Author Topic: Overheard at Work  (Read 4929469 times)

skyrefuge

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Re: Overheard at Work
« Reply #5000 on: October 28, 2014, 09:53:10 AM »
If I have a chunk of cash that could pay off my mortgage (let's say 100k).  And I can invest that money at a rate that will pay for the mortgage interest after taxes, then I'm definitely better off taking the mortgage interest deduction.

Ok, fantastic, but never once has someone verbalized this "invest rather than pay off debt" strategy as "I need the tax deduction". The tax deduction isn't even really relevant in that decision, except that the mortgage interest rate that you have to beat with your investments should be de-rated by your tax rate. In that case, the person is keeping their mortgage "because I can make more money with that money than I pay to service that debt", not because they "need the tax deduction".

Whenever this topic comes up, people always invent esoteric reasons why the "I need the tax deduction" guy is a really a financial wizard with an extremely rare and specific situation. No. That's never been the case in all of history. 100% of the time, the person saying "I need the tax deduction" is just a dumbass who doesn't understand how math works. The financial wizards in those rare situations who DO actually "need" the tax deduction would never actually state it that way to the random relative/co-worker/bar-patron they're blabbing to.

As always, Seinfeld's take: https://www.youtube.com/watch?v=upifaeK0B5U

Timmmy

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Re: Overheard at Work
« Reply #5001 on: October 28, 2014, 09:58:28 AM »
Rebs, that's a well thought out example, and I'm with you, I'd rather invest than pay off debts.

However, I don't think that's the reason for this phenomenon AlanStache refers to. People have been brainwashed into thinking the government is subsidizing the purchase of their house, when in reality they are only picking up a portion of the interest and real estate taxes. It would serve them better to pay no interest. It would serve them best to pay interest and invest at a gain.

I have clients who've told me their old CPA said they need to buy a bigger house to save money on taxes. It's scary that a trusted advisor would say that when there are so many better options for tax planning.

When you consider the standard deduction already includes a big tax savings it also really reduces the effect a reasonable house purchase/mortgage should have on a tax return.

I was going to point this out.  I'm glad you mentioned it.  DW and I end up itemizing most years by only a very small margin.  We essentially get very little benefit from the mortgage interest deduction. I'd imagine a large percentage of taxpayers would be taking the standard deduction instead, if they didn't have a mortgage.  Meaning the effect on their taxes should be minimal. 

AlanStache

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Re: Overheard at Work
« Reply #5002 on: October 28, 2014, 10:47:04 AM »
And can someone explain the "I need the deduction" thing, last year I thought I "got back" like a third of the interest I paid on the loan; so for every 1$ I paid; Uncle Sam 'gave me back' 0.33$.  How would I not be better off not paying the dollar and not getting the 0.33$ back - seems I would be .66$ better off?  Honest question what I am I missing?  Or does mortgage interest lower your taxable income so that someone with high income and who paid lots in interest could come out ahead?  Or would a lower income tax payer get a higher percent back of what they paid in interest?  All this ignores investing the difference etc but purely on a tax level what am I missing when people say "I need the deduction"?

I bolded the answer to your question, that you yourself posted but decided to "ignore"  :P

...

But even if you can't, you may still be better paying the dollar in interest to get the 33 cents back, simply because of the opportunity cost of the money you'd use to pay off the mortgage.

I don't think most people think of it that way (at least people that I hear claiming they need the deduction, or that ... 20% savings is great (and they totally ignore the 80% spending they had to do).

reb: I totally get how paying 3% interest to the bank and getting a third of that back from the Feds and investing what could have paid off the principle is a very good strategy (more or less follow that myself) but I have trouble seeing that most people are doing that.  Seems like most people are thinking they get 100% (or more) of the paid interest back from the Feds, or they count on not having to pay anything on April 15th because they have no savings.

Quote
Ok, fantastic, but never once has someone verbalized this "invest rather than pay off debt" strategy as "I need the tax deduction".
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RyanAtTanagra

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Re: Overheard at Work
« Reply #5003 on: October 28, 2014, 10:47:28 AM »
That's only counting if you can earn at the rate that your mortgage is.  If you earn higher, naturally you'll end up with even more.

But even if you can't, you may still be better paying the dollar in interest to get the 33 cents back, simply because of the opportunity cost of the money you'd use to pay off the mortgage.

