Identifying common financial misconceptions

[MillenialMustache]

Here's a good one - my coworker didn't realize that the money she was getting back in her tax return was her money to start with. She was getting something like $2,000 a year back, and she doesn't have any major tax deductions. She adjusted the amount of people she claimed so less was taken out to start with.

[deborah]

??  "I'm sure your bank wouldn't like this!"
That is the classic calculation for paying a mortgage off fast without pain.  I learned that back in 1978.  We did it, bank was fine with it.   One way or another, get 13 payments done in 12.  Of course they would rather people do the traditional payment schedule.

Or take the annual amount and divide by 26 and pay that twice a month.

I'm sure your bank wouldn't like this!

OK you have $52000 to pay per year - divided by 26 = $2000 - paid twice a month = $4,000 per month = $48,000 per year - you would have paid the bank $4,00 LESS than they were expecting.

[johnny847]

Here's a good one - my coworker didn't realize that the money she was getting back in her tax return was her money to start with. She was getting something like $2,000 a year back, and she doesn't have any major tax deductions. She adjusted the amount of people she claimed so less was taken out to start with.

And this, ladies and gentlemen, is exactly why the tax refund "holiday sales" work!

[RetiredAt63]

My explanation example was off (more coffee!) and you followed it.   But as I said, the basic is, pay 13 months in 12.  Or 26 1/2 months in 24. 

How it works:
So you need to pay $5200 a year.  That is $433.33/month. Or $216.66 twice a month.  Or $200.00 every two weeks.  If you then pay $216.66 every 2 weeks, instead of twice a month, there are 26 two week periods whereas there are 24 twice a month periods - so you pay $216.66 x 26 = $5633.33.  There is the extra $433.33.

If your bank only wants payments once a month (what an uncooperative bank), then the monthly payment would be $433.33 + $433/12 = $433.33 + 36.11 = $469.44.  If you get paid twice a month and want twice a month payments, then just split it to $234.72. If you want every 2 weeks, again do the adjustment. Not a lot more per month, easy to handle in the budget, but faster.   If you round up the payments, say $220 instead of $216.66, it will go a bit faster again.  And if your interest rate changes (lower) keep the payment the same, and it goes faster again.  If the bank doesn't like that, just make sure you can do additional payments at some point, and then do them.  But human inertia being what it is, this way is easier simply because it is automatic.

As a table (based on $5200/year):

Time unit               regular      fast (13 months)  faster (round up as well)
Per month              $433.33         $469.44         $475.00
Twice/month          $216.66         $234.72         $240.00
Every two weeks     $200.00         $216.66         $220.00

Someone else can do the rest of the math, but IIRC 13 months in 12 takes a 25 year mortgage to roughly  19 years.

??  "I'm sure your bank wouldn't like this!"
That is the classic calculation for paying a mortgage off fast without pain.  I learned that back in 1978.  We did it, bank was fine with it.   One way or another, get 13 payments done in 12.  Of course they would rather people do the traditional payment schedule.

Or take the annual amount and divide by 26 and pay that twice a month.

I'm sure your bank wouldn't like this!

OK you have $52000 to pay per year - divided by 26 = $2000 - paid twice a month = $4,000 per month = $48,000 per year - you would have paid the bank $4,00 LESS than they were expecting.

[Gazelle]

The ones that drive me crazy are the tax-related ones, because I find that much of our political discourse takes advantage of tax code misconceptions.  Doesn't anybody know enough about their taxes to know when they are being lied to?

The mortgage interest deduction is hailed as the savior of the middle class, and any attempt to change it is met with fierce resistance, even though it's almost certainly bad policy that encourages people to buy more house than they need.  As many people have pointed out on this thread, the benefit of that deduction only applies to the margin between itemized and standard deduction.  Last year I saved about $275 combined on fed/state/local.  How would the middle class ever survive without our $275???

Another example was the idiotic talking points surrounding the fiscal cliff discussion a few years ago.  The question was whether income tax cuts should be made permanent for all taxpayers, or for only those taxpayers making less than $250k ($200k for singles).  Reasonable people can argue about whether this is good policy, but I got so tired of hearing arguments that relied on tax code ignorance for effect.  I heard multiple times in TV/radio/print media that people making that much money weren't really rich, that in a high COL area like New York, a firefighter and a teacher (or other hypothetical everyman occupations) married to each other might get "hit" by this tax increase.

That married couple with a $250k taxable income probably had itemized deductions, 401k or 403b contributions, health insurance, etc implying a gross income of well over $300k (I think most Americans would call that "rich").  And no one making this point ever talked about what it meant to be "hit" with the tax increase.  Since the increase in marginal rates would only hit income above $250k, it wasn't actually going to affect this hypothetical couple.  If the couple had $260k taxable income, and the marginal rate above $250k went up by 3%, it would cost them $300 (3% of $10k).  Not exactly the crushing blow it was made out to be.

