This is the first year I’ll be filing my own taxes. I’m using the free Turbotax online Federal tax forms. But that comes without professional advice. so half way through the process, I call my Dad:
Me: How come there’s a running counter on the top that says how much tax is due? I thought the whole point is to get refunds …
Dad: The early part of the process records how much you made, so from its perspective you owe taxes. After that, you start to record how much you, a) have already paid in taxes (i.e., withholding) and b) have paid to other things for which you deserve a deduction (e.g., charities). The the amount that you owe exceeds the amount you have already paid or deducted than you will have to pay additional tax. If that which you have already paid exceeds the amount you owe, then you get a refund. You true objective should be to come out exactly even.
If you get a big refund, it’s because you paid the government too much tax during the year (for which they paid you no interest while they held your money). This year, you were a working stiff for the entire year. While your withholdings will likely offset what you owe on your salary, your interest and dividend income is still taxable. You will likely owe taxes.
Me: gah! Thats not fair. I didn’t do anything to them. They’re the ones that messed up if they didn’t take it out right.
Dad: Welcome to the working world. You can have your withholding adjusted so that they take more or less. The IRS never messes up. Only you mess up. California taxes will be a whole other issue. Turbo Tax is not going to give you that one for free.
Dad: You could fill out the actual forms. That’s free.
Me: I could do that and probably find free advice online. So, I’m going to ask a question that I could look up
but I’m lazy. Are u supposed to have an IRA and a 401k?
Dad: It’s OK to be lazy. It gives me value.
Me: haha Write a blog! Maybe someone will find u and give u a book deal!
Dad: It would be very good to have a Roth IRA as well as your 401(k). That’s nice of you to say. But I don’t right that good.
Me: Is a Roth IRA better than a traditional one. I found this website that explains it but i don’t see the difference.
Dad: Different rules of eligibility, different contribution limits and different tax consequences. Roth is better because you will never (providing the law doesn’t change) pay tax on the earnings. Different withdrawal rules too.
Me: What if I die when I’m 30? who gets it?
Dad: I do. Then again, maybe it’s the person you designate as your beneficiary.
Me: I’m watching this Charles Dickens mini series and it’s about a will what wasn’t written correctly and the court case has gone on for generations but eventually all the money was used up in court fees and all the descendants failed at life cause they had been planning on the money.
Dad: Something about counting chickens and eggs hatching …
Make sure you designate a beneficiary for your 401(k) also, so the the Governator doesn’t take it away.
Ladies and gentlemen, that is the inaugural post / test run for A Dad’s Advice
Thanks for reading!