Rich Girl Roundup: Are You On Track to Owe, Get a Refund, or Break Even?

Rich Girl Roundup! Woo! I love it! I had a jolt at like beginning of November in the middle of the night and I thought, taxes, your spidey senses were tingling. Welcome back Rich Girls and Boys to the Rich Girl Roundup weekly discussion of the Money with Katie Show. I'm your host, Katie Gatti Tossan, and every Monday we're going to dig into an interesting money debate or dialogue. But before we do, here's a quick message from the sponsors of this segment. In the complex world of finance, misinformation is all too common. So while you might have heard that certificates of deposit, better known as CDs, are inflexible, inconvenient, and low return earners, it turns out there's more to the story. CDs have the potential to be a pretty solid, long-term financial strategy, and it's all thanks to the high interest rates that are going around these days. Intrigued yet? 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Visit Netsuite.com slash rich girl. That's Netsuite.com slash rich girl. All right, before we get into it, this week's upcoming main episode is a solo jam on investing outside of your retirement accounts. I know, please hold your applause. It's very sexy, very exciting. But we're going to talk about why we do it, how to think about it, and some common pitfalls that you might encounter. Okay, on to the roundup. Hannah, how's it going? Good, this week's question is for me. The question is, and I'll give some context, is it better to owe taxes or get a refund from the boys at the IRS a tax time? And how can I break even? Because several years ago, your girl, more like your girl's husband, incorrectly filled out a tax for her, and then I had a jolt at like beginning of November in the middle of the night, and I thought taxes. And I went, it was like 4.30 in the morning. At first, everybody's senses were tingling. I don't know why, but I'm really glad they did. So funny. So I logged into the IRS calculator thing, and I put everything in, and I was like, oh, you're going to owe $8,800, and I was like, and what we then did was like, frantically try to adjust me and my husband's taxes to take out the max, and then some to kind of recuperate a little bit, and then we still ended up with like a $5,000 tax bill. So then we started looking into like, what are the retirement accounts? I can try to set up to lower this even more. And then in other years, like this past year, because I was so nervous that it would happen again, I got like a $5,000 plus refund. And I don't know that there's any one right answer, but I wanted to get your thoughts on one, what's your kind of like school of thought on this? And two, how do I do this so I can mostly break even? You're just shooting blanks. Okay, so I think there are two primary schools of thought. The first is like, oh, it's better to owe a little bit, because it means you did not give the government an interest-free loan. Yeah. And I think in that same vein, the tendency that people have to treat a refund when they get it, like, oh, it's free money or it's found money. You could just add me next time. Oh, I think people. No, you don't do that. You don't do that. But I totally did do that this year. Psychologically, it leads you to spending it like it's a bonus versus recognizing that this is just your own paycheck money that you are working for. That has just been withheld from you. So that's one school of thought. The other is that it's better to get a refund because it's a bit of a forced savings device. And it allows the average family to get a big cash infusion that they have inadvertently saved throughout the year. I'll be it without earning a yield to be fair. So I think it's one of those areas of finance where you're kind of up against what is the math says the correct thing to do, which would be you don't want a refund because you would rather have the money up front so you can invest it and put it to work for yourself versus what's actually going to happen in practice. And if that is a family's only savings throughout the year, they don't manage to save anything else and then get a big refund. Well, it's probably a good thing that they overpaid in taxes because now they actually have some cash. But I don't know if that's like a situation to aspire to if that makes sense. I think ideally you are in a little bit more control of your money than that. So those are the two kind of schools of thought. It sounds like you lean more toward and understandably so. I'd rather be getting something back than being surprised with a bill. Yes. Yeah. I mean, for me personally, the thing I don't ever want to have to deal with again is that big of a tax bill. The secondary benefit is that then I get the money and I could invest it over time rather than letting it sit with the IRS for a year. So that's what I would lean towards. But as close as breaking even as we can get feels like, is that possible? How do I do it? Well, I agree. I think that that's the goal is to get it as close to net zero where you're either owing or getting back just a little bit. Like you are basically paying your perfect tax bill throughout the year. And obviously you want to try to get it as low as possible if you're talking about just the personal incentives of good tax planning and tax efficiencies. So I wouldn't say my own experiences with this have been intentional, so to speak, but I almost always owe money. So maybe I shouldn't have asked this