Daddy Sam

Back when I was making $13 an hour at my first job out of college (not sure about that ROI, Northwestern), I learned conceptually how those W-4 forms work. Ever since then, I’ve enjoyed pontificating to anyone who will listen about how getting a tax refund is bad. You should want to owe.

Uncle Sam decided to shut me up this year. Or at least put my money where my mouth is, as the gambling degenerates can’t stop themselves from blaring when I’m just trying to make conversation about sports.

My wife and I owe $8,435 federal, $391 state. There will be an underpayment penalty of a few hundred bucks, the equivalent of Iverson stepping over Tyronn Lue after thoroughly mistreating him.

So that little gesture of disrespect will push our tab into $9G territory. Is this what happened to Al Capone and Wesley Snipes, only in a different tax bracket?

It was an accident. Really. We’ve been getting a refund of four or five grand during the married filing jointly era. I grumble about the interest-free loan to the government, but man, that direct deposit every April is nice to see.

No one should celebrate a tax refund though. All that means is they took too much money out of every paycheck. You were paid less than deserved, so the government will make it up by returning what was yours to begin with.

If you think a big tax refund is great, I can be your new best friend. Give me $10,000 today. I’ll put it in a 12-month CD and pocket $250 of interest. Then I’ll give you a $10,000 refund a year from today. What a deal, right!

A dollar today is worth more than a dollar tomorrow. Now, I suppose you can use tax refunds as an automatic savings vehicle. But there are much more intelligent ways to go about this. I work for a financial wellness app called Acorns that automatically invests your spare change into a diversified portfolio. (I won’t be compensated if you use this sign-up link, but you’ll get 5 bucks to start.)

But what do I know; my grasp of financial planning netted a $9,000 subtraction from savings that coincided beautifully with a $4,500 credit card bill. We also need to buy a car now with a baby on the way.

It’s great to know I’ll be balancing the rigors of first-time parenthood with first-time drug dealing to afford diapers, while my wife walks the streets. Or vice versa depending on supply and demand. We want to be a progressive home without traditional gender roles.

How did this happen? How did I descend from personal finance superstar to cautionary tale?

Well, I can’t really get around the fact that we just didn’t pay enough taxes during 2018. By a lot. Withholdings were less than half compared to 2017, when we had a higher income but certainly not that much higher.

So how did that happen? I don’t know. I check my grocery receipt with ferocity to make sure those malicious teenagers don’t charge me for broccoli crowns instead of broccoli. But with paychecks… I guess I never gave them much of a sanity check. The take-home amounts varied throughout 2018 with a raise, 401(k) contributions, commissions. I saw the year-to-date totals and deductions but didn’t comprehend them.

I vaguely remember some warning about checking W-4s to prepare for the new tax law. The task made it on my Evernote to-do list, but other things took precedence, e.g. “Read Game of Thrones.”

Apparently two-income, married filing jointly households living in high-state-income-tax California who usually take the itemized deduction needed to check themselves before they wrecked themselves.

An exemption on your W-4 reduces the amount taken out of your paycheck and applied to taxes. The more exemptions you claim, the smaller your refund in April, or the more you owe.

My wife and I are supposed to claim two exemptions total, not two exemptions each, as we had been doing. Somehow it didn’t matter the first couple of years we filed together.

One reason was something called the personal exemption, not to be confused with W-4 exemptions. Personal exemptions lowered taxable income, just like standard deductions. The new tax law killed personal exemptions but almost doubled standard deductions. Some people benefited overall, some didn’t.

It hurt us in terms of taxable income, but I’m not putting this one on Trump. Our overall tax rate was lowered, and I support any efforts to simplify the labyrinth of deductions and exemptions and crap.

There were at least two more amplifiers in our great symphony of fiscal pain. We overpaid state taxes in 2017 by about $2500, the most I can remember, and that refund was counted as taxable income in 2018.

Also in 2018, I decided to get my Wolf of Wall Street on and started playing with $51,000 in the stock market. I was essentially day trading with the rule to never sell at a loss. On June 15, I put all $62K-ish into Alibaba and it dropped. The price still hasn’t come back up, and I’ve been disciplined enough to not panic and sell. (I was down to $39K in December and now back to $55K.)

The problem with my methodology of never selling at a loss is the IRS thinks I never lose. All they saw was that I made 11 grand off investments in 2018, subject to short-term capital gains tax.

Bro, get off me. I am not Warren Buffett. I was actually down 11 grand at the end of the year.

What I should have done is something called tax-loss harvesting. Sell at a loss in December. Buy right back into another stock, so it wouldn’t violate the spirit of my no-panic, ride-out-the-market rule.

Then for tax purposes, I could use the loss to offset the gains in 2018. If the loss was bigger, I could even reduce my taxable income. Again, I would still be in the market and not lose any potential upswings.

Just to be tidy, I should mention the wash sale rule. This doesn’t allow tax-loss harvesting if you purchase the same or “substantially identical” security within 30 days before or after the sale. So I couldn’t have bought back into Alibaba, but Netflix or Square sure would have worked out well in hindsight.

It was all part of a lesson taught by Uncle Sam, more aptly called Daddy this year.


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