I understand the 'invest money at a higher rate of return than your mortgage', but can you explain that last part of still being worth it even if you can't earn a higher or equal rate of return?

Cheddar Stacker

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Re: Overheard at Work
« Reply #5004 on: October 28, 2014, 11:00:49 AM »
That's only counting if you can earn at the rate that your mortgage is.  If you earn higher, naturally you'll end up with even more.

But even if you can't, you may still be better paying the dollar in interest to get the 33 cents back, simply because of the opportunity cost of the money you'd use to pay off the mortgage.

I understand the 'invest money at a higher rate of return than your mortgage', but can you explain that last part of still being worth it even if you can't earn a higher or equal rate of return?

$1 is worth $1, until you use it for something. If you use it to pay off the mortgage, it completely loses it's utility since it's now gone. By electing to pay interest of 4% you are paying 4 cents to use someone else's $1. Now you can do whatever you want with that $1, including just holding it in an emergency fund, investing it, buying something, rolling a joint, etc. But you can only do one thing with it, after that it's gone.

http://en.wikipedia.org/wiki/Opportunity_cost
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RyanAtTanagra

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Re: Overheard at Work
« Reply #5005 on: October 28, 2014, 11:25:33 AM »
That's only counting if you can earn at the rate that your mortgage is.  If you earn higher, naturally you'll end up with even more.

But even if you can't, you may still be better paying the dollar in interest to get the 33 cents back, simply because of the opportunity cost of the money you'd use to pay off the mortgage.

I understand the 'invest money at a higher rate of return than your mortgage', but can you explain that last part of still being worth it even if you can't earn a higher or equal rate of return?

$1 is worth $1, until you use it for something. If you use it to pay off the mortgage, it completely loses it's utility since it's now gone. By electing to pay interest of 4% you are paying 4 cents to use someone else's $1. Now you can do whatever you want with that $1, including just holding it in an emergency fund, investing it, buying something, rolling a joint, etc. But you can only do one thing with it, after that it's gone.

http://en.wikipedia.org/wiki/Opportunity_cost

Ok, so there could be something better to do with that dollar from a values perspective, even if not from a purely financial one.

GuitarStv

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Re: Overheard at Work
« Reply #5006 on: October 28, 2014, 12:59:42 PM »
frothy.

arebelspy

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Re: Overheard at Work
« Reply #5007 on: October 28, 2014, 01:26:20 PM »
That's only counting if you can earn at the rate that your mortgage is.  If you earn higher, naturally you'll end up with even more.

But even if you can't, you may still be better paying the dollar in interest to get the 33 cents back, simply because of the opportunity cost of the money you'd use to pay off the mortgage.

I understand the 'invest money at a higher rate of return than your mortgage', but can you explain that last part of still being worth it even if you can't earn a higher or equal rate of return?

Because the math isn't a straightforward comparison, there are other factors.

For example, say your mortgage is 4%, and you can earn 3.75%.  If you're getting 1/3 of that mortgage back, you're still coming out ahead even investing at a lower rate, versus paying off the mortgage.

You have to include all factors when you run the numbers, not just "investment rate < mortgage rate, pay off mortgage" (including all the factors would include things like if you take the standard deduction).

Naturally if you're going to just spend that money, it's better to pay off debt.  But the cliche you hear all the time in personal finance circles of "it's dumb to pay $1 in interest to the bank to get $0.33 back in taxes" is flat out wrong - lots of times it's well worth it to pay interest to the bank to get part of that back in taxes depending on what you are doing with the money that you would be paying off the mortgage with.

That's my point, that the cliche you hear there isn't correct.

The original question asked was "How would I not be better off not paying the dollar and not getting the 0.33$ back - seems I would be .66$ better off?  Honest question what I am I missing? " -- that's what was missing, the opportunity cost of the money.   
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AlanStache

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Re: Overheard at Work
« Reply #5008 on: October 28, 2014, 01:57:19 PM »
That's only counting if you can earn at the rate that your mortgage is.  If you earn higher, naturally you'll end up with even more.

But even if you can't, you may still be better paying the dollar in interest to get the 33 cents back, simply because of the opportunity cost of the money you'd use to pay off the mortgage.

I understand the 'invest money at a higher rate of return than your mortgage', but can you explain that last part of still being worth it even if you can't earn a higher or equal rate of return?

Because the math isn't a straightforward comparison, there are other factors.

