Category Archives: Taxes

My 2020 e-File Rejected! All Clues Point To Unprocessed 2019 Tax Return

Retirement doesn’t end our playing the income tax game. It’s that time again when we need to settle up with Uncle Sam. Yes, the yearly joy of filing our income tax return for the past year. Well, I tried to settle with them but shortly after sending off the return I got a 2020 e-File rejected by the IRS. They refused my return and my money. 

I’m one of those personal finance ducks who refuses to over withhold just to get a later refund. I always owe, wait to file by mail, and just live my life like the ancient pre internet days. But the pandemic strikes again, making this year different. We’re being warned it’s best to e-File because the IRS has a bit of a backlog from last year. So I decided to abide by recommendations to help them out a little and possibly myself by trusting the digital gods to process my tax return and correctly debit my bank account. But alas, not so fast buckaroo.

My 2020 e-File Rejected! All Clues Point To Unprocessed 2019 Tax ReturnImage Source

Getting A 2020 e-File Rejected Isn’t a Problem For Only Those Wanting A Quicker Refund

Every year but this I saw little need to bother with e-Filing and instead mailed my return with my payment check. That’s exactly what I did last year. Things were just starting into the pandemic unknowns at the time. I calmly mailed my 2019 federal income tax return and payment check. I then saw that my tax payment check had cleared my bank a couple of weeks later and assumed all was cool. Who would cash your check and not finish the work associated to it? Silly me. It appears they gladly cashed my check but threw my return in their massive pile of what now numbers in the millions tax return backlog. 

My First Clue My 2019 Tax Return Was Never Processed

It now seems like years instead of months ago. Many of us were being sent stimulus money in the spring of 2020. I would check the get my payment website and there was no info. A little later they added to their portal a way to use 2018 AGI info and input a bank account so they could directly deposit the stimulus money. It all worked out. I thought it strange my 2019 AGI wouldn’t work on their portal since I knew they had cashed my 2019 tax payment check. So I just went about my life thinking it’s simply a delayed database issue. I was so naive. 

The Second Clue That My 2019 Tax Return Was Collecting Dust Somewhere

Fast forward to the second round of stimulus. Again, as I heard of people gladly receiving their stimulus direct deposits or debit cards in the mail by early January, I got “no info” on the IRS site and received no stimulus money. This time there wasn’t a way to add information or a bank account. Instead it was recommended to take the credit on our 2020 tax return when we file. Cool, I’ll owe a little more than $1,200 anyway so I’ll write a smaller check to settle things. 

The Final Clue: My Day Of 2020 Income Tax Reckoning Blocked By The IRS e-File Masters

So I still owe the IRS a little bit and wanted to get it over with a month earlier than usual. I also wanted to make it easier for them to send me any stimulus money for this year going forward. I would rather handle my tax withholding than have the government hold onto it until I could redeem a possible credit next year. So I e-Filed my Federal return and soon after got their e-File rejected email. Why? The 2019 AGI figure used doesn’t match their records. What gives, it’s correctly entered?

Now what?

What else do you do but search the web. There’s lots about e-File rejected tax returns as it relates to people desperate to get their refund. None about people who owe money and want to e-File. I suppose I’m an oddball. There are many reasons for the IRS to reject e-Filed taxes. Like issues with an entered social security number or birth date not matching their system data. Mine was simply last year’s tax return AGI related.

I finally found the answer to my issue on an e-File rejection code page. Their take made absolute sense. I have no other assumption than my 2019 return is still sitting in a pile somewhere. So I simply changed my 2019 AGI to $0 on my e-File application. I resubmitted my Federal return and the e-File was now accepted by the IRS. This absolutely tells me my 2019 Federal tax return is still collecting dust somewhere and if I hadn’t e-Filed my 2020 return I would most likely not receive any stimulus money this Spring. 

Worried About Being Accused Of Falsely E-Filing My 2020 Federal Taxes?

No, not at all. I agree with what the eFile.com folks say here:

“Simply a reflection on what the IRS might have stored in their system at this point in time. They might not be an actual reflection whether you did or did not file a 2019 return. The 2019 AGI is used as an identification method when e-Filing your 2020 return, thus you are identifying yourself with what the IRS system has on file at this point in time.” 

My 2020 e-File Experience Takeaways

Keep a copy of that cleared IRS 2019 Income tax check that cleared the bank April 2020 with my 2019 tax return copies

I can assume that the IRS will eventually clear their pandemic caused tax return backlog. But I won’t hold my breath. If they fail to get mine into their system they will come knocking. Usually around 3 years from the filing deadline. A time when this is all a distant memory. I will need that cancelled check as evidence they had my return and biffed it. 

Print evidence of the 2020 income tax debit to my bank account and keep it with my 2020 return copies

I will have the bank account debit info printed much like a cancelled check. Why? Because when it comes to the Government and IRS I believe in CYA. Guess what? No surprise here either, the IRS debit swiftly hit my bank account. They do like getting paid.

Maybe I’ll get stimulus sooner instead of waiting until next year to claim it as a tax credit

New stimulus will be based on either 2019 or 2020 tax return info. Since my 2019 return has not yet been processed I should get any qualified stimulus funds based on this accepted e-Filed 2020 tax return. If not, I’ll just adjust my withholding to reflect the future tax credit for non-received qualified stimulus when filing taxes next year. I’m sticking to my policy of starving the tax monster and never purposely getting a tax refund. 