question. Yeah. Anyone else any other personal finance expert want to chime in? Here's my my cliffs notes, but I do think that they are illustrative. So I'm going to share them. In 2021, I owed about $5,000 because I had incorrectly filled out my W4 at the cycle studio where I taught. So in the W4, I did not tell it. I had other income. So they were basically withholding taxes as though that was my only income for the year. And it was a lot less than my full time income. So I owed $5,000, although in that instance, the way that I ended up lowering the bill from something else down to $5,000 was I maxed out my HSA, which I had not done yet. And I contributed to a Sep IRA, which I had to open and fund in the March before that April. So those are accounts that I think in the case of the HSA, at least, if it's open the previous year, you can contribute retroactively to it for the previous year. So there are a few that worked that way. Right. But at least you you had the fund set aside to fund those extra things so that you can negate that tax bill. Right. Right. I mean, if you have no money set aside, you obviously are not going to be able to invest to lower the bill. But you're also, I would assume have a hard time paying the bill too. So it's a bad situation to me in if you don't have savings. But I think in that case, I just rerouted some incoming funds that probably would have just gone into a brokerage account into the HSA instead or into the Sep IRA instead retroactively for the previous year to lower the bill. That was a little bit harder in 2022 and 2023 because in 22, I owed 40,000 because I hadn't filed quarterly taxes with money with Katie income that I was earning on the side throughout 2021 and I was only paying taxes on my W2 jobs. Though, crucially, I did not face a penalty because I had paid enough of my tax burden such that I didn't end up owing extra money, which is I think it's as long as you paid 100%. It's 100% of the previous year first up to a certain income and then 110% above certain income. It's like 120,000. Once you start getting into the six figure range, I think you have to have paid 110% of your previous year's tax liability, but then you still would not face a penalty I don't believe. So I didn't end up having one. And then in 23, I owed like 50 grand for the same reason as I owed 40 in 22. But importantly, although it is never fun to pay tens of thousands of dollars at once, in both cases, I knew the tax bomb was coming because I knew I was not paying the taxes on that side money. So I intentionally was setting aside a lot of cash in Q4 of those years, you know, both times rather than investing it or doing something else with it because I knew I was going to need it in April to pay that tax bill. I did talk to my CPA about an S-Corp because I know that this is very popular for people that have LLCs or for people that are running solo, pre-nor style businesses, but he recommended again, Stit, and I actually pulled the email because I was curious to remind myself he said, the main reason for electing S-Corp status is so that you can take a limited amount as payroll, subject to payroll taxes, and let the rest flow out only subject to income taxes. However, I don't lean toward them some accountants do because of the extra scrutiny they subject you to, because some people do not take out enough as salary and subject themselves to additional taxes and penalties if looked at by the IRS. So just wanted to address that because I know some people that may be facing big tax bills because they have side hustles or 1099 businesses or what have you. The S-Corp is a very popular recommendation online, and so I wanted to include why. I didn't end up doing that. Yeah, I remember you and I talked a little bit about a step I are at some point because you're like, oh, I know you have a side hustle and there was like a very specific reason I didn't end up doing it, but it's good to kind of keep all these other things in your back pocket. You've gone through this a couple of times now, so what has been your approach now in recent years, if you know that you're on W2 status, you know you're married all those things. Well, my personal philosophy I think has always leans more toward I'm okay with owing, but for the reason that when I'm using tax act and inputting all my W2 or schedule K income, schedule K being what I'm using to report money with Katie independent income associated with the LLC or me alone and not the broader morning brew owned business. I can see how much I owe, which then allows me to make more informed choices about things like additional contributions to a solo 401k to lower my tax liability, or I think I used to use a set IRA. I now use the solo 401k just because it is not that it's easier, but that it tends to create fewer issues for other things like back to a Roth IRA, or I think that was the reason I didn't do the set IRA, and I don't think I qualified as I knew you referenced that. Yeah, my question was when you're doing this and you log in a tax act, are you doing it at a certain time of year, or you just kind of go in whenever, and you're like, oh, that's what I'm projected to. Oh, good question. Well, usually I can't do it until February, because I don't have a W2 or my 1099 NECs, the like non-employee compensation forms, I don't have all of that until February. So I'll go in sometime in February, plug it all in, get the landscape of like, okay, this is what I owe, this is what I'm declaring as side hustle