For example, say your mortgage is 4%, and you can earn 3.75%.  If you're getting 1/3 of that mortgage back, you're still coming out ahead even investing at a lower rate, versus paying off the mortgage.

You have to include all factors when you run the numbers, not just "investment rate < mortgage rate, pay off mortgage" (including all the factors would include things like if you take the standard deduction).

Naturally if you're going to just spend that money, it's better to pay off debt.  But the cliche you hear all the time in personal finance circles of "it's dumb to pay $1 in interest to the bank to get $0.33 back in taxes" is flat out wrong - lots of times it's well worth it to pay interest to the bank to get part of that back in taxes depending on what you are doing with the money that you would be paying off the mortgage with.

That's my point, that the cliche you hear there isn't correct.

The original question asked was "How would I not be better off not paying the dollar and not getting the 0.33$ back - seems I would be .66$ better off?  Honest question what I am I missing? " -- that's what was missing, the opportunity cost of the money.

Question was intended to be more narrowly focused on taxes rather than ones bottom line or preserving/creating options.  I will infer an answer that in 99.99% of cases one will not make back the interest paid to the bank directly from Uncle Sam after filing a 1040.  Not paying down the mortgage is a very good option but it could still be a good option if the mortgage credit did not exist at all (math would be tighter but still might work).

frothy: does anyone else remember the Red Dwarf episode "Balance of Power" where Rimmer starts black carding Lister to end conversations? :-p
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HairyUpperLip

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Re: Overheard at Work
« Reply #5009 on: October 28, 2014, 02:02:14 PM »
Just overheard a coworker complaining about how her toddler throws major tantrums, and that she's "leaving that up to daycare to fix - that's why I work so much and put her in daycare, it means I don't have to deal with these things".

:( stupid useless fucking parents...

HairyUpperLip

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Re: Overheard at Work
« Reply #5010 on: October 28, 2014, 02:03:36 PM »
Why do these people even have children? Their kids are going to be so messed up when they grow up.

We need people to be our bosses and managers.

HairyUpperLip

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Re: Overheard at Work
« Reply #5011 on: October 28, 2014, 02:06:52 PM »
I'm gonna try to blow the foam off the top of this foamy cup of blue box....



And guess what everyone? Nobody knows what the fuck the blue box means or is until they've already learned it. So nobody is weird or dumb for not knowing it. The only thing weird or dumb is thinking you are weird or dumb for not knowing it. :)


senecando

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Re: Overheard at Work
« Reply #5012 on: October 28, 2014, 02:15:20 PM »
I'm gonna try to blow the foam off the top of this foamy cup of blue box....



And guess what everyone? Nobody knows what the fuck the blue box means or is until they've already learned it. So nobody is weird or dumb for not knowing it. The only thing weird or dumb is thinking you are weird or dumb for not knowing it. :)

Ok. Is it just me or is that Orange?

solon

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Re: Overheard at Work
« Reply #5013 on: October 28, 2014, 02:16:38 PM »
Must be their Halloween Sale.

Pooperman

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Re: Overheard at Work
« Reply #5014 on: October 28, 2014, 02:23:50 PM »
I'm gonna try to blow the foam off the top of this foamy cup of blue box....



And guess what everyone? Nobody knows what the fuck the blue box means or is until they've already learned it. So nobody is weird or dumb for not knowing it. The only thing weird or dumb is thinking you are weird or dumb for not knowing it. :)

Ok. Is it just me or is that Orange?

I bet there're hats in that orange box!

dragoncar

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Re: Overheard at Work
« Reply #5015 on: October 28, 2014, 02:38:36 PM »
I'm gonna try to blow the foam off the top of this foamy cup of blue box....



And guess what everyone? Nobody knows what the fuck the blue box means or is until they've already learned it. So nobody is weird or dumb for not knowing it. The only thing weird or dumb is thinking you are weird or dumb for not knowing it. :)

Ok. Is it just me or is that Orange?

It looks orange so they can find it easier, but it's called a "black" box. 

GuitarStv

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Re: Overheard at Work
« Reply #5016 on: October 28, 2014, 02:50:44 PM »
Did you know that the black box in airplanes is actually orange?

HairyUpperLip

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Re: Overheard at Work
« Reply #5017 on: October 28, 2014, 03:23:26 PM »
lolololol

dycker1978

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Re: Overheard at Work
« Reply #5018 on: October 28, 2014, 03:29:52 PM »
Did you know that the black box in airplanes is actually orange?

yeah I heard it was so they could find it easier!