[I'm a red panda]

You're right. I was generally thinking about the reverse "myth" that people spend less if they use cash. In my own life, I'm usually the same as you two - cash is easier to spend

This is totally me. I never overspend on credit- I have to think carefully if a purchase is worth it. But if I have cash, it is gone in an instant. It's like it isn't real money since it doesn't show up on the bank statements.

The graduated tax thing drives me crazy.  I cannot count the number of times I've heard someone say that a promotion cost them money, or they aren't going to take a new job because the taxes will just be higher so they'll be making less.

I've also never had enough debt on a house to take the mortgage interest deduction.

[Goldielocks]

Here is a new one. I just looked into the family act, which is effective in canada for 2014.

My problem s that the government is touting it as equivalent to splitting income with a lower paid or non working spouse, as if up to $50k of the income was earned by the lower paid spouse.

Roughly Canada's first attempt at married filing jointly.

All looks good until you get to the last line that says 'max $2k'.

It is really like sharing only $20 to $30k , unless you have unusual tax credits you could not use, like disability and such.

The problem is that the govt PR is putting out like it splits $50k when it really doesn't.
I will take the tax cut but the info should be more truthful

[I'm a red panda]

I've heard the same arguement a lot with regards to overtime pay. That after a certain amount of overtime, the government takes so much that it stops being worth it to work the extra time.

My understanding - please correct me if I'm wrong - is that it comes out in the yearly tax filing. So that individual paycheck is taxed as though you make that level of money every paycheck, but when you file your taxes with your actual income for the year, you will get back the difference between what you paid in taxes on that check (presumably a higher tax bracket on a chunk of it) and what you owe in taxes for the year (your normal tax bracket for all of it).

The problem is that people look at their paychecks as their income and their tax refund as fun free money from the government that has no relation to their income. 

They don't seem to realize they are getting their own money back.  I think if they did, people would be a lot less happy about refunds than they are.

[Le Barbu]

Here is a new one. I just looked into the family act, which is effective in canada for 2014.

My problem s that the government is touting it as equivalent to splitting income with a lower paid or non working spouse, as if up to $50k of the income was earned by the lower paid spouse.

Roughly Canada's first attempt at married filing jointly.

All looks good until you get to the last line that says 'max $2k'.

It is really like sharing only $20 to $30k , unless you have unusual tax credits you could not use, like disability and such.

The problem is that the govt PR is putting out like it splits $50k when it really doesn't.
I will take the tax cut but the info should be more truthful

The benefit is up to 2k$. In our case (me 80k$ and wife 25k$) the advantage should be close to 1,500$

[BlueHouse]

You're right. I was generally thinking about the reverse "myth" that people spend less if they use cash. In my own life, I'm usually the same as you two - cash is easier to spend

I'm in the same boat. I hate using cash. Not only is it easy to spend (or lose!), it doesn't leave a trail to help you figure out where it went. I've got $35 in my wallet right now, but according to YNAB, I should have $68.  Where's the rest?  Who knows! 

I'm the exact opposite, and I believe most "non-mustachians" are too.  To me, paying with plastic is fake, phony, and unreal.  So much so that I often don't even pay attention to what I'm signing and sometimes can't tell you how much I just spent if I used a credit card.  But anytime my short little alligator arms have to reach down deep into my pockets and pull together a few crinkly bills, it feels like I'm giving away a piece of my future. 
I guess many other (regular) people feel the same way and that that s why casinos have us use plastic chips instead of our own dollars. It's pretty common for people to have a few chips left at the end of a night and decide to play "one last round" or to tip out extra well rather than go "cash out".  But if you have a $20 bill in your pocket, most wouldn't blow that last bill on a game that they intend to lose, would they? 

[thd7t]

I've heard the same arguement a lot with regards to overtime pay. That after a certain amount of overtime, the government takes so much that it stops being worth it to work the extra time.

My understanding - please correct me if I'm wrong - is that it comes out in the yearly tax filing. So that individual paycheck is taxed as though you make that level of money every paycheck, but when you file your taxes with your actual income for the year, you will get back the difference between what you paid in taxes on that check (presumably a higher tax bracket on a chunk of it) and what you owe in taxes for the year (your normal tax bracket for all of it).

The problem is that people look at their paychecks as their income and their tax refund as fun free money from the government that has no relation to their income. 

They don't seem to realize they are getting their own money back.  I think if they did, people would be a lot less happy about refunds than they are.

This is also coming from a misconception, though.  The tax return isn't just "an interest-free loan to the government".  It's also a hassle-free savings method (which currently pays similar interest to a normal bank).  As long as people aren't blowing their checks, it really isn't a bad thing.  Of course, many people do blow their checks...