Starve the Monster: My Early Retirement Income Tax Strategy

I always try to cover everything when it comes to income taxes. In what I call my previous life, I spent several years in the income tax industry with some IRS interactions. It’s always best to be on the legal side of things and cover your keister at all times when it comes to the tax monster. I use the term tax monster because it will happily over-eat without squabbling but will hunt you down and destroy you if you don’t feed it what it thinks you owe. 

If you make a habit of mailing in your tax return as I have then it’s best to be aware. Your 2019 tax return may just be sitting in a 80 foot pile of paper somewhere resulting in e-File rejected from the IRS. That may cause a delay in any 2021 stimulus money and when your 2020 income taxes will be processed. It’s also best to make sure you have all of your supporting paper records in order for a possible later visit from the tax monster. Hard to know if something will go wrong with the IRS backlog efforts. It’s always better to be safe than sorry. 

Retirement 2019 Tax Planning: It’s A Good Time To Start Bean Counting

I’m always trying to use both my non-taxable accounts and taxable IRA income to keep my tax rate as low as possible. It amuses me when people will get a rise out of a killer 8% gain on an investment but give little thought about the retirement taxes they pay. The new tax brackets are from 10% to 37%, so saving on taxes for retirement distributions is a big deal too. But before you can do any retirement 2019 tax planning you have to know where you stand within the new tax laws. That’s the only way you can possibly structure your retirement income in a tax efficient way to stay below desired taxable income thresholds. Here are the recently released 2019 income tax details.

Retirement 2019 Tax Planning: It’s A Good Time To Start Bean Counting

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Retirement 2019 Tax Planning Details To Factor In

The big tax overhaul of questionable benefit to us regular folks went through last year and has a few tweaks for 2019. I’m looking forward in the coming months to seeing exactly what, if anything, the peanuts they tossed to low-income and middle class taxpayers works out for our 2018 tax filing once we put our final numbers to the 1040. No matter how the tax burdens and benefits shifted, we have to live with it and pay up. Knowing where we sit income-wise and looking at any options we may have to keep as much of it as we can is always a prudent retirement planning move. Once estimating our 2019 income and its taxable/non-taxable sources we can begin forming the basis for our retirement 2109 tax planning.

Deductions Were Moved Slightly Up

The taxes we end up paying are all about Taxable Income, therefore deductions are the logical starting point.

2019 Standard Deduction

Who can forget how they touted how their Tax Cuts and Jobs Act doubled our Standard Deduction but quietly said little about the elimination of personal exemptions which used to be $4,050 a piece. So much for a huge tax break. If you didn’t pay attention last year then may I be the first to say, SURPRISE! Your “Schedule A” goalpost was moved farther away. The Standard Deduction did adjust up a little from 2018.

Single Standard Deduction – 2018 it was $12,000. For 2019 it will be $12,200

Married Standard Deduction – 2018 it was $24,000. For 2019 it will be $24,400

Head of Household Deduction – 2018 it was $18,000. For 2019 it will be $18,350

2019 Retirement Contributions

For anyone still picking up a paycheck the amount that can be set aside tax deferred for retirement has also increased slightly for 2019.

401K – For 2018 it was $18,500. For 2019 it will be $19,000. Age 50 or older can add another $6,000 to that.

IRA – 2018 it was $5,500. For 2019 it will be $6,000. The age 50 or older catch-up contribution stays at $1,000.

Schedule A Deductions

Last year’s filing of 2017 will most likely be the last year I will ever be able to file with a Schedule A to save money. Increasing the Standard Deduction at the demise of Personal Exemptions only made filing long-form with Schedule A harder to benefit from. Add to that the other sweetie highlights of Tax Reform and depending on your state property tax and income tax rate, there will be some federal income tax filing pain ahead.

The new Mortgage Interest rules and caps from 2018 remain. Homes bought after 1/1/18 caps deductible interest at a $750,000 loan value. Equity loan interest remains non-deductible with no exceptions.

State and Local taxes are still capped at $10,000.

Medical Deduction is 10% of AGI (Adjusted Gross Income).

2019 Individual Income Tax Brackets

This is where the rubber meets the road. Retirement tax planning means trying to fall within the lowest tax brackets possible.

2019 Individual Income Tax Rates Single-Taxable Income Married Filing Jointly – Taxable Income Head of Household – Taxable Income Married Filing Separate – Taxable Income
10 percent 0 – $9,700