Pooperman

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Re: Overheard at Work
« Reply #5019 on: October 28, 2014, 03:34:30 PM »
Did you know that the black box in airplanes is actually orange?

yeah I heard it was so they could find it easier!

Reminds me of the time my good friends Pete and Repete were on the trampoline. It seemed to last forever!

SwordGuy

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Re: Overheard at Work
« Reply #5020 on: October 28, 2014, 04:50:25 PM »
That's only counting if you can earn at the rate that your mortgage is.  If you earn higher, naturally you'll end up with even more.

But even if you can't, you may still be better paying the dollar in interest to get the 33 cents back, simply because of the opportunity cost of the money you'd use to pay off the mortgage.

I understand the 'invest money at a higher rate of return than your mortgage', but can you explain that last part of still being worth it even if you can't earn a higher or equal rate of return?

Because the math isn't a straightforward comparison, there are other factors.

For example, say your mortgage is 4%, and you can earn 3.75%.  If you're getting 1/3 of that mortgage back, you're still coming out ahead even investing at a lower rate, versus paying off the mortgage.

You have to include all factors when you run the numbers, not just "investment rate < mortgage rate, pay off mortgage" (including all the factors would include things like if you take the standard deduction).

Naturally if you're going to just spend that money, it's better to pay off debt.  But the cliche you hear all the time in personal finance circles of "it's dumb to pay $1 in interest to the bank to get $0.33 back in taxes" is flat out wrong - lots of times it's well worth it to pay interest to the bank to get part of that back in taxes depending on what you are doing with the money that you would be paying off the mortgage with.

That's my point, that the cliche you hear there isn't correct.

The original question asked was "How would I not be better off not paying the dollar and not getting the 0.33$ back - seems I would be .66$ better off?  Honest question what I am I missing? " -- that's what was missing, the opportunity cost of the money.

Correct but totally irrelevant to the majority of people answering that they need the deduction.   That's because they have no money to invest!

I understood the original context was about paying off the mortgage in the normal course of events, i.e., the 30 (or 15) years for the mortgage was almost over.   I think that people would be far better off the month after they pay off the mortgage that way than they were the month before.   Now they would have more cash to invest!  (Of course, it would go for a new BTSD vehicle or jet skis, but one can always hope.)

scottish

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Re: Overheard at Work
« Reply #5021 on: October 28, 2014, 05:37:06 PM »
Well make sure you factor in the investment risk.   0.25% isn't a very good return if your $100K investment declines 5% in value just before you have to renew the mortgage.
« Last Edit: October 28, 2014, 05:38:40 PM by mustachebill »

Chaplin

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Re: Overheard at Work
« Reply #5022 on: October 28, 2014, 06:08:10 PM »
A shocking number of people don't understand how a  progressive tax system works. They think that if they go up to the next tax bracket, they pay that tax rate on all of their income, not just the margin.

I agree! This one bit of financial education could be so important. I am continually surprised when I hear people express this. It seems to go unquestioned by some people because it fits certain narratives about government.

PS241

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Re: Overheard at Work
« Reply #5023 on: October 28, 2014, 07:25:44 PM »
I had an experience last week:

Boss guy(20 years my senior) walks by waving a price of paper, "hey, have you done this yet?"
Me: "what is it?"
Boss guy: "401k deferral for bonuses" (annual profit sharing bonuses come out in a few weeks)
(At this point I made the fatal mistake that he was encouraging me to put more of my bonus in my 401k)
Me: "yeah I increased mine last year, but accounting screwed it up and set it to zero so I didn't even get the match.They said they screwed it up because apparently pretty much everyone else sets it to zero" (with tone of voice implying those people are morons)
Boss guy: "I see....."
Me: "yeah, they ended up having to do a separate check for the match and they took off the equivalent amount out of my paychecks for the rest of the year"
Boss guy: ".... so your saying I should probably do up to the match then or that is throwing away free money"
Me: 8-0 "yes...what were you going to do?!"
Boss guy: "well Joe suggested setting it to zero so I could get the whole bonus"
Me: "well I've  always heard you should save 50% of your raises or bonuses..."