[oinkette]

And also that the cash vs credit (what makes you spend more) is a fair or useful comparison. The comparison is not cash vs. credit. It's about limits. Typically cash is fairly limited, whereas the credit is not, or has a much higher limit. If you think you spend more if you use credit compared to cash, try walking around with $5000 of cash in your wallet (or whatever your credit limit is) and see how you spend then. The more you have to spend, regardless of method, the easier spending is. If you need a clear limit in order to spend less money, then go for it - use a small amount of cash. But don't buy into the myth that it's the payment method that is helping here.

Actually for some people it DOES make a difference.  I'm far more conscientious of what I spend when I use cash vs. credit.  Even with $5000 of cash in my pocket I feel like it's MINE, and I'm hesitant to just give it away willy nilly.  Credit cards make it easier for me to distance myself from what I have in the bank.

[TreeTired]

I feel like a chump every time I pay anything with cash.  If they don't give a cash discount (who does that these days?) and accept credit cards, I use the credit card.  Why not get cash back?   Had a big discussion about how unfair it was that I was able to pay my son's college tuition with a credit card.  Don't talk to me, talk to the school!   

[I'm a red panda]

This is also coming from a misconception, though.  The tax return isn't just "an interest-free loan to the government".  It's also a hassle-free savings method (which currently pays similar interest to a normal bank).  As long as people aren't blowing their checks, it really isn't a bad thing.  Of course, many people do blow their checks...

I have never heard of anyone who takes the "forced savings" method to actually build long term savings. They use it to finance large (but delayed, therefore "saved for") purchases or vacations.

If they were able to "force savings" and put it into an actual savings account or investment when they got the check back, I might agree with looking at it as anything as an interest free loan to the government- but there is almost no one who says "yay! I got a tax refund!  That's amazing, I'm going to invest it."

There may be people who are thinking "hmm... tax refund this year? Okay, I'll be investing that."  But those people typically aren't setting up their withholdings to force the savings. They could just save on their own.

[I'm a red panda]

I feel like a chump every time I pay anything with cash.  If they don't give a cash discount (who does that these days?) and accept credit cards, I use the credit card.  Why not get cash back?   Had a big discussion about how unfair it was that I was able to pay my son's college tuition with a credit card.  Don't talk to me, talk to the school!

This.  I paid cash for a car. I put $3k on credit, but that was the most they would allow. I would have loved to charge the whole thing.

My college charged a 3% fee to use a credit card, basically negating any points you could get.

[Goldielocks]

Here is a new one. I just looked into the family act, which is effective in canada for 2014.

My problem s that the government is touting it as equivalent to splitting income with a lower paid or non working spouse, as if up to $50k of the income was earned by the lower paid spouse.

Roughly Canada's first attempt at married filing jointly.

All looks good until you get to the last line that says 'max $2k'.

It is really like sharing only $20 to $30k , unless you have unusual tax credits you could not use, like disability and such.

The problem is that the govt PR is putting out like it splits $50k when it really doesn't.
I will take the tax cut but the info should be more truthful

The benefit is up to 2k$. In our case (me 80k$ and wife 25k$) the advantage should be close to 1,500$

Thanks,you sparked me to take a closer look.

Using your scenario of $85 k / $25k income, as you know that this represents transferring approximately $30k from one spouse to another, for federal taxation offset, as if each were instead making $55k for a total of $110k.

Now, if you earned just $10k more (at $95k), you would "MAX" out on the $2k limit of the tax savings, after transferring only $35k to your spouse.  So much less than the gov't touted $50k sharing / split.

Your example is a good one, becasue in 2011, $110k/year was the average 2-income family with kids amount for BC.

So, taking it further, if your neighbor earned all the money -- $110k, and had a stay at home spouse at $0, even after the family cut "Split" they would STILL be paying $5k  more in taxes than you. 

Of course, yes, this is better than paying the >$6500 more without the family tax cut, but still, not great, as it is marketed as a plan to benefit families, and yet the family making the AVERAGE family income, can only share at best $35k of tax base (if dual uneven incomes), or $12k if single income.   

Definitely not the great deal that was promised years ago, or the current P.R. claim of being able to transfer up to $50k of income... so few people would be able to transfer more than $12k (single  income) to $35k under usual tax scenarios. 

[Goldielocks]

This is also coming from a misconception, though.  The tax return isn't just "an interest-free loan to the government".  It's also a hassle-free savings method (which currently pays similar interest to a normal bank).  As long as people aren't blowing their checks, it really isn't a bad thing.  Of course, many people do blow their checks...

I have never heard of anyone who takes the "forced savings" method to actually build long term savings. They use it to finance large (but delayed, therefore "saved for") purchases or vacations.

If they were able to "force savings" and put it into an actual savings account or investment when they got the check back, I might agree with looking at it as anything as an interest free loan to the government- but there is almost no one who says "yay! I got a tax refund!  That's amazing, I'm going to invest it."

There may be people who are thinking "hmm... tax refund this year? Okay, I'll be investing that."  But those people typically aren't setting up their withholdings to force the savings. They could just save on their own.