Pay 10% of taxable income

0 – $19,400

Pay 10% of taxable income

0 – $13,850

Pay 10% of taxable income

0 – $9,700

Pay 10% of taxable income

12 percent $9,701 to $39,475

Pay $970 plus 12% of the amount above $ 9,700

$19,401 to $78,950

Pay $1,940 plus 12% of the amount above $19,400

$13,851 to $52,850

Pay $1,385 plus 12% of the amount above $13,8500

$9,701 to $39,475

Pay $970 plus 12% of the amount above $ 9,700

22 percent $39,476 to $84,200

Pay $4,543 plus 22% of the amount above $39,475

$78,951 to $168,400

Pay $9,086 plus 22% of the amount above $78,950

$52,851 to $84,200

Pay $6,065 plus 22% of the amount above $52,850

$39,476 to $84,200

Pay $4,543 plus 22% of the amount above $39,475

24 percent $84,201 to $160,725

Pay $14,383 plus 24% of the amount above $84,200

$168,401 to $321,450

Pay $28,765 plus 24% of the amount above $168,400

$84,201 to $160,700

Pay $12,962 plus 24% of the amount above $84,200

$84,201 to $160,725

Pay $14,383 plus 24% of the amount above $84,200

32 percent $160,726 to $204,100

Pay $32,749 plus 32% of the amount above $160,725

$321,451 to $408,200

Pay $65,497 plus 32% of the amount above $321,450

$160,701 to $204,100

Pay $31,322 plus 32% of the amount above $160,700

$160,726 to $204,100

Pay $32,749 plus 32% of the amount above $160,725

35 percent $204,101 to $510,300

Pay $46,629 plus 35% of the amount above $204,100

$408,201 to $612,350

Pay $93,257 plus 35% of the amount above $408,200

$204,101 to $510,300

Pay $45,210 plus 35% of the amount above $204,100

$204,101 to $306,175

Pay $46,629 plus 35% of the amount above $204,100

37 percent $510,301 and up

Pay $153,799 plus 37% of the amount above $510,300

$612,351 and up

Pay $164,710 plus 37% of the amount above $612,350

$510,301 and up

Pay $152,380 plus 37% of the amount above $510,300

$306,176 and up

Pay $82,355 plus 37% of the amount above $306,175

The additional deduction for aged (65 and older) or the blind is $1,300. It is increased to $1,650 if also unmarried and not a surviving spouse.

2019 Brings One Less Tax Penalty

For those who dare live on the edge without medical insurance, the ACA non-insured penalty will no longer apply for tax filing year 2019. It was still in effect for the 2018 first year of Tax Reform.

 

The IRS notice for tax year 2019 is full of all kinds of tax details, much more than talked about here. Hopefully the short list provided above helps you get an idea of what to look at for your retirement 2019 tax planning.

Is Early Retirement Using Stealth Wealth Gaming The System?

I have been told by some people who I’m routinely in contact with that I’m hard to figure out. I’m always dressed casually, drive some older but uniquely memorable cars, and they know I don’t work in any conventional sense. Yet I am able to live in a somewhat high-cost area. I am seen all over town and at events enjoying the heck out of life. I do stick to what they see as a financially measured routine. Just an average friendly guy on a budget. It works great for me because that’s exactly who I am. I’m not purposely using stealth wealth to fool anyone I encounter. As I get to know people better I clue then into the ways of early retirement.

For me, practicing stealth wealth isn’t about hiding my net worth from my family, friends, and community, although I don’t talk about it with people. It’s about how I want the government to see me. Based on my taxable income, I live below average median income levels. A type of stealth wealth strategy to live beneath the government tax and benefits radar. Am I gaming the system? Good question. I’m of sufficient net worth to retire early, yet I’m indistinguishable from the lower-income working class. I simply live the same frugal lifestyle that I enjoy and used to reach my early retirement financial target. I just look like most everyone else in this income centric society and its current economic rules.

Is Early Retirement Using Stealth Wealth Gaming The System?

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Is My Use Of Stealth Wealth Gaming The System?

I shamelessly admit that I use stealth wealth tactics to my advantage. As far as I am concerned I’m just using a different flavor of what the worshiped rich do. I use every legal means possible to pay less taxes and make myself able to take full advantage of qualifying benefits. Some people who I talk about early retirement with feel that some aspects of stealth wealth seems as unfairly gaming the system. I have to explain that “the system” they feel uncomfortable about gaming is based on rules and laws. None is being broken. For some crazy reason the thought of any of us common folk doing what the worshiped rich do is somehow unethical. I wonder, where do these kinds of thoughts come from? Well, I refuse to feel any shame and here’s why –

Using Today’s Most Worshiped Rich Guy As An Example To Make My Point

This guy proves why using stealth wealth to game the system must be alright with today’s world. He flaunts his wealth. It’s well known what was revealed during the presidential debates. In one of the only dug up tax returns, even with millions in income, he used tax loopholes to pay no income taxes. He famously proclaimed, “that makes me smart”, yet it wasn’t held against him. He obviously received the electoral-college edge to become president and has millions of ardent followers.

So, if the worshiped rich do it and it’s seen as OK, why then is it held against or thought unethical if the working class takes advantage of any tax laws and benefits that are available? Is gaming the system only acceptable for the worshiped rich?

Obamacare – Affordable Care Act (ACA)

Having a decent net worth and doing what it takes to qualify for low-cost Obamacare health insurance is the issue some folks lose their minds over. That’s why I always start with using the most famous, or as some prefer, infamous, of today’s worshiped rich guys as an example.

Yes, if you use stealth wealth strategies to keep your taxable income low enough in early retirement, you can get federally subsidized health insurance. Why is stealth wealth retirees using subsidized ACA healthcare different from when billionaires pay no or very little in income taxes? They certainly receive the same benefits of being an American as the working class people who do pay taxes every year. Answer: It isn’t! If purposely structuring your income to qualify for taking ACA subsidies is being an unethical leech, then so is the billionaire president or any of the many others for paying no or ridiculously low federal income tax on millions in income.

