Tax Season 2012: Work No Longer Pays

[unofan]

Re: Tax Season 2012: Work No Longer Pays

But why pay more in total than you have to? Throw a few extra bucks at the principal, and the total amount of interest you'll have to pay goes down!

The interest rate on my house if 4.5 percent. There's not that much of an incentive to pay it off early (though we ultimately will), especially when the student loans are at 7-11%. There's absolutely zero incentive to pay our cars off early, since the interest rate is only 1%. At that point, the car company is losing money to inflation alone.

 

[FreshFish]

Re: Tax Season 2012: Work No Longer Pays

The interest rate on my house if 4.5 percent. There's not that much of an incentive to pay it off early (though we ultimately will), especially when the student loans are at 7-11%. There's absolutely zero incentive to pay our cars off early, since the interest rate is only 1%. At that point, the car company is losing money to inflation alone.

For lenders, it is not only the interest rate, it also is how many times they can lend the same money (due to fractional reserve banking). It is sort of like Walmart, even with lower prices they might make more money if they can turn over their inventory faster.

That's the one factor missing from every analysis of the crash that I read. The "velocity of money" (the number of times the same dollar is spent while it circulates) has gone way down.

 

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

The interest rate on my house if 4.5 percent. There's not that much of an incentive to pay it off early (though we ultimately will), especially when the student loans are at 7-11%. There's absolutely zero incentive to pay our cars off early, since the interest rate is only 1%. At that point, the car company is losing money to inflation alone.

I completely agree that your student loans should come first, as those are the highest rate. I love when people throw in variables to refute my point... although perhaps it's payback because I used to do it when I was young...

 

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

Kinda reminds me of that guy who files those crazy-*** lawsuits against Tiger Woods and Lady Gaga and other people.

Apparently this isn't that uncommon in prison - it passes the time, and legal-minded inmates like to do stuff like that for practice and to learn about the system.

They're bored out of their minds. What else are they going to do in the slammer?

It keeps Bernie Madoff's mind sharp.

 

[Bob Gray]

Re: Tax Season 2012: Work No Longer Pays

It's certainly true that if a person has much higher interest rate loans, such as student loan or credit cards, those should be the first to get paid off.

Really, paying off your mortgage versus paying the minimum and investing elsewhere comes down to your perspective on risk and reward. Putting your money in the stock market, you may do very well, or you may lose money. History would tell you over time that you make a good return in the stock market, but one can argue that history may not be a good predictor of what will happen with all the circumstances going on right now (spiralling national debt, European problems, sluggish economy, etc.). Personally, I see a lot of value in paying bills/loans down and becoming as debt free as possible. There is a peace of mind in knowing you're financial future isn't hinged tightly to how the market moves from day to day and that if things go bad, you've paid off your car, house, etc. and can live on significantly less income if necessary. Of course everyone is in different spots in life and has different circumstances, but I'd encourage folks to be fiscally conservative in their personal finances (as I urge our federal government, in vain, to be fiscally conservative).

 

[Almington]

Re: Tax Season 2012: Work No Longer Pays

It's certainly true that if a person has much higher interest rate loans, such as student loan or credit cards, those should be the first to get paid off.

Really, paying off your mortgage versus paying the minimum and investing elsewhere comes down to your perspective on risk and reward. Putting your money in the stock market, you may do very well, or you may lose money. History would tell you over time that you make a good return in the stock market, but one can argue that history may not be a good predictor of what will happen with all the circumstances going on right now (spiralling national debt, European problems, sluggish economy, etc.). Personally, I see a lot of value in paying bills/loans down and becoming as debt free as possible. There is a peace of mind in knowing you're financial future isn't hinged tightly to how the market moves from day to day and that if things go bad, you've paid off your car, house, etc. and can live on significantly less income if necessary. Of course everyone is in different spots in life and has different circumstances, but I'd encourage folks to be fiscally conservative in their personal finances (as I urge our federal government, in vain, to be fiscally conservative).

I don't think anyone can make a wrong choice when choosing between paying down debt or saving/investing. Personally I agree with Bob that paying down debt is a better choice over investing the money for the simple reason of cash flow (as Bob states). I also don't think that the return over the debt payments is enough to compensate for the risk that one must take on to get that return.

Even if you think that you can earn a return of 3% over your mortgage (after accounting for all the tax implications with regards to both the taxes on the investment and the mortgage interest) would that really be enough to justify the risk that is associated with the stock market? Would you invest in the stock market knowing that on average you would only get a 3% return (on average)?

I understand about leverage and the velocity of money and fully admit that the person who invest over paying off his mortgage will come out ahead of me provided that nothing goes two wrong, I've seen enough to recognize that expecting nothing to ever go wrong isn't a realistic way to view the world.