I suppose I am one that got used to the "Forced savings" through my tax refund...
   
My Annual bonus is used for long term savings, but the tax refund pays for annual property taxes, home insurance and annual car insurance -- total of $6k per year now.   Sure is nice to have the money in hand to pay all these that come due within the following 2 months..   Otherwise, the money would just sit at 0.25% savings APY in the bank as it builds.

This year, first time, I have a separate savings account to cover this $6k building up right now, so maybe a lot of it would go into investments.... but maybe not all, --> being able to fund summer camp for kids is always nice, or a car repair, or ?? Even I have a hard time seeing it as anything other than "un-allocated funds to spend" without an immediate short term need.

[Prairie Stash]

Here is a new one. I just looked into the family act, which is effective in canada for 2014.

My problem s that the government is touting it as equivalent to splitting income with a lower paid or non working spouse, as if up to $50k of the income was earned by the lower paid spouse.

Roughly Canada's first attempt at married filing jointly.

All looks good until you get to the last line that says 'max $2k'.

It is really like sharing only $20 to $30k , unless you have unusual tax credits you could not use, like disability and such.

The problem is that the govt PR is putting out like it splits $50k when it really doesn't.
I will take the tax cut but the info should be more truthful

Thank you for posting your own misconception.

[Le Barbu]

Here is a new one. I just looked into the family act, which is effective in canada for 2014.

My problem s that the government is touting it as equivalent to splitting income with a lower paid or non working spouse, as if up to $50k of the income was earned by the lower paid spouse.

Roughly Canada's first attempt at married filing jointly.

All looks good until you get to the last line that says 'max $2k'.

It is really like sharing only $20 to $30k , unless you have unusual tax credits you could not use, like disability and such.

The problem is that the govt PR is putting out like it splits $50k when it really doesn't.
I will take the tax cut but the info should be more truthful

Thank you for posting your own misconception.

About the same kind as the 13 mortgage repayment/year instead of 12 (or 26 instead of 24)

The only way to get ahead with mortgage is to set payment so they fit salary/income deposit. If one is paid once a month, should pay mortgage once a month etc. Every other sequence is irrevelent. Saddly, many coments were writen here about complicated strategies that worth nothing.

[CDP45]

??  "I'm sure your bank wouldn't like this!"
That is the classic calculation for paying a mortgage off fast without pain.  I learned that back in 1978.  We did it, bank was fine with it.   One way or another, get 13 payments done in 12.  Of course they would rather people do the traditional payment schedule.

Other options - I expect to have a chunk of money come in sometime in the next year or two - when I renewed my mortgage, I went for three year open instead of 5 year fixed, so I will have no penalty in paying off a huge chunk when that money comes in. Plus interest was lower, and I kept my payment the same, so my amortization period shortened (more to principal since less to interest).  Benefits - I can convert to fixed any time I want (if interest rates start a climb)  Since it is prime plus a %, when the Bank of Canada dropped its rate by 0.25% and the banks followed by dropping their prime by 0.15%, my interest went down.  My projected pay-off date just advanced by 4 months. 

But the point is, my "go-to" person at my branch and I worked this out together, I didn't have to raise any kind of fuss.  Mind you, we both knew there were 4 other major banks with local branches that would happily give me a mortgage if I didn't like what my bank had to offer.  If you know your options and the arithmetic, you should be able to get the mortgage terms you want.

Or take the annual amount and divide by 26 and pay that twice a month.

I'm sure your bank wouldn't like this!

Your bank doesn't give a shit because they immediate sell the loan to the government and someone else typically services it. This is called the pre-payment rate and for the foreseeable future 0 people are going to do this because of low interest rates. There are a ton of threads about paying down your mortgage early, and it really doesn't make sense for most people, especially when you're reducing your leverage for no improvement in rate.

[immocardo]

Misconception:I shouldn't take a deal for 0% financing because I can pay it off immediately

You are actually giving up money.

Say you are going to purchase something for 2,000 and they offer 24 months interest free financing.  You are essentially getting 2,000*(1.04^2)-2000 or whatever you want for an interest rate for free
In this example it would be a little less than $163 (due to payments being made)

Misconception:As long as I'm making the minimum payment on a financed item I'll be fine.

What they don't tell you is that by making the minimum payment the entire amount won't be paid off by the end of your 0% period.  You have to be VERY careful when doing this.

I made a purchase from Best Buy that gives 36 months of 0% financing.  The minimum payment would result in 36 YEARS of payments. 

And here is the kicker.  If I pay off all but $1 of the initial balance and I hit the end of that 36 month window.  Interest will be charged for all 3 years at 18%

I shared this story with my girlfriend and she exclaimed that it is an unfair system, but I couldn't help but laugh because although it is predatory and taking advantage of people that don't read the things they agree to, it makes it so that us Mustachians can benefit from 0%

[RichMoose]

Here is a new one. I just looked into the family act, which is effective in canada for 2014.