It’s perfectly legal and within the rules to be an IRA millionaire and apply for Obamacare subsidized health insurance. For many people, early retirement before age 65 and starting medicare must find a way to overcome the huge healthcare challenges. If your income amount qualifies, the ACA should be considered without shame, regardless of anyone’s overall portfolio size.  

My Early Retirement Healthcare

I’m not on the ACA and I pay $1064 a month (2018) for my health insurance from an employer retirement benefit. I’m one of the dwindling few Americans who after 30 years of service had something like this available. But it has changed to a use-it-or-lose-it for life benefit because of company mergers and is under threat of being cancelled every year. Based on our taxable income I could get a subsidized ACA silver plan for half what I’m now paying. But the ACA is under constant political threat. So, even though I could save substantially, I won’t give up my retirement benefit. I’m on my retirement benefit healthcare plan until it gets killed. But I see no shame in going to the ACA If anything happens to my retirement health plan.

Purposely Lower My Tax Rate

When working there was little I could do to lower my taxable income beyond what a 401k and IRAs could do. After that I was just left with Schedule A deductions. There wasn’t a legal way that I could substantially reduce my taxable income. I paid in taxes nearly what my yearly retirement budget is now. Once I retired and started living off of my portfolio I had some control over taxable income. My biggest stealth wealth move is looking like I live on a lower income and thus pay little in taxes. It comes right out of the billionaire handbook – Pay the least amount of taxes possible.

Tax Efficient Income Strategy

I purposely use a tax efficient retirement withdrawal strategy to control my taxable income and improve portfolio longevity success. Instead of trying to find tax deduction loopholes as the worshiped rich do, I use a mix of both taxable and non-taxable funds during the year to get my total budgeted amount. It lowers my taxes and is what allows me to be eligible for ACA subsidies if I ever need them. If I were to go on the ACA I would need even less taxable income from my portfolio and will pay even less taxes. A win-win!

Delayed Tax Payment

Not only do I keep my taxable income low but I only pay the minimum taxes through the year without getting hit with a underpayment penalty. I make the government wait to the last-minute to get what’s fully owed. The amounts I hold back go instead into an interest paying account. Why shouldn’t working class folks, the dwindling middle class, collect interest on their money by saving it instead of prepaying more than they need to? Even if it’s a small interest income amount earned, it’s more than zero. I never overpay through the year. Refund my own overpaid money, interest-free, only when they are good and ready to – Forget that!

The recent tax cuts threw us a few peanuts and gave the big cuts to the worshiped rich and corporations. That alone is reason to think about ways to game this part of the system in our favor just like the folks who dreamed up this new scheme. What’s good for the wealth flaunting elite is good for the stealth wealth early retiree and everyone else.

Living Well Without Shame

Early retirement is all about living well, very well, for the working middle class. There are many things that should be considered. Some are less known than others, like the retirement loophole to get IRA money before age 59 ½ without penalty. Using stealth wealth strategies both in how we live and how we structure our finances isn’t gaming the system. It’s taking advantage of a financially sustainable lifestyle within the existing rules and laws so we too can live well.

Gaming The System? Hardly!

As to those who feel stealth wealth retirees are gaming the system, we need to get over squabbling with each other over the peanuts that the worshiped rich message we are only worthy of. What next, tell us that the Social Security and Medicare we were forced to pay into our whole lives should be cut to cover the growing deficit.? A deficit made worse from the worshiped rich tax cut.

We have the same rights to pay lower income taxes and collect any qualifying benefits as the billionaire ruling class and mega corporations do. It isn’t gaming the system at all. It’s about putting our money towards our retirement freedom, the causes, charities, and the people we care about. And, for me that list has absolutely no worshiped rich folks on it.

I do love being the regular ordinary guy that’s hard to figure out by folks. After decades of paying into the system a higher percentage of my income than the worshiped rich do, I love even more being seen by the government as a lower-income working class taxpayer like most everyone else. I do admit there may also be enjoyment that goes beyond financial in my tactics. Sometimes it’s the little things that we amuse ourselves with that adds a little fun to life.

Don’t Forget To Do Your 2018 Retirement Tax Planning

Being retired means being smart about our income. Retirement Tax Planning should be a big part of that. Managing our retirement income to pay the least amount of income tax means we can stretch our savings to go farther. I use a combination of taxable IRA income and non-taxable accounts to keep my tax rate as low as possible.

It all starts with knowing the new tax brackets and deductions. Here is what the TRUMp – GOP tax cut ended up with.

 

2018 Tax Brackets For Your 2018 Retirement Tax Planning-

Married couples filing jointly, starting Jan. 1, 2018 and ending in 2026, the income tax brackets are:

10 percent up to $19,050

12 percent on $19,051 to $77,400

22 percent on $77,401 to $165,000

24 percent on $165,001 to $315,000

32 percent on $315,001 to $400,000

35 percent on $400,001 to $600,000

37 percent above $600,000

Single individuals, starting Jan. 1, 2018 and ending in 2026, the income tax brackets are:

10 percent up to $9,525

12 percent from $9,526 to $38,700

22 percent on $38,701 to $82,500

24 percent on $82,501 to $157,500

32 percent on $157,501 to $200,000

35 percent on $200,001 to $500,000

37 percent above $500,000

Other Income Tax Changes to plan for-

Standard Deduction

This tax cut architects decided to increase the Standard Deduction. The new amount to be subtracted from your AGI –

Single Individuals

Goes from $6,350 to $12000 for 2018

Married Couples

Goes from $12,700 to $24,000 for 2018

As promoted, they doubled the standard deduction but don’t get too excited when starting your 2018 retirement planning. At the same time they quietly did away with your Personal Exemption of $4,050 per person. So the overall tax cut benefit isn’t as HUGE as being sold.