income, so I know I can contribute up to 25% of my net business income to a solo 401k or to a Sapp IRA to wipe that off the table. But really, I mean, if you're tracking it throughout the year, you have the option to to be doing any sort of business expenses. Like if you're at the end of the year and you know, okay, I have a big tax bill coming, I also need to invest in the business in some way. So instead, I'm going to buy new equipment or I'm going to hire some contractors to do some work for me at the end of the year so I can write off that income and lower that tax bill. So theoretically, like if you own a small business and you're trying to do that at the end of the year, it's probably preferable, but in my case, I typically will just look in February. I think though, if you're trying to reach that net zero point, the best way to do it is to just accurately fill out your W4s. So I mean, I thought we did. Like we changed it, you know, and then we kind of went through the whole process again, but it the whole. So do you know what went wrong? Would you know what you had filled out in Christland the first time or why you were owing 8,000? Yeah. So I guess it was kind of twofold. One was that we had moved and so that's like the tax rates had changed based on our moving across different states. It was like a small amount there, but then the big thing was that we had put married on our W4. And so we got like the maximum money back, but then I had the side hustle that I was doing. And then my husband got severance from somewhere that from the previous job that had also put married. So it basically was not withholding enough. Right. So then the last two years, we've been putting singles. So it takes the maximum out every time. So we don't ever feel like, oh, we're going to have to. Oh, and that has worked out well. The only thing is that obviously we're taking way less home throughout the year. And then we get a nice surprise in February, March. But I was curious, like outside of me waking up and being like taxes, like my tax number is wrong. Was there a type of, you know, process where you'd like go to the IRS calculator once a quarter and say, this is what you're on track. Oh, versus not. And then like, adjusting from there. No, I probably would not recommend anyone's recalculating this on a quarterly basis. That's probably overkill. Cause I don't think having a net zero tax bill is that big of a deal. The bottom line, I think is that the IRS is looking at assuming you are married, filing jointly, your household income has just one lump sum, right? And they might be taxing some of it differently if it is 1099 self employment income. Cause in that case, you're also paying self employment taxes. You're paying both sides of the payroll tax for the self employment income in addition to your federal and state tax liability. But it's looking at everything holistically. So if he got severance that was on tax, that is probably hard to account for. I would just in that case, probably have said, okay, we know we are going to be responsible for the, you know, to pay probably 25% of this back. So we got to set that aside. And then for your side hustle income, you can account for that in a W4, I think in section 4C, where you can elect to have extra income withheld based on income that you're getting from another source. They can take more taxes out of your W2 income to kind of make up for the fact that you have income coming from somewhere else. And then you're not having to file quarterly taxes on that side hustle income. So I would say that's probably the best way to get an accurate read as opposed to it sounds like what y'all are doing, which is telling on the W4, I'm single tax me as though I'm a single household earning this much. I think you probably would be better served just answering the form honestly. And saying, I have a spouse who works and earns this much. Like that is going to be the more accurate outcome. To be fair to the IRS, I'm not doing it to dishonestly. Well, I think you'll have a better, I think your outcomes will be more accurate. You'll probably get closer to either like a small refund or a small bill than kind of treating it as though you've got two incomes that are being taxed separately. And you know, if you want to, you can always go to the smart asset income tax calculator, plug in your total gross income from all sources derived with your zip code into that calculator, you can put it in the show notes. And it'll tell you your total tax liability based on the amounts for you're bringing in where you live your filing status though it might be potentially short, 7.65% on the self employment income in that total because it's only applying the employee half. It's it's only doing the payroll taxes that you as an employer paying, not the other half. So to speak of the self employment tax that you're probably paying. So if you have, we'll say, you know, 200,000 total between you and 50,000 of it is self employment income, then 50K of that 200 is going to be exposed to an additional 7.65%. Percent that this calculator would not be telling you about because it's not thinking any of it is self employment. Okay, that's super, super helpful. I really appreciate that. Yeah, good. Well, I think given the chaos to the last couple years have been us moving. So we had to file in different states. We got married. So our like marital status changed. We opened up new different retirement accounts because your girls started working