My problem s that the government is touting it as equivalent to splitting income with a lower paid or non working spouse, as if up to $50k of the income was earned by the lower paid spouse.

Roughly Canada's first attempt at married filing jointly.

All looks good until you get to the last line that says 'max $2k'.

It is really like sharing only $20 to $30k , unless you have unusual tax credits you could not use, like disability and such.

The problem is that the govt PR is putting out like it splits $50k when it really doesn't.
I will take the tax cut but the info should be more truthful

The benefit is up to 2k$. In our case (me 80k$ and wife 25k$) the advantage should be close to 1,500$

Thanks,you sparked me to take a closer look.

Using your scenario of $85 k / $25k income, as you know that this represents transferring approximately $30k from one spouse to another, for federal taxation offset, as if each were instead making $55k for a total of $110k.

Now, if you earned just $10k more (at $95k), you would "MAX" out on the $2k limit of the tax savings, after transferring only $35k to your spouse.  So much less than the gov't touted $50k sharing / split.

Your example is a good one, becasue in 2011, $110k/year was the average 2-income family with kids amount for BC.

So, taking it further, if your neighbor earned all the money -- $110k, and had a stay at home spouse at $0, even after the family cut "Split" they would STILL be paying $5k  more in taxes than you. 

Of course, yes, this is better than paying the >$6500 more without the family tax cut, but still, not great, as it is marketed as a plan to benefit families, and yet the family making the AVERAGE family income, can only share at best $35k of tax base (if dual uneven incomes), or $12k if single income.   

Definitely not the great deal that was promised years ago, or the current P.R. claim of being able to transfer up to $50k of income... so few people would be able to transfer more than $12k (single  income) to $35k under usual tax scenarios.

@goldielocks: Based on your numbers I'm assuming you did not calculate the value of the whole package which is: Up to $2000 tax credit,$1000 increase in allowable child care deductions, increase of kid fitness credit to $1000, and increased UCCB.

For most families with a couple kids under 18, I suspect they will benefit quite a bit more than you think. Not that the whole package is easy to understand (which would have been nice).

Here's an example for Alberta. Spouse 1: $80000, Spouse 2: $30000, 2 kids age 9 and 12, max child care expense, max fitness tax credit, and max UCCB. This would be for no other deductions like RRSP, RPP, interest, med, ed, etc etc.

Under the old plan they would have about $86,130 in spending money after taxes and benefits.
Under the new plan they would have about $89,435. For a total benefit of $3,305 under the new program.
For a "true split", pretending each income was adjusted to $55,000 and all the benefits were under the old plan they would have $86,568 in spending money after taxes and benefits.

Let's do another Alberta "stay at home mom" example where Spouse 1: $110,000, Spouse 2: $0, and all else the same.
Old plan net: $82,380
New plan net: $85,610. Total benefit of $3,230 under new program.

Is the new plan really a raw deal and misleading? No, I don't think so. Is it more complicated than it needs to be? Yeah, for sure. Do I hate boutique tax credits, deductions, and crap that makes tax returns complicated? You betcha! I wish they would just reduce general taxes from the bottom up by increasing the basic personal deduction and moving the brackets up instead.

[johnny847]

Misconception:I shouldn't take a deal for 0% financing because I can pay it off immediately

You are actually giving up money.

Say you are going to purchase something for 2,000 and they offer 24 months interest free financing.  You are essentially getting 2,000*(1.04^2)-2000 or whatever you want for an interest rate for free
In this example it would be a little less than $163 (due to payments being made)

All of this is strictly true. However, I do want to mention that in the case of car loans, oftentimes they require that you pay for collision/comprehensive insurance for your car until the loan is paid off. Now if you think that such insurance is good value (I don't think so....but that's just me), then this has no effect. However, if you weren't planning on paying for such insurance, then you should take into account the extra insurance costs when trying to see if it still makes sense. In today's low interest rate environment, it may not (but then again, it's because of the low interest rate environment that there are 0% loans available....I don't know. Point is, just run the numbers).

[Riff]

Misconception:I shouldn't take a deal for 0% financing because I can pay it off immediately

You are actually giving up money.

Say you are going to purchase something for 2,000 and they offer 24 months interest free financing.  You are essentially getting 2,000*(1.04^2)-2000 or whatever you want for an interest rate for free
In this example it would be a little less than $163 (due to payments being made)

Although, if you can get a better deal because you're paying in cash, this isn't true. 

[Goldielocks]

Here is a new one. I just looked into the family act, which is effective in canada for 2014.

My problem s that the government is touting it as equivalent to splitting income with a lower paid or non working spouse, as if up to $50k of the income was earned by the lower paid spouse.

Roughly Canada's first attempt at married filing jointly.