For an individual- It’s not the new $12,000 – $6,350 = $5,560 increased overall deduction. Its that $5,560 – $4,050 (lost exemption) = $1,600 that is your increase in deduction.

For a married couple- It’s not the new $24,000 – $12,700 = $11,300 increased overall deduction. Its that $11,300 – $8,100 (lost exemptions) = $3,200 that is your increase in deduction.

Basically they moved personal exemption amounts into the standard deduction with a slight bump to provide a little tax relief, but at the same time produces a larger move against the itemized deduction thresholds. That threshold is now higher than they were by way of magic tax cut deduction manipulation.

Child Tax Credit

Doubled to $2,000 per dependent child under age 17. It has a refundable portion of $1,400. This means families can lower their tax bill to zero and still get a refund for the remaining value.

Mortgage Interest

Homes purchased from 1/1/2018 – 12/31/2025 will have their deductible mortgage interest capped at $750,000 in loan value. But hello, the new tax plan also does away with home equity loan interest deductions. There is no grandfathered exception for home equity loans being deductible going forward.  For those who retired with a vacation or second snowbird home, that mortgage deduction is also gone.

State and Local Tax Deductions

Your State and Local Tax are now capped at a maximum deduction of $10,000. That includes home property taxes within this deduction grab bag.

 

These are the primary changes to use in your 2018 retirement tax planning. Remember, these personal tax changes will expire after 2025 if not renewed by our all-loving government leaders.

What else can I say. Good luck, enjoy the small tax cut to those that will find one, and to the folks in charge telling us this is the biggest tax cut ever, c’mon man, really? Thanks for the peanuts!

Starve The Tax Monster 2: Retirement Tax Strategy Reloaded

My Early Retirement Tax Strategy has always been to manage my retirement income to pay the lowest possible tax rate and never get a tax refund. My Starve the Tax Monster-2 tax strategy manages restricted tax withholding. This year I will push the amount I’ll owe to just under the IRS penalty threshold. I’m starving the tax monster until it’s dinner time, the income tax deadline mid April.

Starve The Tax Monster 2: Retirement Tax Strategy Reloaded

My Retirement Tax Strategy, Reloaded to Withhold The Least Possible

I just can’t allow myself to ever overfeed the tax monster just to wait for it to regurgitate the excess to me once it gets around to it. I’ve always felt that using the federal government as an interest free savings account isn’t financially smart. But this year my motivation and strategy is amplified and more of a mini personal protest. Not only will I make sure I won’t overpay for a refund, I am pushing the amount I will owe to the limit. The plan is to write a last minute larger check to settle my taxes.

Last year I posted my 2016 Starve the Tax Monster early retirement income tax plan when I found that I over withheld federal taxes on my IRA distributions. I took advantage of my withholding mistake and painlessly increased my Roth holdings and made tax withholding changes for the next year.

This year it’s all about my disgust with the fraud, incompetence, and the waste running amok. I can’t change or control much in any of this nonsense that’s going on. But I can control how I pay my owed taxes for the year. I might as well earn some interest on my delayed tax payment money too.

They Finally Got My Goat

There a couple of things that pushed me toward this retirement tax strategy.

First the Equifax hack.

I established a credit freeze at all three credit reporting agencies to help stop fraudulent loans against us. But I can’t stop a fraudulent income tax filing against my and/or my wife’s Social Security numbers. The IRS says to file early for your refund before any fraudsters do. Any fraudulent tax returns against a Social Security number will result in the legit taxpayers experiencing huge delays in their refunds. Forget that. I will just send my check in by the filing deadline. If the IRS paid out a fraudulent refund in error to some jack-wad then they can work that out on their own time and money.

Second, I’m somewhat annoyed about all the White House travel spending waste.

From Cabinet members private and chartered plane issues to the VP Pence football game political stunt. Not to mention the cost of all the President’s weekends away from Washington spent golfing at his properties. They always do what they are going to do. But I don’t have to like it or go out of my way support it.  

Lastly, I think the proposed tax reform clearly favors the rich and corporations and frankly it stinks.

Even though it is far from law, it shows their intent and priorities. As far as I am concerned they are simply tossing peanuts to the middle class and the poor.

Legally Starving the Tax Monster

As I wrote in last year’s starve the tax monster post,

I use the term monster because it will happily over eat without squabble but will hunt you down and destroy you if you don’t feed it what it thinks you owe. I have to pay the tax monster something to keep it off my back but not more than I have to pay. It’s better that I manage my money than trust the monster with it.”

Obviously not paying taxes will get you in big trouble with the tax monster. Fines and interest are added to your tax obligation as penalty. Go too far and prison is also a possibility. There are also interests and penalties for underpaying your taxes. My retirement tax strategy walks the line without crossing the underpayment penalty rules. The rules state you can avoid underpayment penalty if after completing your income taxes you:

  • Owe less than $1,000,

Or if you owe more than $1000, the lower of-

  • Paid at least 90% of the tax you owe for the current tax filing year through withholding or quarterly estimated payments.
  • Or your tax withholding/payments are equal to 100% of your previous year’s tax obligation.

