarios I presented. If such a thing were possible I’d find everyone who is not getting their company match, and explaining to them they could double their money instead of lending it out interest free. Next, I’d sit with those who are paying 18% or more and not paying their cards off in full. It goes on from there. Why does Mark dismiss the real cost that most of us face? The top 10%ers don’t need to worry about $3K tied up, but they are also more likely to have their finances in order.

Now, are you still so sure a refund is a great thing?

written by Joe

Jan 04

2015 is now in the history books. As I was prepping for our annual New Year’s eve party, I heard CNBC in the background, “The S&P 500 was down 3/4 of a percent for the year, the worst year since 2008.” True, I suppose, but the tone is the opposite of how I discussed the year end with my wife. When we spoke about the market early last year, I looked at the returns we had from 2009 through 2014, a compound return of 17.3%/yr and cumulative growth of 160% over that time. The market’s P/E was relatively on the high side, and given the choice, I’d prefer to see a year with the index flat, but earning grow a bit to reduce the overall P/E a bit. I wanted flat, and got flat. The S&P total return, including dividends returned 1.3% for the year. Not great, but not a down year, and given the rates one sees in the bank, still better than CDs or money market. Price to earnings didn’t shrink as I hoped. From 20.02 on Jan 1, I see an estimated 21.54 for year end.


We ended the year on a bit of a sad note. My mother died after 15 years of multiple battles with cancer. When this happened, the day after Christmas, my inclination was to post a quick message on Facebook, but I found my account disabled due to my use of a pen name. While I do have a credit card with JoeTaxpayer as the printed name, Facebook wanted a number of different IDs including government issued. So, I am done with Facebook, or rather, they are done with me. If, and when I decide to ‘go public,’ it will take some time to re-engage with the near-1000 people who decided I was good enough to friend on FB. Meanwhile, I’m going through the sites I read regularly finding the ones that used FB sign-in, and trying to convert to a different method. Many are FB only, and I won’t be able to post at all.

Working on my 2016 resolutions, next.

written by Joe \\ tags:

Dec 28

The end (of 2015) is near. Still, you can do a lot to help your finances before the ball drops on Thursday and we ring in the new year. Let’s look at some of my top year end tips –

  • The Charitable RMD is now an option that will be available every year. This part of the tax code allows those who are 70-1/2 and taking RMDs from their IRA to donate directly to a charity. In effect making a donation deductible even though the donor doesn’t itemize. This code needed to be renewed each year, but recently, congress made this rule permanent.
  • If you are retired already, and are not too close to the next tax bracket consider a Roth conversion to “top off” your current bracket. Say you are at a taxable $65K. You have an additional $9,900 you can withdraw or convert to Roth, and pay just 15%. By converting to Roth, you help to keep from breaking through the 25% rate as your withdrawals increase in the future.
  • Do you have an FSA (flexible spending account) at work? If there’s a bit of money left, you should consider a quick purchase, typically, eyeglasses come to mind as they are an easy expense, and have a wide range of cost from simple reading glasses at $100 to a fancy pair of glasses well over $500. Don’t let that money get forfeited.
  • Year end is good time to look at how much you are depositing to your 401(k) account. Can you bump the deduction up by a percent or two? You won’t regret it .
  • Did 2015 bring you any change in family members? Marriage, new child, divorce,  family member pass away? It’s time for an annual review of the beneficiaries on all of your accounts. It’s never to soon to see if your new spouse has a former spouse of their own as a beneficiary. Pretty important to get that updated asap.
  • Last, see if the Tax Loss Harvesting I wrote about can help you. You can read the full article, but the important thing to know now is that you can take stock losses against up to $3000 of ordinary income each year. Hopefully, your are making a profit, but this is an easy way to get a bit of money back on a stock you are holding at a loss and are wanting to sell.

That’s all for this year, Happy 2016


written by Joe \\ tags: ,

Nov 09

I don’t know where I first heard this expression, it might has been a movie line, or it might have been uttered in response to a very bad business proposal. The full line is, “if you’re going to screw me, the least you could do is take me to dinner and a movie first.” Vulgar, yes, but it’s my reaction to the latest budget congress just passed which impacts my projected social security benefit. I just lost over $63K in future benefits.

Let me take a step back and explain. The Social Security rules are so convoluted that Professor Laurence Kotlikoff has both a book, Get What’s Yours — The Secrets to Maxing Out Your Social Security Benefits, as well as a web site, maximizemysocialsecurity.com to help people navigate this ridiculous minefield. I always knew a bit about the social security strategies, but didn’t give it much thought until recently, as my wife will turn 60 in 2016. Me, I’m 53, and still have some time, but I figured it’s not too early to understand what benefits we can expect. Larry’s book offers strategies for most combinations of people and relationships you can imagine. Divorced couples, older retirees with children under 18, it’s really a myriad of possibilities.


My situation was relatively simple. My wife has nearly 7 years on me, and the strategy that made the most sense was for her to get her maximum benefit at 70, and then when I hit my full retirement age (67), I’d have the ability to apply for just the “spousal benefit.” My wife’s benefit at 70 would be about $3500, therefore I’d have been eligible for $1750/mo while I waited 3 more years to take the benefit based on my own work record. 3 years of this spousal benefit would have totaled $63,000. The new rules, among other things, prohibit this strategy, along with any strategies that included filing and suspending.