While I don't agree with everything that Dave Ramsey says, I do think that he has the order of steps (even if the specific details may not fit your specific situation) that most people should follow down:
1.) Save a small emergency fund
2.) Pay off all non-mortgage debt
3.) Save a large catastrophe fund (2 months of expenses, plus 2 month for every person in the household)
4.) Put 15% of income in tax advantage retirement funds
5.) Save ~10% for children's education and other intermediate goals
6.) Pay off any mortgage debt remaining.
7.) Save, invest, and build wealth.

 

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

Also one thing to remember is that an investment is not a loss until you cash it out below the price at which you bought. The gain/loss your brokerage tells you is if you were to sell your stock at that minute.

I remember my ex-girlfriend had a HUGE problem with me even putting money into the stock market, or any sort of retirement account for that matter. That's not why we broke up, though.

 

[Bob Gray]

Re: Tax Season 2012: Work No Longer Pays

Also one thing to remember is that an investment is not a loss until you cash it out below the price at which you bought. The gain/loss your brokerage tells you is if you were to sell your stock at that minute.

I remember my ex-girlfriend had a HUGE problem with me even putting money into the stock market, or any sort of retirement account for that matter. That's not why we broke up, though.

Or to say it more fully, it's neither a loss or a gain until you cash it out. Many people had huge gains when the market was much higher, but didn't cash out at the right time (which of course is impossible to predict), and lost a lot of paper gains.

 

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

Or to say it more fully, it's neither a loss or a gain until you cash it out. Many people had huge gains when the market was much higher, but didn't cash out at the right time (which of course is impossible to predict), and lost a lot of paper gains.

Very true, and something I know all too well. Of course, I also typically only invest in dividend-paying stocks, so that helps when factoring in gains. Sadly I don't invest enough to be able to automatically re-invest, but at least it gives me some options as to where to invest.

 

[Almington]

Re: Tax Season 2012: Work No Longer Pays

Also one thing to remember is that an investment is not a loss until you cash it out below the price at which you bought. The gain/loss your brokerage tells you is if you were to sell your stock at that minute.

I remember my ex-girlfriend had a HUGE problem with me even putting money into the stock market, or any sort of retirement account for that matter. That's not why we broke up, though.

But if you invest that money you couldn't spend it on her! I think that your ex and my ex were reading from the same playbook.

True that only by selling are any losses/gains realize, but you REALLY don't want to end up in a situation where circumstances are forcing a sale when you don't want to.

 

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

But if you invest that money you couldn't spend it on her! I think that your ex and my ex were reading from the same playbook.

True that only by selling are any losses/gains realize, but you REALLY don't want to end up in a situation where circumstances are forcing a sale when you don't want to.

I don't think so; she was cheaper than me! She actually didn't seem like I should spend it on her (although that may have been her motive). Plus, I'm absolutely terrible when it comes to gifts.

Obviously you don't want to force yourself into a sale. Hence why it is important to DIVERSIFY!!! Not only with which stocks/funds you pick, but also where your money is invested.

 

[FreshFish]

Re: Tax Season 2012: Work No Longer Pays

you REALLY don't want to end up in a situation where circumstances are forcing a sale when you don't want to.

exactly my point on paying down debt. you don't want to pay down debt to such an extent that you have no access to cash when you absolutely must have it. Also my point on contributing prematurely to a 401k plan (or 403b plan). you first have to spend less than you make, then you can think about contributing to those plans. I've seen too many people rolling over credit card debt from month to month so that they can contribute to a retirement plan. that makes no sense even if you have an employer match (if you actually do a detailed numerical analysis). step-by-step from basics to more advanced. no one else's rule of thumb works better than Charles Dickens:

"Income 20 pounds, expenses 19 pounds sixpence: happiness. Income 20 pounds, expenses 20 pounds sixpence: misery."

 

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

Three rules before starting to invest:

1. Eliminate all high yield (or potentially high-yielding) debt. This includes credit cards, your light bill, your rent (if you're in an apartment), and all associated payments.
2. Obtain health insurance. Whether it's through work, a state low-income plan, or independently, you need to have it.
3. Obtain long-term disability insurance. Same deal with the health insurance.

Now you're ready to invest.

 

[RaceBoarder]

Re: Tax Season 2012: Work No Longer Pays

So, I want to stab someone with a pencil...

I didn't get any Federal Income Tax Withheld from either of my two jobs... That means a $0 Federal refund right? Should I even calculate Loan Interest into all this then? I mean, it seems pointless... It's gonna be $0 any way I figure this, right?

 

[ScoobyDoo]

Re: Tax Season 2012: Work No Longer Pays

So, I want to stab someone with a pencil...