At that point he threw the paper in the garbage. Small victory I guess...

dragoncar

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Re: Overheard at Work
« Reply #5024 on: October 28, 2014, 07:34:47 PM »
I had an experience last week:

Boss guy(20 years my senior) walks by waving a price of paper, "hey, have you done this yet?"
Me: "what is it?"
Boss guy: "401k deferral for bonuses" (annual profit sharing bonuses come out in a few weeks)
(At this point I made the fatal mistake that he was encouraging me to put more of my bonus in my 401k)
Me: "yeah I increased mine last year, but accounting screwed it up and set it to zero so I didn't even get the match.They said they screwed it up because apparently pretty much everyone else sets it to zero" (with tone of voice implying those people are morons)
Boss guy: "I see....."
Me: "yeah, they ended up having to do a separate check for the match and they took off the equivalent amount out of my paychecks for the rest of the year"
Boss guy: ".... so your saying I should probably do up to the match then or that is throwing away free money"
Me: 8-0 "yes...what were you going to do?!"
Boss guy: "well Joe suggested setting it to zero so I could get the whole bonus"
Me: "well I've  always heard you should save 50% of your raises or bonuses..."

At that point he threw the paper in the garbage. Small victory I guess...

I just set it to -10k so I get extra bonus

iris lily

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Re: Overheard at Work
« Reply #5025 on: October 28, 2014, 07:39:47 PM »
Last week I talked to a manager who told me that she had to put "extra windfall money--not paychecks" into a separate Christmas account because she and her spouse always overspend, so they've found that separating out the money works better in keeping to a budget. She was talking about thousands of dollars blown at Christmas.

ugh. This woman is well into her 50's.

« Last Edit: October 29, 2014, 01:31:14 AM by iris lily »

arebelspy

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Re: Overheard at Work
« Reply #5026 on: October 28, 2014, 08:24:04 PM »
Well make sure you factor in the investment risk.   0.25% isn't a very good return if your $100K investment declines 5% in value just before you have to renew the mortgage.

Here in the states we have 30-year fixed rate mortgages.  There's no need to "renew" one.

You should be able to beat today's mortgage rate over 30 years.  The worst 30-year period in US stock history has been 8.5%.  Sure, the future could be worse than the past, but I'll take a bet that it won't be significantly worse than the worst period so far.
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auntie_betty

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Re: Overheard at Work
« Reply #5027 on: October 28, 2014, 11:29:55 PM »
Not overheard, said to me by a client:

'My wife thinks her sister is flash. But I think it's all about perspective. After all, if you have 50,000 in the bank then spending 800 on a bag is no big deal. If we had that kind of savings I wouldn't mind if she spent a few thousand on clothes'.

I guess that's why he'll never get 50k in the bank. And why the sister hasn't got 100k+.

thatbrowncat

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Re: Overheard at Work
« Reply #5028 on: October 29, 2014, 07:44:56 AM »
The other day, I heard from my officemates that ZTE Grand X2L  smartphone went on a one-day sale.

 From the Original price - P11,990 (around $273) to P 1,999. (Around $46).

Some of my officemates went nuts over this! They wanted to buy the phone (even though they had their own functional smartphones). Some asked their friends/relatives to go to the  mall where the ZTE kiosk was located and buy the phone.

In the end, the kiosk (in our city) only had 30-50 available units for sale

seanc0x0

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Re: Overheard at Work
« Reply #5029 on: October 29, 2014, 08:12:52 AM »
Last week I talked to a manager who told me that she had to put "extra windfall money--not paychecks" into a separate Christmas account because she and her spouse always overspend, so they've found that separating out the money works better in keeping to a budget. She was talking about thousands of dollars blown at Christmas.

ugh. This woman is well into her 50's.

Well, at least that's better than putting it all on credit cards and paying a metric boatload of interest.

rocksinmyhead

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Re: Overheard at Work
« Reply #5030 on: October 29, 2014, 08:18:16 AM »
Last week I talked to a manager who told me that she had to put "extra windfall money--not paychecks" into a separate Christmas account because she and her spouse always overspend, so they've found that separating out the money works better in keeping to a budget. She was talking about thousands of dollars blown at Christmas.

ugh. This woman is well into her 50's.

Well, at least that's better than putting it all on credit cards and paying a metric boatload of interest.

That's what I was thinking! It may be a dumb thing to spend a lot of money on, but at least she's thinking ahead?

iris lily

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Re: Overheard at Work
« Reply #5031 on: October 29, 2014, 08:31:27 AM »

Well, at least that's better than putting it all on credit cards and paying a metric boatload of interest.