Figuring Out The Year’s Tax Withheld vs. Estimated Obligation

It’s late enough in the year to make a good estimate of this year’s taxable income. I run that estimated 2017 amount through the 2016 tax software I used. This gives me my approximate 2017 tax obligation. By looking at what tax has been withheld and scheduled to be withheld I came up with my probable 2017 tax filing result. I simply had a lot of room to increase my underpayment amount before the year ends.

My 2017 Retirement Tax Strategy

My retirement tax strategy adjustment for this year is to stop my IRA federal withholding for November and December. I will come in owing just below the $1000 penalty threshold. Stopping the last 2 months of tax withholding will increase the amount they will have to wait for. I will file my taxes and send a check by the April 15th tax filing deadline.

Delaying payment of up to $999 to settle my taxes isn’t much, but it is about 30% of my yearly tax obligation. Frugal living and managing income for low taxes has it’s benefits.

I simply keep invested and save the money that I didn’t withhold as taxes. In the whole scheme of things financial, the amount doesn’t add up to much, but some interest/dividends is better than nothing. Mostly I just get satisfaction delaying the monster’s feasting and overeating my money right away.

My 2018 Retirement Tax Strategy

My SEPP 72t ends this year and I will be giving myself a raise for 2018, making my taxable retirement income higher next year. I also ran that increased amount through the tax software to estimate my 2018 tax obligation.

Based on my tax software test results I will restart a 10% federal tax withholding from my 2018 retirement income in July.

Note: I do this stop and start withholding because my IRA fund holder only allows for federal tax withholding of at least 10% from distributed funds. If they could do it I could easily set the withholding rate at 5% year-round. That would also accomplish the same starve the monster retirement tax strategy.

Next October I can run the numbers again to see if my 2018 income and tax calculations are still valid for owing either just under $1000 in taxes, or having withheld 100% of this year’s lower retirement income tax obligation. Based on the results I can make necessary tax withholding adjustments.

Words of Caution

The IRS expects that we pay as we go. You can’t pay your taxes on the last month or two for the year or they could penalize you for underpayment for the first 3 quarters of the year.

The way this retirement tax strategy works for me is I get a 1099R that says the amount of federal taxes withheld for the year. I don’t believe the IRS will go through the trouble to verify it was evenly paid throughout the year if I come in below the underpayment penalty thresholds.

If I was paying quarterly estimated taxes I would instead pay a reduced amount of estimated taxes each quarter. I’d calculate an amount to result in the same end of year underpayment below the penalty threshold.

This retirement tax strategy only delays what I am obligated to pay. It in no way reduces or eliminates my income tax. However, I do reduce my tax obligation by using a tax efficient retirement withdrawal strategy.

Lastly

Starving the tax monster is only a minor financial win if I save the money and it earns interest or dividends. But I am looking at what I call my mini-protest bonus: The huge personal satisfaction I get knowing I am starving the tax monster for as much and for as long as possible.

The big take away:
  • Don’t use the Federal Government as an interest free savings account- Never Purposely over withhold for tax refunds.
  • Know the income tax underpayment penalty thresholds and stay below them.
  • Have the discipline to save/invest your money and pay your tax obligation before the income tax filing deadline.

 

CYA Disclaimer:

I write this article for entertainment and informational use only. In no way should this article be considered professional tax or financial advice on how anyone should handle their income taxes. Do your own research and seek professional help before setting out on your own tax plan. If you freely decide to follow my retirement tax strategy then you do so at your own risk.  

Starve the Tax Monster: My Early Retirement Income Tax Strategy

I like to apply a title to my projects and plans. It’s my way of adding a little fun. My 2017 Early Retirement Income Tax Strategy is named “Starve the Tax Monster”. I know that it’s the season for thanks, charity, worship, family, and friends. But this is a great time of year to review our personal finances for this year and the next.

Starve the Monster: My Early Retirement Income Tax StrategyPlease don’t get me wrong. I do love the celebration of everything that is good and decent in the world during the holidays. But I still take a little time now before the year comes to an end to assess my financial stuff and especially taxes.

By doing this I have time to make adjustments and this year I’m glad that I did.

You may find similar issues in your own tax situation.

Tweaking My Early Retirement Income Tax Strategy

Step 1- Set Income Tax Goals

I believe the first step is to identify one’s tax strategy goals. My goals are simple.

Stay in lower tax brackets. I will do this through establishing threshold base taxable income limits to keep my taxes as low as possible. I fund my lifestyle with a combination of taxable and non-taxable income. My income tax efficiency goal is to be in the 15% tax bracket or lower.

Keep things simple-No shady strategies. I will have no complicated schemes or maneuvers and I will pay my fair share but nothing more. I don’t want to do anything that would be difficult to defend or puts my name on an IRS auditor’s desk. It is all about flying below their radar.

Never withhold so much that it causes a large tax refund. In fact, my goal is to NEVER get a refund and always owe some tax at tax filing time. There’s no reason to give the government an interest free loan.