All looks good until you get to the last line that says 'max $2k'.

It is really like sharing only $20 to $30k , unless you have unusual tax credits you could not use, like disability and such.

The problem is that the govt PR is putting out like it splits $50k when it really doesn't.
I will take the tax cut but the info should be more truthful

The benefit is up to 2k$. In our case (me 80k$ and wife 25k$) the advantage should be close to 1,500$

Thanks,you sparked me to take a closer look.

Using your scenario of $85 k / $25k income, as you know that this represents transferring approximately $30k from one spouse to another, for federal taxation offset, as if each were instead making $55k for a total of $110k.

Now, if you earned just $10k more (at $95k), you would "MAX" out on the $2k limit of the tax savings, after transferring only $35k to your spouse.  So much less than the gov't touted $50k sharing / split.

Your example is a good one, becasue in 2011, $110k/year was the average 2-income family with kids amount for BC.

So, taking it further, if your neighbor earned all the money -- $110k, and had a stay at home spouse at $0, even after the family cut "Split" they would STILL be paying $5k  more in taxes than you. 

Of course, yes, this is better than paying the >$6500 more without the family tax cut, but still, not great, as it is marketed as a plan to benefit families, and yet the family making the AVERAGE family income, can only share at best $35k of tax base (if dual uneven incomes), or $12k if single income.   

Definitely not the great deal that was promised years ago, or the current P.R. claim of being able to transfer up to $50k of income... so few people would be able to transfer more than $12k (single  income) to $35k under usual tax scenarios.

@goldielocks: Based on your numbers I'm assuming you did not calculate the value of the whole package which is: Up to $2000 tax credit,$1000 increase in allowable child care deductions, increase of kid fitness credit to $1000, and increased UCCB.

For most families with a couple kids under 18, I suspect they will benefit quite a bit more than you think. Not that the whole package is easy to understand (which would have been nice).

Here's an example for Alberta. Spouse 1: $80000, Spouse 2: $30000, 2 kids age 9 and 12, max child care expense, max fitness tax credit, and max UCCB. This would be for no other deductions like RRSP, RPP, interest, med, ed, etc etc.

Under the old plan they would have about $86,130 in spending money after taxes and benefits.
Under the new plan they would have about $89,435. For a total benefit of $3,305 under the new program.
For a "true split", pretending each income was adjusted to $55,000 and all the benefits were under the old plan they would have $86,568 in spending money after taxes and benefits.

Let's do another Alberta "stay at home mom" example where Spouse 1: $110,000, Spouse 2: $0, and all else the same.
Old plan net: $82,380
New plan net: $85,610. Total benefit of $3,230 under new program.

Is the new plan really a raw deal and misleading? No, I don't think so. Is it more complicated than it needs to be? Yeah, for sure. Do I hate boutique tax credits, deductions, and crap that makes tax returns complicated? You betcha! I wish they would just reduce general taxes from the bottom up by increasing the basic personal deduction and moving the brackets up instead.

I am not arguing about the other cuts which apply to all not just the hi -lo split.

Previously, as a family earning $110k on a single income, many many of the other benefits would have been reduced. like child care offsets, more taxes and less free money overall to spend on fitness tax credit, etc. I am not complaining about those (loudly), just that the govnment spin machine announced this for past few years like the family tax cut would help equalize taxes paid between identical income families.

Even when it limits this to $2k, the press releases still tout it in a way that makes it seem to be more like $6.5k is possible.

[BlueHouse]

Home office deduction is really a deferral of taxes. You eventually have to pay it back (or die first)

[SomedayStache]

This is one that almost tripped me up at tax time:
A DCFSA (unlike an FSA) requires requires tax forms at tax time (Specifically the form 2441).

In previous year's I'd claimed the tax credit for dependent care but 2014 was the first year I signed up for a dependent care flexible account.  I happily went throughout the year submitting for reimbursement from my employer for dependent care expenses and I thought I was done with the paperwork. 

Lo and behold you have to also fill out the 2441 with the provider's EIN or the IRS counts the DCFSA money as taxable income.

So does that mean that if you 'lose' money by not having as many dependent care expenses as planned and are unable to get reimbursed from your employer you not only lost out on the cash, but it is also counted as taxable income (even though you never received it?)

[Miss Prim]

Most people don't understand finance at all and taxes least of all.  And for most of them I know it is not lack of brain power, it is lack of interest.  I am constantly trying to educate people at work on the basic principles of saving and investing and they just really do not care!  And these are women who were high up in their high school classes, I'm talking a lot of valedictorians and salutatorians in my field (science). 

I think money management is like anything else, you either have an interest in learning about it or you don't.

                                                                                        Miss Prim

[Runge]

I don't know if this is myth or real, but people tend to think:  Not carrying credit card balances will hurt your credit rating.  What in the name of fuck?  If you had no debt, what the hell do you care about your credit rating for?  What logic is going on here?  "I should pay mad interest monthly so that I can borrow even more in case I ever need it?" 