That's what I was thinking! It may be a dumb thing to spend a lot of money on, but at least she's thinking ahead?
[/quote]

That is true.

skunkfunk

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Re: Overheard at Work
« Reply #5032 on: October 29, 2014, 10:02:50 AM »
A shocking number of people don't understand how a  progressive tax system works. They think that if they go up to the next tax bracket, they pay that tax rate on all of their income, not just the margin.

I agree! This one bit of financial education could be so important. I am continually surprised when I hear people express this. It seems to go unquestioned by some people because it fits certain narratives about government.

Crap, I knew this but have been doing my back-of-the-envelope calculations wrong. BRB editing several months of forum posts.

dude

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Re: Overheard at Work
« Reply #5033 on: October 29, 2014, 11:00:24 AM »
Well, this is kinda overheard at work, since a co-worker sent it to me. It's a forum for federal correctional officers, and this particular officer was asking advice on what to do with his TSP (Fed version of 401k) back in 2012 (he's updated it since):

http://www.prisonofficer.org/main-control/15777-anyone-bop-have-suggestions-tsp.html

Here's the most entertaining response of the bunch (the G Fund, for those who don't know, is invested in specially-issued T-Bills; it hasn't broken a 3% return since 2008 -- 2.97%, 2.81%, 2.45%, 1.47%, 1.89%):

"5% for the matching funds, 100% in the G Fund. Then everything else I can save into cash, gold, and silver. You'll lose your ass in all of the funds except G, and that's not guaranteed either. I participate in the hope that the 5% agency contribution will at least offset my market losses. The stock market is headed for a massive crash. Ditto for all bond markets. The entire world is in a period of massive deflationary de-leveraging. Money in the form of excessive debt is being destroyed. The prices of precious metals will eventually collapse too once people realize that hyperinflation is not a danger. Before then it will be time to sell precious metals before the bottom falls out of those prices.

Safe investments? Farmland. Marketable skills. The paid-off home mortgage and no other debt. And good health."

dragoncar

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Re: Overheard at Work
« Reply #5034 on: October 29, 2014, 11:01:51 AM »
A shocking number of people don't understand how a  progressive tax system works. They think that if they go up to the next tax bracket, they pay that tax rate on all of their income, not just the margin.

I agree! This one bit of financial education could be so important. I am continually surprised when I hear people express this. It seems to go unquestioned by some people because it fits certain narratives about government.

Crap, I knew this but have been doing my back-of-the-envelope calculations wrong. BRB editing several months of forum posts.

It's too bad there no intuitive way to estimate your total taxes. 

frugalnacho

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Re: Overheard at Work
« Reply #5035 on: October 29, 2014, 11:08:22 AM »
A shocking number of people don't understand how a  progressive tax system works. They think that if they go up to the next tax bracket, they pay that tax rate on all of their income, not just the margin. So these people think the interest deduction saves them money overall by keeping them in a lower tax bracket.

Yes.  I was especially confused as a kid when I was told by several different grown ups that exact thing.  It wasn't a misunderstanding on my part, because I probed them to get answers because it didn't make sense to me.  They explained it to me that if they worked over time, they made more money, which bumped them into a higher tax bracket, which meant they take home less money overall than if they had not worked over time (not just pay more taxes).

When I later learned about the tax system I figured out they were just idiots.  I don't understand how they could have been working and paying taxes all those years and still have such a gross misunderstanding of their own tax bills.  You paid the fucking taxes! Every year! How do you not understand how your own taxes are calculated?!?!  How did you get such a well paying job when you can't even understand a simple concept like a progressive tax?!?

Maigahane

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Re: Overheard at Work
« Reply #5036 on: October 29, 2014, 11:14:26 AM »
A shocking number of people don't understand how a  progressive tax system works. They think that if they go up to the next tax bracket, they pay that tax rate on all of their income, not just the margin. So these people think the interest deduction saves them money overall by keeping them in a lower tax bracket.

Yes.  I was especially confused as a kid when I was told by several different grown ups that exact thing.  It wasn't a misunderstanding on my part, because I probed them to get answers because it didn't make sense to me.  They explained it to me that if they worked over time, they made more money, which bumped them into a higher tax bracket, which meant they take home less money overall than if they had not worked over time (not just pay more taxes).