Step 2 – Run the Numbers

At this time of year I have all my income projections and tax withholding details. I keep track of these things along with my budget so I don’t need to wait for any W2s or 1099s to do this.

I use tax software each year to prepare my taxes so I just set up a test tax return on the last tax filing year’s software and plug-in my end-of-year numbers. In the old days I did my taxes by hand. I would simply print out the tax forms to do this.

Even though there will be small changes in Standard Deductions and Personal Exemptions for the following year this is close enough. Since we are mortgage free we don’t have enough deductions to go Schedule A so we use the Standard Deduction. When I was still with a mortgage I would use the previous year’s numbers which worked out well enough for this exercise.

This test tax return’s result will let me know whether I am on track with my income tax goals and give me an estimate of what I will owe or be refunded.

This year I screwed up big-time and I have over $2000 in Federal Tax refund projected. I never saw it coming so it is good I found out now.

Step 3 – End of Year Income Tax Efficient Options- This Year

Most people would be happy to see a $2000 refund to look forward to. But I hate the idea that I will file a return and then wait for the Government to send it to me when they feel ready to pay me back.

I like to look at my options and long-term retirement funding goals. Part of which is my future efficient Social Security tax strategy of which Roth IRAs are critical.

Action to take- Based on my test income tax results I’ve decided to eat up the refund with Roth Conversions which are a huge part of my early retirement tax efficiency moves.

I reran my numbers through the tax software test return and found I can convert $17,000 to a Roth IRA and the increase in what I will owe in my State taxes won’t be too bad. I was planning on doing a smaller Roth conversion this year anyway.

Step 4 – Income Tax Efficient Tweaks for the Upcoming Year

The fist thing I did after seeing the test tax return results was kick myself and then figure out what happened.

Early in 2010 after my first early retirement I started my lifestyle funding with a SEPP (72t) Substantially Equal Periodic Payments to sidestep the early withdrawal penalty. I also set it up to withhold 10% for Federal income taxes from each monthly distribution.

This arrangement serves me well when I’m doing my “retire early and often” thing. This year I only had a 3 month craft beer-tender gig for a couple of four-hour shifts a week. Our taxable income of less than $35,000 for 2 people means my 10% tax withholding from my SEPP (72t) income was too much.

Action to take- I have notified my financial planner who handles my SEPP (72t) to decrease the federal withholding from 10% to just 2% for next year. This way I will owe just under $500 in Federal income taxes once I file my taxes in the future. At this time I have no plans for beginning another encore career. But if I land a sweet paying gig aligned with my passions and interests I will make withholding adjustments.

(Update Jan 2017: My CFP informed me that they can only withhold 0% or 10%. I have it set for 0% now and then in October will have it changed to 10% for the last 3 months of the year)

Other Tax Issues To Look At

This is a good time to look at any non-retirement account investment-dogs you might want to unload to take the investments losses.

If you use the long form with Schedule A to file your taxes then look to see if instead of waiting whether a well-placed charitable contribution or paying for other deductible expense before year-end will improve your tax situation. Same goes for any business or rental property related deductible purchases. That is if the move makes sense.

If you find that you underpaid your taxes by far too much and worry about under-payment interest/penalties then make use of the time now to adjust your tax withholding up for the rest of the year.

In Closing

I blew it tax-wise this year and overfed the monster. Politics aside, I use the term monster because it will happily over-eat without squabble but will hunt you down and destroy you if you don’t feed it what it thinks you owe.

I have to pay the tax monster something to keep it off my back but not more than I have to pay. It’s better that I manage my money than trust the monster with it.

Everything considered, my discovered tax oversight isn’t too bad. My Early Retirement Income Tax Strategy tweaks will have me add to my Roth IRA holdings before year-end. I will also be giving myself an 8% early retirement funding raise without increasing my taxable income. Sweet!

Even though I can make a Roth conversion for this year up to the tax filing deadline, I like to keep things in the same year when I can. I am very happy to have taken the time during this holiday season to get a head-start and make the necessary income tax tweaks.

What’s your tax strategy?

New Tax Efficient Retirement Withdrawal Strategy

A New Tax Efficient Retirement Withdrawal Strategy changes everything we have been told. Primarily about which funds to tap first for our retirement funding. Everyone has heard that we should always start our retirement funding by withdrawing from our taxable investments first. Then once those funds are depleted tap our Tax advantaged IRA and 401K retirement accounts. Finally our tax exempt Roth IRA funds would be tapped. Only if needed once our IRAs are gone.

It turns out that advice as being the best fund withdrawal strategy may have been a little too simplistic. It didn’t really consider the overall tax-owed-consequences vs. the delayed tax investment growth potential. The New Tax Efficient Retirement Withdrawal Strategy will squeeze another 4 to 6 years of retirement funding over what we have all been taught before.

The New Tax Efficient Retirement Withdrawal Strategy Reverses Everything

Research was done by William Reichenstein,  Ph.D., CFA*: Professor and Powers Chair in Investment Management, Hankamer School of Business, Baylor University, Waco, TX, USA. His results show that the conventional retirement fund withdrawal belief should be reversed.  This is due to long-term tax implications and their impact on retirement portfolio funding longevity.

What is the New Tax Efficient Retirement Withdrawal Strategy?

