Hacker News Reader

Comment by PopAlongKid | Hacker News Reader

I think the basic thing about taxes that is least understood is the difference between gross income and taxable income (the latter is the amount that tax brackets apply to). A close second is the difference between tax liability, and refund/balance due on the tax return.

View on HN

Just try to convince the average person that “getting a big refund” is a bad thing, since it means you gave the U.S. government an interest free loan.

Oh yes, that's another fun one! Your yearly tax return should be as close to 0 as possible, otherwise you're either over- or under-withholding. Then again, I met some people that use it as a kind of piggy bank because they wouldn't be disciplined enough to save up for bigger purchases otherwise and... well, I can't even, but if it works for them, there are worse things to spend money on.

I have income from multiple sources and they are not aware of each other. For example, they will all keep paying social security even when I’ve exceeded the max deduction. It is far too complicated to correct the finance departments of multiple companies. I just reconcile it all at the end of the year and get a refund. Got a better strategy I can use?

If your separate income streams are pretty predictable and so is the overwitholding, and if you care enough: you can put a negative number in the "extra witholding" box on your W-4.

I wouldn't say this is a better strategy, but you can definitely min/max this even if your income is not stable by extrapolating out your expected income and expected witholding a few times a year and adjusting your W-4 based on your calculations.

Wow I wouldn't trust that. I'd add extra exemptions plus a positive withholding if needed.

Woah, it’s okay to have different tax situations. I started a business one year and got a pretty big refund. But we’re not out there bragging about how we get big refunds every year like it’s some goal to aim for and accomplishment to be proud of if achieved. That’s the mentality people are criticizing.

It sounds like you’re not one of the people they met who use it like a piggy bank. From my perspective, they’re just describing the habits of people who are used to not having any money: gotta spend this windfall quick because money doesn’t last long. It’s irrational and ultimately harmful but it’s borne from the practice of spending all of your money every month on non-trivial things and still being required to increase debt in order to stay in your apartment, e.g., credit card spending.

It's not necessarily irrational. For example, for some people if they ever have any extra money, someone else will immediately spend it for them. If the earner wants to make a larger purchase, perhaps something that will cost short term but pay off in the long term, they need some mechanism to save, outside of the regular controls that apply to daily life.

You may think this situation is still irrational, that the other person is being irrational. But again, there are many life situations out there. Perhaps they have lived in situations where they had to fight for what they needed. Perhaps they lived with an earner who would spend their money on drugs if it wasn't taken away, and yet if the non-earner saved it up themselves, the earner would find it and spend it.

The supposedly rational thing may depend on everyone around you to also be rational, and everyone around them, etc. And given that we are human, and humans are not fully rational...

You can file a W-4 with exemptions and avoid overwithholding! This is a fixable problem.

How do I use a w4 to fix the social security problem without incurring underpayment of state and federal? Exemptions apply to all the taxes, no?

https://www.irs.gov/forms-pubs/about-form-w-4

Fill it out correctly and your employers will do the right thing.

I think the W-4 only applies to federal income tax. There's no field that instructs employers how much to pay in FICA (their share and yours). At best you can reduce withholdings to account for the excess FICA payments.

It's all total tax burden. Dollars are fungible.

Not sure about state, but you don't pay Federal Income and FICA separately. They are just numbers that get added together. You just pay money, and the IRS splits it up after they collect. If you "overpay" Income by $1000 and "underpay" FICA by a $1000, you're done, no problem.

FICA cap is per employer, not total. Is that what you're referring to?

FICA cap is not per employer. Well, it is from a withholding perspective (only because it would be impractical to make employers monitor withholding outside their control), but once you do your taxes for that year, you’ll get everything you paid in over the cap refunded.

Right, but employers aren't allowed to coordinate to calculate whether the hit the cap together or not. They don't have that discretion. See

https://www.ecfr.gov/current/title-26/part-31#p-31.3121(a)(1...

By the interest free loan logic, you should have your employer withhold zero and then you put your taxes in a high yield savings account and pay them all as late as possible.