When I later learned about the tax system I figured out they were just idiots.  I don't understand how they could have been working and paying taxes all those years and still have such a gross misunderstanding of their own tax bills.  You paid the fucking taxes! Every year! How do you not understand how your own taxes are calculated?!?!  How did you get such a well paying job when you can't even understand a simple concept like a progressive tax?!?
Because they either didn't do their own taxes or they just got the tax amount from the table without bothering to figure out how it was figured.

On a funny note I did have a friend who got a 50 cent pay raise and his check actually went down without him changing anything. The payroll system his employer used decided that the tiny pay raise bumped him in to a higher bracket and took out a higher percentage of tax. In the end he came out ahead but short term it did hurt him.

frugalnacho

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Re: Overheard at Work
« Reply #5037 on: October 29, 2014, 11:21:11 AM »
A shocking number of people don't understand how a  progressive tax system works. They think that if they go up to the next tax bracket, they pay that tax rate on all of their income, not just the margin. So these people think the interest deduction saves them money overall by keeping them in a lower tax bracket.

Yes.  I was especially confused as a kid when I was told by several different grown ups that exact thing.  It wasn't a misunderstanding on my part, because I probed them to get answers because it didn't make sense to me.  They explained it to me that if they worked over time, they made more money, which bumped them into a higher tax bracket, which meant they take home less money overall than if they had not worked over time (not just pay more taxes).

When I later learned about the tax system I figured out they were just idiots.  I don't understand how they could have been working and paying taxes all those years and still have such a gross misunderstanding of their own tax bills.  You paid the fucking taxes! Every year! How do you not understand how your own taxes are calculated?!?!  How did you get such a well paying job when you can't even understand a simple concept like a progressive tax?!?
Because they either didn't do their own taxes or they just got the tax amount from the table without bothering to figure out how it was figured.

On a funny note I did have a friend who got a 50 cent pay raise and his check actually went down without him changing anything. The payroll system his employer used decided that the tiny pay raise bumped him in to a higher bracket and took out a higher percentage of tax. In the end he came out ahead but short term it did hurt him.

That's mind blowing.  These were not struggling people, these were well off people in nice neighborhoods with boats and cottages up north.  They must have been getting bumped into a very high tax bracket.  But still, it makes me wonder how/why they would pay such a large bill without even a basic understanding of how it's calculated. 

I've seen the same thing with our payroll system.  It's not intelligent at all.  It takes whatever you made this pay period and multiplies it by 26 pay periods, regardless of the circumstances around the check (OT or bonus) and regardless of where in the year it falls, and then multiplies a certain factor to estimate withholding.  So if you make $30k/yr, and get a 10k bonus on the last pay check, it just assumes you are going to make an insane amount of money (despite already receiving all 26 pay periods for this tax year) and withholds most of the bonus. 

dycker1978

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Re: Overheard at Work
« Reply #5038 on: October 29, 2014, 11:28:52 AM »

I've seen the same thing with our payroll system.  It's not intelligent at all.  It takes whatever you made this pay period and multiplies it by 26 pay periods, regardless of the circumstances around the check (OT or bonus) and regardless of where in the year it falls, and then multiplies a certain factor to estimate withholding.  So if you make $30k/yr, and get a 10k bonus on the last pay check, it just assumes you are going to make an insane amount of money (despite already receiving all 26 pay periods for this tax year) and withholds most of the bonus.

I get the same thing every year.  The first two cheques from my Job we get$5000 bonus and $3500 bounus.  The deductions from these cheques are huge, because it calculates, incorectly, that my salary for the year will be substancally higher than what it is.  I have reduced sorce deductions as much as I can throught the year so that I dont end up giving the gvernment an intrest free loan all year.

frugalnacho

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Re: Overheard at Work
« Reply #5039 on: October 29, 2014, 11:39:41 AM »
Luckily we do ours at the end of the year and I file my taxes ASAP so it's not much of an issue.  That would suck to get the early year bonus though.

Bigote

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Re: Overheard at Work
« Reply #5040 on: October 29, 2014, 11:45:07 AM »
Just an FYI guys it's called a black box

Yeah, but did you know they're not actually black? They're bright orange, so they can be seen better.

Sometimes they're red.