Simply stated. The new strategy is that we start by funding our retirement by first taking money from our tax-deferred 401K/IRA accounts. We limit those withdrawals to stay below the upper threshold of the 15% tax bracket. We then tap our non-retirement account savings/investments only when we need more than what the 15% tax bracket allows. Then lastly we should tap our tax exempt Roth investments.

The basic philosophy of this New Tax Efficient Retirement Withdrawal Strategy is this. A strategy where we never pay more than 15% in taxes.  (With the tax law changes that started in 2018, this would now be to stay at or below the 12% tax rate). That is where the increase in portfolio funding years is achieved.

Supporting examples were presented in William Reichtensteing’s research. If a retiree used the commonly known retirement fund withdrawal strategy. Meaning starting with their taxable investment funds before tapping their IRA/401K funds. They would run out of money in 30 years. However with his new approach the same portfolio would last 34.37 years. An advanced strategy that includes two Roth IRA conversions was shown to extend portfolio funding to 36.17 years.

The New Tax Efficient Retirement Withdrawal Strategy and Early Retirement

Clearly retiring early before age 59 ½ will present challenges due to early withdrawal penalties. To totally follow Reichtensteing’s New Tax Efficient Retirement Withdrawal Strategy takes using an IRS rule. To fund early retirement with an IRA and avoid the 10% early withdrawal penalty  a retiree is limited to what is allowed through the IRS SEPP 72t rules . The other penalty-free option is being age 55 or older to tap a 401K.

Early Retirement – What I Did

When I retired early at the age of 51 most of my investments were in tax advantaged retirement accounts. I did fund my early retirement lifestyle by using the IRS SEPP (Substantially Equal Periodic Payments) 72t guidelines. This means I receive a penalty free monthly amount from my IRA. In a way I was already using the New Tax Efficient Retirement Withdrawal Strategy. It was out of my own personal necessity. Not a premeditated tax efficiency move.

I have also since retired early from an encore-career. One where I grew my non-retirement taxable savings and investments. I use those after tax funds to supplement my 72t withdrawals. My 72t payments are limited to the initial IRS acceptable amount when I started it. They must continue for the 5 years or age 59 1/2, whichever is longer. There are no inflation adjustments for 72t payments.

In Closing

I’m always interested in new ideas and concepts when it comes to retirement. I always find it fascinating to discover things that buck the conventional thinking. I am a Leisure Freak after all. There is little that is traditional about my retirement thinking.  Check out Reichtensteing research  and his examples to see if you agree.

Please note. I am not a financial planner and only share this for informational purposes. Before you make any drastic changes to your retirement funding plans do your research. If you need help then seek the advice of a CFP.

Your thoughts and comments are welcomed. What do you think about Reichtensteing’s research findings?

Are you considering the New Tax Efficient Retirement Withdrawal Strategy?

Are you at least willing to look into it?

How to Handle that IRS Notice

How to Handle that IRS Notice that you found in your mail box. The April 15th tax deadline has long passed. We have put the tax season behind us as we head into summer. Feeling like we have a good idea where we are financially. But now is the IRS season of sending notices. One in particular is the common CP2000 notice.

Here is How to Handle that IRS Notice If you happen to be the unlucky recipient of the CP2000.

What is the CP2000 notice?

IRS notices are identified by a number that they assign to the form. It can be found printed on the top right of each page. That is where you would see CP2000. The “CP” means “Computer Paragraph”. The 2000 is IRS defined as meaning this notice is what they call an “information return program verification request“.

The notice is the result of an IRS process called the “Automated Underreporter Program” of matching amounts that you entered on your tax return against the amounts they received on informational reports. Primarily the informational reports W-2 and the various 1099s (1099-DIV, 1099-B, 1099-INT, 1099-R, etc.). The multi-page notice CP2000 is generally kicked out when a discrepancy is detected.

What You Need To Do.

The CP2000 notice is the way the IRS proposes an adjustment to your tax return. It is not a bill. At least not yet. What the IRS does is list the differences in amounts it found between what was entered on your tax return and what it found on the various information reports. The details (differences) are in the summary area of the notice.

What the IRS is doing by sending you the notice CP2000 is asking you to explain these differences. You generally have 30 days to respond. Either by agreeing with their adjustment or disagreeing with all or part of their adjustments and their findings.

The CP2000 notice comes with all necessary forms for you to fill out. If necessary it also includes their application for a payment plan. Answering the CP2000 to the IRS may not be the end of your tax adjustment headaches. That’s because the IRS shares this information with the State Revenue Agencies. You may have to also amend and refile your State Income Tax forms.

What to Expect Next.

Based on information provided by the Taxpayer Advocate office, the IRS has guidelines that calls for them to process your answers within about 45 days. However the Taxpayer Advocate concedes that the IRS is usually unable to meet the 45 day deadline because it receives back around 10 million returned letters a year in response to their mailings of various notices, including the common CP2000. You just have to hold tight until they get back to you.

In Closing

If you get an IRS Notice that you are unsure how to handle it or have other major questions contact a tax professional. If your taxes were prepared by a tax professional then be sure to include them through this process. If you think ignoring the CP2000 or other IRS notices is the best way to go just know that the IRS may be slow but they never forget and will eventually hunt you down and collect what they believe you owe plus any of their perceived appropriate penalties and interest.

Have you ever been the lucky recipient of the CP2000 Notice?

Have you received other types of IRS Notices that made or ruined your day?