Author Topic: A Few Tax Questions  (Read 3258 times)

CmFtns

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A Few Tax Questions
« on: June 24, 2015, 11:19:25 AM »
So I've read up a lot on financial stuff pretty much nonstop over the past 6 months since I came to the realization that
"Oh shit I have a real job and I'm on my own now."

It has become a bit of an obsession and its how i found MMM and this community.

However, I still feel like there are a few puzzle pieces missing to fully understand how to be completely self-sufficient in handling my own finances... especially relating to understanding taxes. So I'm just going to throw out a few very specific questions that I have had a hard time finding through this forum or google searches. Please forgive me if any of these have already been answered.


1) Are Standard Deduction, Personal Exemption, 401k Contributions and IRA Contributions exempt from all taxation (Federal Income tax, Social Security and Medicare)?

2) How do you determine if IRA contributions or what percent of them are Deductible? (I know there are calculators and it's based off income & enrollment status in other retirement accounts but I want to understand how it is calculated)

3) Are there any other major Tax deferment or avoidance methods that I am missing besides those mentioned above and things like tax breaks for children/dependents or FSA medical spending accounts?

4) If I change my 401k contribution percent midway through the year will my federal witholding be recalculated based on my new expected taxable income? or is that dependent on the specific companies payroll? Lets just say I haven't contributed to 401k for the first 6 months of tax year then I contribute a huge amount to max it out in next 6 months. Does my federal witholding go down to almost zero in second half of year since my new expected taxable income is 18.5k lower or does it stay the same and I get a huge tax return?

5) I had a bonus (which i received only 2/3 of) and it was explained to me it was taxed differently (25%)+med+ss because it's a "supplemental wage"but is it taxed the same as other income come tax time? (Do i get a tax return on that bonus to make it taxed the same % as my other income that is not taxed 25%)

6) Can I rollover a 401k to a Traditional IRA like once every 6 months or once a year if I prefer money to sit in an IRA investing vs my 401k?

Thanks ahead of time
« Last Edit: June 24, 2015, 11:29:39 AM by comfyfutons »

Cheddar Stacker

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Re: A Few Tax Questions
« Reply #1 on: June 24, 2015, 11:33:08 AM »
1) Are Standard Deduction, Personal Exemption, 401k Contributions and IRA Contributions exempt from all taxation (Federal Income tax, Social Security and Medicare)?

No, just federal and state. FICA (SS/MED) comes out of gross earnings. There are very few things that are exempt from those taxes when you have actual earnings from a paycheck. The few exceptions I can think of are Medical/Dental deductions for your portion of the premiums, and HSA contributions deducted from your paycheck.

2) How do you determine if IRA contributions or what percent of them are Deductible? (I know there are calculators and it's based off income & enrollment status in other retirement accounts but I want to understand how it is calculated)

You can deduct a Traditional IRA contribution if your income is below a certain threshold. See the link below for further details:

http://www.paychex.com/a/d/accounting/CCH_Fed_Facts_and_Figures_2015.pdf

3) Are there any other major Tax deferment or avoidance methods that I am missing besides those mentioned above and things like tax breaks for children/dependents or FSA medical spending accounts?

HSA
FSA
529 plans for kids college.

4) If I change my 401k contribution percent midway through the year will my federal witholding be recalculated based on my new expected taxable income? or is that dependent on the specific companies payroll? Lets just say I haven't contributed to 401k for the first 6 months of tax year then I contribute a huge amount to max it out in next 6 months. Does my federal witholding go down to almost zero in second half of year since my new expected taxable income is 18.5k lower or does it stay the same and I get a huge tax return?

It will go down based on your new expected taxable income. If you begin on 7/1 and max out the $18K limit, so $3K/month, your net paycheck will only change about $2,250/month assuming you're in the 25% tax bracket. This is because you will not pay federal (or state) taxes on this income now, you will pay taxes on it when you withdraw it from your 401K/IRA.

5) I had a bonus (which i received only 2/3 of) and it was explained to me it was taxed differently (25%)+med+ss because it's a "supplemental wage"but is it taxed the same as other income come tax time? (Do i get a tax return on that bonus to make it taxed the same % as my other income that is not taxed 25%)

It all goes into your return to determine your refund/balance due. It will all go into taxable income, which is what ultimately determines the % of tax you will pay on it. The more tax deferral you do, the lower that tax % will be.

CmFtns

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Re: A Few Tax Questions
« Reply #2 on: June 24, 2015, 11:38:30 AM »
thanks for the answers cheddar =)

BTW that paychex chart is freaking amazing
« Last Edit: June 24, 2015, 11:42:52 AM by comfyfutons »

MDM

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Re: A Few Tax Questions
« Reply #3 on: June 24, 2015, 11:41:37 AM »
1) Are Standard Deduction, Personal Exemption, 401k Contributions and IRA Contributions exempt from all taxation (Federal Income tax, Social Security and Medicare)?
All of those reduce your federal income tax but do not affect SS & Medicare.