This strategy that impacted me was not used very often, it seems. The Times’ story that discussed it was titled “Rarely Used Social Security Loopholes, Worth Thousands of Dollars, Closed.” Perhaps that headline really summed it up. There wasn’t going to be a groundswell of protest for a strategy relatively few people used. On other sites, the comment to this news story contained remarks like, “I’m glad to see this strategy used by the 1%ers done away with. Maybe it will leave more money in the social security trust fund so I’ll actually get my benefit.”

I’m trying to keep an open mind here. On one hand, $63K. On the other hand, a strategy that was probably used only by the well-informed, which may very well skew to the top 10% or even the 1%. The spousal benefit was useful for any couple to use as a way of collecting a benefit while allowing one person’s own benefit to grow 8%/yr for the time between full retirement age and 70. Those who knew about this strategy and planned for it, need to make a bit of a course correction.

Those are the general details. I’m sorry this strategy wasn’t better known and used by more people. We’ll get by ok without this extra money, but I can’t help but wonder what changes are coming next. Will there be any benefit left by the time I’m old enough to collect?

written by Joe \\ tags: ,

Nov 02

I’ve been known to use the expression, “Don’t let the tax tail wag the investing dog.” I stand by that remark. If you own a stock and it’s time to sell since it no longer is a stock your own criteria would justify, by all means, sell it. Holding it for an extra month to get long term favored gains may result in a greater loss than the missed long term treatment.

That said, the strategy of tax loss harvesting can help you boost your returns a bit depending on your timing. Let’s look at how this can work for you. First, you need to understand taxation of long term capital gains. There’s a zero percent rate for gains on sales of stocks (including mutual funds) held for over one year. But, there’s a catch. This great rate applies to those in the 10% or 15% brackets. If you take a peek at my last post, you’ll see that, in 2016, for a couple, the 15% bracket ends at $75,300. Add the exemptions and standard deduction, totaling $20,700, and this is an even $96,000, gross income. Less than 25% of households had more than this much income in 2014 according to the latest census data, so this strategy will help most of my readers. Last, understand the rules regarding wash sales. If you sell a stock or fund at a loss and purchase “substantially identical” funds or ETFs with 30 days, this triggers a wash sale. Earlier this year, Michael Kitces wrote an in depth article, Does Tax Loss Harvesting “Almost” Substantially Identical Mutual Funds And ETFs Trigger A Wash Sale Problem? For my purposes, selling an S&P tracking fund or ETF and buying a larger index, whether tracking the top 1000 or 1500 stocks should suffice.

You’re looking at your brokerage statement, and find you have 2 funds, one showing a $3000 gain, the other a $3000 loss. A contrived, simple example. For this discussion, we’ll assume they are generic, say S&P 500 index, and a broad Small Cap fund. If you sold both of these, and bought other funds this year, the loss and gain cancel, no tax due, no tax savings. Instead, sell the losing fund this year, buying into another fund reflecting your desired asset allocation. Now, you have a $3000 (the maximum you can take each year) loss, and you’ll see $450 more in your tax refund when you file. At the end of the following year, review your holdings, and if you won’t have a loser to sell in the next year, sell the one with the gain, and buy into another to keep your allocation to your goals. This move will raise your basis to the new, higher level, and should the market fall from this new level, you’ll have another chance to sell for a loss.

Let’s look at how this strategy could have been implemented over the decade from 2000 to 2009.


This is the ‘lost decade’ for the S&P, a remarkable 10 years that resulted in the S&P losing 9% of its value. You can click on the chart above to take a look, full size, or go to MoneyChimp and look at the returns for 2000 through 2009. In this crazy decade, we can take advantage of the market’s volatility by taking the losses along the way, and reinvesting this money. This example starts with a $30,000 investment account all reflecting the return of the S&P. For each year from 2000 though 2003 we are able to deduct a $3000 loss and get $450 back when filing. Note, even though 2003 had a gain, the S&P index dropped 40% in the 3 years from 2000 to 2002, and by shifting from one fund to another, there were $12,000 were of losses to claim over the 4 years. In the next few years, basis is increased by swapping funds. Here’s a chart illustrating this –


You can see, the ‘regular’ return reflects the buy and hold, but ‘taking losses’ adds $450 each year we are able to take the $3000 loss. $3000 is the maximum you can take each year again ordinary income. Typically, losses first offset gains, but in our example, we’ll only take losses when they can be deducted against ordinary income. In this decade shown, losses are taken in each year from 2000 to 2003, and again in 2008 and 2009. The gains up to 2007 are used to increase basis by swapping funds, so in 2007, your basis is $36,697. Another fund swap in 2008, results in loss of over $13,000 letting you spread the deduction over the next 4+ years, so even though 2010 and 2011 showed gains, you are still taking a loss and adding $450 into the account.

The result of this annual effort is a 10% swing, instead of losing 9% for the decade, we are up just over 1%. To be fair, with expenses, we’d be just about at break-even, vs being down 9% plus expenses. Another way to look at it is that the return was improved by a full 1%/yr just from this strategy. No magic here, just using the rules of our tax code to write off losses against ordinary income, but take the gains tax free.


written by Joe \\ tags: , ,