Whenever the bank tells me that voluntarily lowering my credit limit (that is, I'm asking for them to put it back to sane $5000 levels because they keep jacking the limit), it could 'hurt my credit rating',  I answer, "I don't owe anything and don't plan on doing so. What do I care if it 'hurts' it?  Stab that bastard in the guts for all I care."

I was talking with a coworker today and this topic came up. His "logic" was that if you carry a balance once or twice at the beginning of your credit history, it can help give a boost to your credit initially. The reasoning is that it shows the credit bureaus that you can handle a paying off debt.

Wait...so by carrying a balance for a month or two, particularly at the beginning of your credit life, proves to the credit bureaus that you can handle debt?!?!? Yeah, you may have paid it off the next month but...seriously???

A snippet of our exchange:
Him: "If you don't have any history of carrying a balance, they don't know that you can pay off a large bill"
Me: "So by not paying your bill on time proves that you can handle your finances and pay off a large bill...?"

Oh the insanity...

[Candace]

Home equity loan is a great way to finance a vacation!

This cannot be a common thing, can it?  [shudders]

A coworker of mine is right now on a Viking River cruise with his wife that they paid for out of their retirement savings.

[teacherwithamustache]

Me (College Counselor):  Why are you claiming your kid as a dependent on your taxes?  They would be eligible for more FAFSA money if you did not claim them.
Parent:  I need the tax deduction
Me:  That amount is a maximum of $1000?  By having your 18 year old file as an independent they would be eligible for $5500 in Pell Grants plus whatever local grants their university honors.  So unless you have a fully funded scholarship fund they should be filing as an independent.

Parent: I dont need to give Uncle sam any more of my money

Me:  SMH

[MDM]

Me (College Counselor):  Why are you claiming your kid as a dependent on your taxes?  They would be eligible for more FAFSA money if you did not claim them.
Parent:  I need the tax deduction
Me:  That amount is a maximum of $1000?  By having your 18 year old file as an independent they would be eligible for $5500 in Pell Grants plus whatever local grants their university honors.  So unless you have a fully funded scholarship fund they should be filing as an independent.

This looks great - except it appears the IRS won't allow it in most cases.  E.g., from http://www.fastweb.com/financial-aid/articles/how-do-i-become-independent-on-the-fafsa-if-i-am-under-age-24:

Undergraduate students who are under age 24 as of December 31 of the award year are considered to be dependent for federal student aid purposes unless they are married, have dependents other than a spouse, are an orphan, are a veteran or active duty member of the US Armed Forces or satisfy other very limited criteria. If a student who is under age 24 doesn’t satisfy one of these criteria, the odds of being considered independent are very slim.

Dependency status for federal student aid purposes is not the same as dependency status for federal income tax purposes. Students cannot qualify as independent merely by claiming themselves as an exemption on their own federal income tax returns, not even if they are no longer supported by their parents.

Other web pages, e.g. https://studentaid.ed.gov/fafsa/filling-out/dependency, seem to say the same thing.  Do you have a reference to indicate otherwise?

[skunkfunk]

Me (College Counselor):  Why are you claiming your kid as a dependent on your taxes?  They would be eligible for more FAFSA money if you did not claim them.
Parent:  I need the tax deduction
Me:  That amount is a maximum of $1000?  By having your 18 year old file as an independent they would be eligible for $5500 in Pell Grants plus whatever local grants their university honors.  So unless you have a fully funded scholarship fund they should be filing as an independent.

This looks great - except it appears the IRS won't allow it in most cases.  E.g., from http://www.fastweb.com/financial-aid/articles/how-do-i-become-independent-on-the-fafsa-if-i-am-under-age-24:

Undergraduate students who are under age 24 as of December 31 of the award year are considered to be dependent for federal student aid purposes unless they are married, have dependents other than a spouse, are an orphan, are a veteran or active duty member of the US Armed Forces or satisfy other very limited criteria. If a student who is under age 24 doesn’t satisfy one of these criteria, the odds of being considered independent are very slim.

Dependency status for federal student aid purposes is not the same as dependency status for federal income tax purposes. Students cannot qualify as independent merely by claiming themselves as an exemption on their own federal income tax returns, not even if they are no longer supported by their parents.

Other web pages, e.g. https://studentaid.ed.gov/fafsa/filling-out/dependency, seem to say the same thing.  Do you have a reference to indicate otherwise?

This is true. Myself, wife, and her sister have had this problem. Her parents, being small business owners, undergo much shenanigans to get their income low enough for her sister to get OLAP.

[dragoncar]

I don't know if this is myth or real, but people tend to think:  Not carrying credit card balances will hurt your credit rating.  What in the name of fuck?  If you had no debt, what the hell do you care about your credit rating for?  What logic is going on here?  "I should pay mad interest monthly so that I can borrow even more in case I ever need it?" 