I have a picture I took in lower manhattan a couple of days after 9-11, of a poster that the FBI put up asking for help locating the 'black box'.   The one they showed in the poster was red.   I'll find the picture and post it here later. 

solon

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Re: Overheard at Work
« Reply #5041 on: October 29, 2014, 12:25:18 PM »
Just an FYI guys it's called a black box

Yeah, but did you know they're not actually black? They're bright orange, so they can be seen better.

Sometimes they're red.

I have a picture I took in lower manhattan a couple of days after 9-11, of a poster that the FBI put up asking for help locating the 'black box'.   The one they showed in the poster was red.   I'll find the picture and post it here later.

Hmm... so apparently the FBI can't find them when they're red. They should make them orange.

HairyUpperLip

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Re: Overheard at Work
« Reply #5042 on: October 29, 2014, 01:23:21 PM »
wait... so black boxes are really orange? :-p

frugalnacho

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Re: Overheard at Work
« Reply #5043 on: October 29, 2014, 01:28:45 PM »
There is a blue, black, red, orangey foam encompassing this thread.

GuitarStv

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Re: Overheard at Work
« Reply #5044 on: October 29, 2014, 01:45:05 PM »
wait... so black boxes are really orange? :-p

Orange is the new black.

AlanStache

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Re: Overheard at Work
« Reply #5045 on: October 29, 2014, 02:10:31 PM »
Personally, I find this foam boring.  Can't think of a way to picture boring foam, so I went with gross...




:-p

jk
Be the person Mr. Rogers knows you can be.

skyrefuge

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Re: Overheard at Work
« Reply #5046 on: October 29, 2014, 02:13:10 PM »
They explained it to me that if they worked over time, they made more money, which bumped them into a higher tax bracket, which meant they take home less money overall than if they had not worked over time.

Yep, I've heard the exact same thing many times (though never at work, sorry!)  I figure the people in this thread who jump and contort to explain such ignorant statements as possible examples of financial-wizardry are simply lucky enough to have never known such ignorant anti-mustachians, and thus give far too much benefit-of-the-doubt (I think I've even done the same for some other types of statements reported in this thread). Which is weird, since right here are 100 fucking pages documenting the unbelievable stupidity of real-life people! Ah well, hope springs eternal, which is nice, I suppose.

senecando

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Re: Overheard at Work
« Reply #5047 on: October 29, 2014, 02:22:41 PM »
Which is weird, since right here are 100 fucking pages documenting the unbelievable stupidity of real-life people! Ah well, hope springs eternal, which is nice, I suppose.

Code: [Select]
    104 pages
 -    2 pages (black box discussion)
 -    1 page  (100 page celebration)
 -    1 page  (other foam)
-----------
   100 pages of unbelievable stupidity

HairyUpperLip

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Re: Overheard at Work
« Reply #5048 on: October 29, 2014, 02:25:51 PM »
Which is weird, since right here are 100 fucking pages documenting the unbelievable stupidity of real-life people! Ah well, hope springs eternal, which is nice, I suppose.

Code: [Select]
    104 pages
 -    2 pages (black box discussion)
 -    1 page  (100 page celebration)
 -    1 page  (other foam)
-----------
   100 pages of unbelievable stupidity

hahahaha

Goldielocks

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Re: Overheard at Work
« Reply #5049 on: October 29, 2014, 02:27:13 PM »
A shocking number of people don't understand how a  progressive tax system works. They think that if they go up to the next tax bracket, they pay that tax rate on all of their income, not just the margin. So these people think the interest deduction saves them money overall by keeping them in a lower tax bracket.

Yes.  I was especially confused as a kid when I was told by several different grown ups that exact thing.  It wasn't a misunderstanding on my part, because I probed them to get answers because it didn't make sense to me.  They explained it to me that if they worked over time, they made more money, which bumped them into a higher tax bracket, which meant they take home less money overall than if they had not worked over time (not just pay more taxes).


Great description of what I have heard people "grown-ups" say, too.   

Why this wide spread fallacy in thinking?

Could it be that because of increased marginal tax rate, your hourly pay, net of taxes, on overtime, can be less than your hourly pay next of taxes on the first 40 hours of work....     because your basic 40 hours includes all your regular deductions, so your next tax on the first 40 hours is quite low, but fully taxed on the overtime pay.

At this point, people say to themselves -- work overtime for only $25 per hour in my pocket, instead of $30 per hour during normal hours?
_____________________________________________________
Thoughts?  I am giving the "grownups" too much thinking credit?