The IRS already thought of this - they charge you interest on the money you owed them (with some exceptions, like waiving it the first year it happens, only charging you if you withheld less than last year, etc).

Yeah, it sucks that the IRS is such a buzz-kill here, with 4-5% HYSA's, it would be nice to just let all the taxes sit there and pay one lump sum in April.

I owed a decent chunk more one year due to investments I sold, and left the money in tbills since I knew I was withholding at least as much as the previous year.

The interest rate is also much higher than you can earn on anything risk free (8% right now) plus there’s penalties on top.

Not sure I understand. Taxes are due in April. You don’t get charged a year of interest on the amount you own when filing…

https://www.irs.gov/payments/underpayment-of-estimated-tax-b...

You owe taxes all year round. What you're doing in April is settling up and filing for the year. If you run your own business, you're required to pay a lump estimated taxes 3 times a year in addition to your annual filings. If you're too short, you owe and you owe interest. The IRS has a safe haven rule where if you pay 90% of what you owed this year, or at least 100% of what you owed last year, they won't penalize you. It's actually one of the reasons I personally do over withhold. I do some contract work on the side, and rather than calculating and sending in estimated taxes every quarter, I just have my regular job send in about 25% of the contracting income I expect to make. On years when I did as much contract work as I expected, I basically get nothing back or I might owe $200. On years where I don't, sure I gave the government an interest free loan but I also didn't have to think about my taxes for the whole year.

Whenever these things are talked about in percentages it is worth bringing it down to dollars to make sure the effort is worth it - the average “interest” on a return is probably about $100 (4K return/2 * 5% - tax).

$100 isn’t nothing but it’s not everything either.

If you get a refund it means you overpaid your taxes. The amount you've overpaid can be considered a zero interest loan to the government. If you hadn't overpaid your taxes you could have invested that money.

(Not from the US) Why is it a good thing to lend for free to the US gov ? Because the regional banks aren’t that stable ?

“Look! I filed my taxes and I got money back! Yay money!” (Could have had that money all along.)

The people that enjoy a tax refund would not really even notice the small amount they "could have had all along" by adjusting their withholding amounts.

Nah, because for people with poor financial skills, the ability to save is very difficult (even if they had the "Extra" money in their account each pay period instead of paying extra taxes). So even though you're technically getting your money "back", for some people they would not have been successful to 'save' so much without it being forced on them.

It is not a good thing because it is interest free and inflation exists. If you would have had that money earlier you could have put it in high yield saving account or payed down debt.

It is not interest free. E.g., I was paid $480 in interest on overpayments last year.

It is interest free if the IRS pays you within N days of you filing. If they're slower, then they pay interest.

Where N is some value between like .... 30 and 90? I forget.

There are a number of different overpayment interest regimes[1]. Mine was paid based on time elapsed from the time of overpayment (overpaid quarterly estimated taxes).

[1]: https://www.irs.gov/payments/interest#pay

You pay tax on those overpayments.

But they only pay that if they don’t return it that year (for normal W-2 employees).

Yes, I got a 1099-INT from the IRS.

In some cases (depending on your tax situation) other forms of bonds (municipal/state) may be better because of how or if they get taxed.

I did not deliberately overpay as an investment strategy :-).

Last time I looked, you needed to be in a higher tax bracket than I was to make Muni bonds worth it, in part because my state (WA) does not have income tax. Something like the 35% bracket.

And anyway, my investment strategy is not long bonds at this point in my life.

People like getting the big lump sum and some don't even realize it was their money all along that they just overpaid throughout the year. It's not a good thing for individuals to overpay.

The average person is a financial train wreck of dumpster fires.

That's not how the Earned Income Tax Credit works....

I never understood why people think that giving an interest free loan to our government is a bad thing.

Try convincing a tech person that the shares they get as compensation from their employer are equal to getting money and buying those shares at the time they get them. I also think tech workers tend to over-estimate what "average person" really is because they mostly know "above average people".

Yes, this is another example of irrational money behavior that is common in the tech world. According to a poll on our company slack, only about 50% of the employees plan to sell any of their RSUs and maybe 15% sell all.

Reply on news.ycombinator.com