Whenever the bank tells me that voluntarily lowering my credit limit (that is, I'm asking for them to put it back to sane $5000 levels because they keep jacking the limit), it could 'hurt my credit rating',  I answer, "I don't owe anything and don't plan on doing so. What do I care if it 'hurts' it?  Stab that bastard in the guts for all I care."

I was talking with a coworker today and this topic came up. His "logic" was that if you carry a balance once or twice at the beginning of your credit history, it can help give a boost to your credit initially. The reasoning is that it shows the credit bureaus that you can handle a paying off debt.

Wait...so by carrying a balance for a month or two, particularly at the beginning of your credit life, proves to the credit bureaus that you can handle debt?!?!? Yeah, you may have paid it off the next month but...seriously???

A snippet of our exchange:
Him: "If you don't have any history of carrying a balance, they don't know that you can pay off a large bill"
Me: "So by not paying your bill on time proves that you can handle your finances and pay off a large bill...?"

Oh the insanity...

Makes sense to me.  In most of the population, paying off your card every month just implies a very large salary.  But the first time that large salary person gets their hours cut and simultaneously gets a large medical bill, they might not be very responsible with the debt. 

What the banks want to see is that you can consistently pay off debt larger than your ability to pay.  I.e., how does this person act when the shit hits the fan?

It doesn't really apply to Mustachians because we all have a "very large salary" as compared to our expenses, but for the average American it makes sense.  Anyways, most of us can get a 0% APR for 12 months deal and get the benefits of carrying a balance without incurring ridiculous interest.

[MDM]

Her parents, being small business owners, undergo much shenanigans to get their income low enough for her sister to get OLAP.

OK, I give up: http://www.acronymfinder.com/OLAP.html  Guessing it is none of those, but...?

[larmando]

Thank you so much, you 5th noble gas you.  I knew about "amortization schedules", but it wasn't until you mentioned that the first payment would be exactly $250 in interest in an off-hand manner that I made the connection that THE REASON interest is such a high part of one's first payments is because you're paying interest on such a large amount.  Beautiful.  Now off to yell at my sister who had explained it to me awhile back that the banks do it "just because they want all their interest upfront" and an amortization schedule is something they make up out of thin air.

Really? I get this one all the time ("they make you pay most interest at the beginning") and people don't get why, while it's so simple... (and it's true for all debt, btw).

Also heard: "yes, property prices can go down, but *not* in this particular location, because they never have" (err...), and "by next year my apartment *will have increased in value*" (yes it might. or it might not. better not count on the fact that it will). Also "it's a bad time to invest so you better spend everything" (great idea....), and even "the stock market returned 10% on average per year so it's what it's going to do in the next 10 years" (well....).

[larmando]

Just paying 2 weeks early does not do much.

GoodStash BadStache is right.  The trick is to make 13 monthly payments in the year, not 12 - somehow.  So take 1/2 a month's payment and pay it every two weeks (so you made 26 payments, not 24).  Or take the annual amount and divide by 26 and pay that twice a month.  Or add 1/12 of your monthly payment to each monthly payment.  The details don't matter much, what matters is paying that extra month each year.  We paid off a 25 year mortgage in 19 years that way, many years ago.  Nothing else, just that.  It probably helps a bit to do it over the year instead of a lump payment at the end of the year - but a lump payment at the beginning of the year should be better.

This is what spreadsheets are for - you can set up different scenarios and see what has the best payoff that works with your budget.  Banks in different countries may calculate payments a bit differently, but if you know how your bank does it, it doesn't really matter what others do.

It's really not this complicated. The trick is to pay as soon as you have the money, as long as you don't have a "better" use for the money (better investment? higher interest debt? you need some emergency fund to sleep better at night?). That will lead to you not paying interest on that amount since the day it is lodged, as opposed to paying it and having the money sit at 0 interest (supposing that's what you'd do with the money instead). Of course if that means paying 10$ extra every months it might not be worth it (especially if you have e.g. to notify your bank via letter, in which case the cost of the stamp would be higher than the interest saved), so make sure to do it with a worthwhile sum. :)

[skunkfunk]

Her parents, being small business owners, undergo much shenanigans to get their income low enough for her sister to get OLAP.

OK, I give up: http://www.acronymfinder.com/OLAP.html  Guessing it is none of those, but...?

Oops, I mispelled it. OHLAP.

https://www.okhighered.org/okpromise/benefits.shtml

[amberfocus]

Misconception: Being "rich" or a "millionaire" equals having gobfuls of CASH.

Every single time I've mentioned that the SO and I are millionaires, I get the following response: "No, you're not, you don't have a million dollars in the bank!"

I strongly suspect that this misconception stops a lot of folks from investing. They only feel "rich" when they hold assets in cash, but they don't appreciate that while cash is an asset, not all assets are cash.