April 8, 2016
Dear Everyone:
I finished my
taxes last week. By
“finished” I mean that the
IRS happily charged my
credit card for
the few thousand dollars that I was short on giving them already.
And the
State of California took a nice chunk of cash out of my checking
account. And charged me a
“penalty” because I didn’t pay them more than enough ahead of time.
Back in the day, when I worked for a big, impersonal, global company,
all of your taxes were paid ahead of time, through
payroll deduction.
You filled out a form, called a
W-2, that told the
payroll department how many deductions you were planning on claiming,
and they deducted your taxes based on that information and sent the
money off to the Feds and whichever state(s) in which you were working
and/or living.
And nearly every year someone would “lecture” me on the importance of
not giving the government more money than it deserved.
“You’re just giving them an interest-free loan of your money if
you overpay your taxes.” The
advice was always to increase the number of deductions on your W-2 and
invest the money you “saved” before paying the difference when it came
time to “render
unto Caesar”.
Apparently, a lot of people started claiming deductions that weren’t
exactly kosher.
Like saying they had fourteen children when they really had only
two. That’s why the
government started requiring
social
security numbers for offspring.
Personally, I liked the security of “overpaying” my taxes.
It meant that I got a little bit back the following year.
But there was always a catch.
The money that you got back from the state was considered
“income” by the IRS. In
other words, the IRS took taxes based on the money you made in 2003.
The state also took some money.
When you did your taxes in 2004, the state sent you a bit back,
called a refund. Which the
IRS called “income” and taxed again in 2004.
There is a technical term for this.
It’s called
Double-Dipping.
Whatever. It was never all
that much anyway. But you
could avoid the Double Dipping by underpaying your state taxes, thus
eliminating the refund.
This year I discovered that the State of California decided to penalize
people who “underpaid” their taxes through payroll deduction.
So while you might “save” on the “interest-free loan” that you
gave the feds, the state would charge you for “saving” too much.
And how much did it cost me to make this discovery?
A whopping $9.00.
That’s considerably less than what the credit card company charged me to
arrange to pay the IRS for me.
How much was that?
About the cost of lunch for two at a
Walnut
Creek restaurant.
Including tip.
So now I know how much to set aside to pay my taxes next year and that’s
what I really needed to know.
It’s all part of this figuring out what “retirement”
means in the real world.
The advantage of having experience is in knowing what to expect in the
future. The disadvantage is
that basing everything on experience is that it’s like hurtling down the
freeway at 90 miles per hour with your eyes glued to the rear-view
mirror.
Love, as always,
Pete
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