I didn't get any Federal Income Tax Withheld from either of my two jobs... That means a $0 Federal refund right? Should I even calculate Loan Interest into all this then? I mean, it seems pointless... It's gonna be $0 any way I figure this, right?

If you didn't get any withheld then wouldn't you be the one writing the check? Unless of course it falls under a certain amount. I think you need to file regardless. Unless you want issues with the IRS for the rest of your life.

 

[DisplacedCornellian]

Re: Tax Season 2012: Work No Longer Pays

So, I want to stab someone with a pencil...

I didn't get any Federal Income Tax Withheld from either of my two jobs... That means a $0 Federal refund right? Should I even calculate Loan Interest into all this then? I mean, it seems pointless... It's gonna be $0 any way I figure this, right?

If you didn't get any withheld then wouldn't you be the one writing the check? Unless of course it falls under a certain amount. I think you need to file regardless. Unless you want issues with the IRS for the rest of your life.

Check the filing reqs - look like the threshold for filing is $9500.

http://www.irs.gov/publications/p17/ch01.html#en_US_2011_publink1000170392

If you didn't have anything withheld - you might end up having to pay in, so it could DEFINITELY be worth it to deduct loan interest where you can to minimize that amount.

Screw around with turbotax or any of the other bazillion free filing systems - they make it pretty easy.

 

[FreshFish]

Re: Tax Season 2012: Work No Longer Pays

So, I want to stab someone with a pencil...

I didn't get any Federal Income Tax Withheld from either of my two jobs... That means a $0 Federal refund right? Should I even calculate Loan Interest into all this then? I mean, it seems pointless... It's gonna be $0 any way I figure this, right?

Generally, if you are filing single, then there is no tax on the first $9,500 of income (between standard deduction and personal exemption). See IRS form 1040.

As far as student loan interest goes, it depends. If you are running a sole proprietorship and your loan interest was incurred directly related to your business (e.g. you operate a computer repair business and you had a loan to go to Tech School to study computer repair) then you probably can deduct your student loan interest directly on schedule C. Otherwise, it's not worth trying to itemize deductions unless the total exceeds $5,800 (the minimum deduction available to all single taxpayers).

Surprisingly, the 1040 EZ is not that complicated nor difficult to complete, if you fall into that category. I think there are powerful forces in our society that have a vested interest in having people feel more stupid than they actually are.

 

[Twitch Boy]

Re: Tax Season 2012: Work No Longer Pays

Filing single and 0, and I bought a home last year, so I'm expecting a nice-sized <strike>receipt for an interest-free loan to the government</strike> refund. Would like to put it toward a debt of some kind since I'm doing well enough without it, and I have the PFD coming later this year.

Leaning car because that's my biggest non-mortgage monthly payment, I got a brutal interest rate, and paying it off early would free up a ton of monthly income and leave me with a pretty valuable asset (Jeeps depreciate EXTREMELY slowly, especially in Alaska where any 4WD vehicle is worth its weight in gold.) Or I could also drop it into the principal on my mortgage to speed up my equity and allow me flexibility if I decide/am forced to move. Or I could dump it into TSP. Already pay the full balance on my CC - really only use it for big ticket/online purchases, gas, and emergencies. Student loans aren't that bad, and besides they're mostly deductible (would like to eventually be a good son and help my parents with theirs at some point, though.) Doing well otherwise, taking in more than I'm giving out.

Any suggestions?

 

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

Filing single and 0, and I bought a home last year, so I'm expecting a nice-sized <strike>receipt for an interest-free loan to the government</strike> refund. Would like to put it toward a debt of some kind since I'm doing well enough without it, and I have the PFD coming later this year.

Leaning car because that's my biggest non-mortgage monthly payment, I got a brutal interest rate, and paying it off early would free up a ton of monthly income and leave me with a pretty valuable asset (Jeeps depreciate EXTREMELY slowly, especially in Alaska where any 4WD vehicle is worth its weight in gold.) Or I could also drop it into the principal on my mortgage to speed up my equity and allow me flexibility if I decide/am forced to move. Or I could dump it into TSP. Already pay the full balance on my CC - really only use it for big ticket/online purchases, gas, and emergencies. Student loans aren't that bad, and besides they're mostly deductible (would like to eventually be a good son and help my parents with theirs at some point, though.) Doing well otherwise, taking in more than I'm giving out.

Any suggestions?

Whichever one is the highest interest rate.

 

[FlagDUDE08]

Re: Tax Season 2012: Work No Longer Pays

So, I want to stab someone with a pencil...

I didn't get any Federal Income Tax Withheld from either of my two jobs... That means a $0 Federal refund right? Should I even calculate Loan Interest into all this then? I mean, it seems pointless... It's gonna be $0 any way I figure this, right?

Was Social Security and Medicare withheld? If not, that needs to be reported and paid.