here, got our life together. So I think it's just been kind of a conundrum of like why we've never been able to nail it. What about other people that are also moving across states like we have? Well, it's funny because I think checking. I know this sounds so obvious, but like, have you tried Google? So there's this amazing website. It's called google.com. So let's say you live in Texas and you're taking the job in California and you're moving to California and they're like, hey, we're going to give you this amazing relocation package and you're like, awesome. And then you get there and you're like, oh my god, I have to pay 10 per like going from a state that has no state income tax to a state that has high state income tax. You're really going to feel that. So I would say I'm in the opposite vote now. And oh, baby, you you went from the most expensive to like a more reasonable expensive states ever. And it's like I'm rolling in it. Yes, there you go. That's the opposite, as you might you might experience the opposite someday. But I think if you're moving, checking that kind of thing ahead of time and factoring it into your decisions, it sounds obvious, but it's we're not talking about negligible numbers in some cases. What's the top marginal rate in California? Like 13%. Brought. I don't even know. I really was just like, if I take home 50% I'm happy. Right. So I think that you got to think about that. And I tend to just like that smart asset calculator. We're all I'll just go in there sometimes at the beginning of the year when I'm kind of doing my annual planning in January. And I never know how much we're going to make because it's so dependent on business income. But I'll just guess like I think it's going to be somewhere in this ballpark. Let me put that in to just see what is our effective tax rate? What percentage of every dollar are we keeping versus what are we paying? And then once I have a good sense for that and you can use your previous year's tax return to as kind of a guide. There's actually a great episode. We'll link in the show notes with I think it's named Sean Mulvaney. He's known as like the five tax guy. And he has a great interview on shoes FI about tax planning using your previous year's tax return that is really, really helpful and can kind of show you how that tax return can be a bit of a road map for like where you could have potential optimization. So we'll include that. But sometimes I'll I'll use that time to like reassess. We know where are we maybe missing opportunities. When is it potentially a good time to look at deductions that we haven't yet? And do we think we're going to really oh or not so much. I mean, you built that tax smart investing bundle, which I'm really excited about because I think that this is the first year that we can really optimize using that bundle to be like, hey, historically, you've had to like what's the best way to get ahead of that? Yeah. Cool. This is really helpful. I think I've used this smart asset calculator a couple times and I find it really, really helpful as opposed to the IRS calculator, which is just like plugging in and hoping that it lands somewhere annually where you want it to. I like that smart asset can tell you per paycheck how that affects you. So yeah, thank you. This is really helpful. Of course. I also think we didn't really talk about married filing jointly versus separately, but I do think it's worth saying that I've never really understood why people file separately because the U.S. is like the only country where you get a tax break for being married. And so by finally, I didn't know that this got married for tax. By filing separately. I made a joke about that in my vows. I was like, this is amazing. This is going to save me so much money. But anyway, so I looked into it because I was curious. And according to Investopedia, there's one scenario in which married filing separately may be especially wise. If you do not want to be liable for your spouses taxes and suspect that they are hiding income or claiming deductions or credits falsely. So basically tax fraud. Then filing separately is probably the best option because when you sign a joint return, you're basically legally saying we are both responsible for the accuracy of this return. So I'll be doing married filing single from now. I'm just kidding. I'm kidding. Any tax liabilities or penalties that may apply then apply to both of you. So if you're signing your own return instead, you're only responsible for the accuracy of that one. But in any case, we have the tax smart investment planner that had a reference. It's a master class that we have that if you are kind of just getting started with tax smart investing and you find yourself making more money and you're trying to see how the different filing statuses and or the different accounts that you could contribute to or have access to how that could change your tax bill, where you might want to be investing. That is a good resource. So we'll link that in the show notes as well. I have to say up front Katie did not ask me to bring up the bundle. It wasn't even a thing that came up. But I was like, oh, yeah, this is a thing that exists. So thank you. Amen. Thank you. All right. That is all for this week's Rich Girl Roundup. We'll see on Wednesday. Actually, to talk about investing outside of your retirement accounts, AKA non-tax advantaged investing. So you're getting it from all angles here on The Money With Katie Show. I love to see it. Bye. Bye.