Quote
2) How do you determine if IRA contributions or what percent of them are Deductible? (I know there are calculators and it's based off income & enrollment status in other retirement accounts but I want to understand how it is calculated)
http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

Quote
3) Are there any other major Tax deferment or avoidance methods that I am missing besides those mentioned above and things like tax breaks for children/dependents or FSA medical spending accounts?
There are some.  You might buy an old (e.g., for tax year 2014) copy of TurboTax, TaxAct, etc. and enter what you expect to have for 2015.

Quote
4) If I change my 401k contribution percent midway through the year will my federal witholding be recalculated based on my new expected taxable income? or is that dependent on the specific companies payroll? Lets just say I haven't contributed to 401k for the first 6 months of tax year then I contribute a huge amount to max it out in next 6 months. Does my federal witholding go down to almost zero in second half of year since my new expected taxable income is 18.5k lower or does it stay the same and I get a huge tax return?
Withholding is usually done specific to each paycheck, and assuming that paycheck amount will become your annual income.

Quote
5) I had a bonus (which i received only 2/3 of) and it was explained to me it was taxed differently (25%)+med+ss because it's a "supplemental wage"but is it taxed the same as other income come tax time? (Do i get a tax return on that bonus to make it taxed the same % as my other income that is not taxed 25%)
An amount was withheld at 25%, but your tax owed will depend on your overall income for the year.

You can also look at tools such as the case study spreadsheet (see link in the case study sticky), https://turbotax.intuit.com/tax-tools/calculators/taxcaster/, etc.

In sum, pretty much what CS said.

Cheddar Stacker

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Re: A Few Tax Questions
« Reply #4 on: June 24, 2015, 11:44:59 AM »
thanks for the answers cheddar =)

BTW that paychex chart is freaking amazing

You're welcome.

In sum, pretty much what CS said.

Always good to have a second opinion though. As you know, I make mistakes and overlook the obvious sometimes.

On top of MDM's recommendation for turbo tax, there's the taxcaster which is helpful to play with:
https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

CmFtns

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Re: A Few Tax Questions
« Reply #5 on: June 24, 2015, 11:52:25 AM »
6) Can I rollover a 401k to a Traditional IRA like once every 6 months or once a year if I prefer money to sit in an IRA investing vs my 401k?

I also edited in a 6th question at the end that I forgot... You mind answer that too real quick?
thanks

Cheddar Stacker

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Re: A Few Tax Questions
« Reply #6 on: June 24, 2015, 12:02:03 PM »
6) Can I rollover a 401k to a Traditional IRA like once every 6 months or once a year if I prefer money to sit in an IRA investing vs my 401k?

I also edited in a 6th question at the end that I forgot... You mind answer that too real quick?
thanks

It depends on the plan. Check with HR and the 401k plan administrator (TPA). I can't. It's called an in-service distribution.

Zaga

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Re: A Few Tax Questions
« Reply #7 on: June 24, 2015, 12:19:21 PM »
6) Can I rollover a 401k to a Traditional IRA like once every 6 months or once a year if I prefer money to sit in an IRA investing vs my 401k?

I also edited in a 6th question at the end that I forgot... You mind answer that too real quick?
thanks
No, a 401-K stays with your current employer until you leave that job, at which point you can rollover the balance.

This can be a disadvantage in some circumstances.  Like my DH had a 401-K with really high fees.  We maxed it out anyways because the tax benefit (25%) far outweighed the fees (1.41%/year).  2 years later he got a new job and we rolled over the balance to his IRA with low fee funds.  I personally think it was worth paying 1.41% for 2 years to save 25% on the contributions!

CmFtns

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Re: A Few Tax Questions
« Reply #8 on: June 24, 2015, 01:49:44 PM »
No, a 401-K stays with your current employer until you leave that job, at which point you can rollover the balance.

This can be a disadvantage in some circumstances.  Like my DH had a 401-K with really high fees.  We maxed it out anyways because the tax benefit (25%) far outweighed the fees (1.41%/year).  2 years later he got a new job and we rolled over the balance to his IRA with low fee funds.  I personally think it was worth paying 1.41% for 2 years to save 25% on the contributions!

Yea I was just wondering about that. Luckily my 401k plan has some good options theres a sp500 tracking index that is .05% expense ratio... Of course most people probably are in the actively managed option for fees in the 1% range

Zaga

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Re: A Few Tax Questions
« Reply #9 on: June 24, 2015, 03:19:45 PM »
No, a 401-K stays with your current employer until you leave that job, at which point you can rollover the balance.

This can be a disadvantage in some circumstances.  Like my DH had a 401-K with really high fees.  We maxed it out anyways because the tax benefit (25%) far outweighed the fees (1.41%/year).  2 years later he got a new job and we rolled over the balance to his IRA with low fee funds.  I personally think it was worth paying 1.41% for 2 years to save 25% on the contributions!

Yea I was just wondering about that. Luckily my 401k plan has some good options theres a sp500 tracking index that is .05% expense ratio... Of course most people probably are in the actively managed option for fees in the 1% range
If you have that option, then why rush to move it?  You're golden!