Category Archives: Taxes



Could March Madness Brackets and Tax Brackets be Merged into One?

Tax Bracketology

Taxes are complicated.  Last year, the federal tax code stood at 3,951,104 words.  The instructions alone for the 1040 form were 206 pages long.  People spent an average of 15 hours complying with the 1040 “long” form.  It’s no wonder so many people choose not to do their own taxes and outsource the work to tax accountants who are experts at wading through the deep swamp of rules and regulations.

On the other hand, it only takes a few minutes to fill out a March Madness bracket.  I probably spent ten minutes on mine this year.  Others may spend longer depending on how Beautiful Mind they want to get.  Some might just be happy with a 30 second random blitz of team picks.  The beauty of the NCAA Final Four is anything can happen.  Any team, no matter how good they are, can lose a game on a any given day.  All it takes is one loss by the team you picked to win it all, and your bracket is busted.

Taxes also have brackets.  However, these brackets are used to determine what percentage of your income you’ll pay to the IRS.  Here the tax brackets for 2014:

2014 tax brackets
Courtesy of BankRate.com

The culminating event of college basketball coincides perfectly with the tax season.  If only there were some way of combining the simplicity and fun of picking the Final Four with the complexity and pain of paying taxes.  Well, I think there’s a way to do it.  Here’s how it would work:

  1. Before the tournament begins, fill out your bracket and submit a copy to the IRS, along with your income from last year.  How far your picks go in the tournament will determine which tax bracket you end up in.
  2. Everyone will start off in the 30% tax bracket.  If any of your picks advance out of the first round, your tax bracket drops to 25%.  Then, if one of your teams makes it past the second round and into the sweet sixteen, your tax bracket goes down to 20%.  As the tournament progresses and your teams advance further, your tax bracket will continue to drop.  If you’re lucky enough to pick the winner of the whole thing, you’ll end up paying no taxes at all!
  3. Once the tournament is over, the IRS will send you a bill based on how your bracket did.  Just send a check back to them and you’re done!  No other deductions, no complicated tax forms to fill out, just one simple March Madness bracket.

It makes total sense to combine the tax brackets with March Madness brackets.  This simple system would require no complicated IRS forms, or digging up obscure tax deductions.  The tax form would go from 206 pages to one page.  It’s the nearly perfect combination of two great American Spring pastimes.  The only thing missing is the incorporation of the start of baseball season.

What if the March Madness brackets and tax brackets were merged into one?  Could this be the solution to our country’s tax mess?



The President May Change the Rules for Your Roth in 2015

Do you have a Roth IRA?  If you do, you probably already know a Roth is a retirement savings tool that lets you withdrawal your savings tax-free…as long as you follow a set of rules laid out by the IRS.  For example, you can only contribute to a Roth if you’re married and make less than $191k per year (less than $129k per year if you’re single).  You also may only withdrawal money from your account if you’re older than 59 1/2 (with a few exceptions).

Not too bad, right?  Well, now there could be a couple new gotchas to be aware of.  According to this MarketWatch article by Andrea Coombes, there are two new proposals President Obama could soon sign into law.  The first would require Roth owners to take what’s called a Required Minimum Distribution.  Basically, every year after you reach age 70 1/2, the IRS requires you to withdrawal an increasing percentage of your account balance.  Take a look at this calculator to see what your RMD would be at any particular age.  If you don’t take the required minimum distribution, the IRS can hit you with a 50% excise tax on the amount you failed to withdrawal.  By the way, this rule already exists for traditional IRAs and 401ks.

The second proposal ready to be signed into law would require your heirs, upon your death, to completely empty your Roth IRA account within five years.  Currently, your heirs can extend their withdrawals over their entire lives.

So, what does all this mean for you?  Well if you’re not contributing to a Roth IRA and never plan to in the future, not much.  But, if you’re an avid Rother like me, you may have to tweak your retirement plans.  A Roth may no longer be the right choice for leaving an inheritance and you may have to withdrawal more money in retirement than you originally anticipated.

Roth IRAs are a great savings tool, but be aware that the rules to play the Roth game aren’t set in stone.  They can change with the flick of a politician’s pen.  Consider keeping a tax account handy to help you keep up with it all.



Tax Deductions You May Have Forgotten to Claim

Yesterday was tax day.  Hopefully you remembered to file.  If you didn’t, it’s not too late.  Get on the internet and start filling out the paperwork!  Of course you might owe some extra penalties and late fees, but it’s better than ending up in jail like Wesley Snipes or Al Capone.

Whether or not you remembered to file your taxes, Ashe Schow from the Washington Examiner has put together a list of deductions you probably didn’t know you could take.

Obviously, gambling losses are tax deductible.  You certainly can’t expect to pay taxes on any hard-earned money you’ve left in Vegas.

I like that the IRS specifically mentions that you can’t deduct illegal operations or treatments.  You wouldn’t want criminals accidentally reporting their black-market smuggling businesses to the federal government.

My favorite is the clarinet lessons.  I thought the only cure for a child’s overbite was a set of braces.  If more parents knew about this, there would be a lot less braces and a lot more clarinet players.

Now if you forgot to file your taxes this year and the IRS does end up filing charges against you for tax evasion, it’s not the end of the world.  According to the Washington Examiner article, your legal expenses would be tax deductible.



No More Taxes…For At Least 10 Months

Woohoo!  Mrs. Pennypacker and I survived another tax season.  Our tax returns have been processed and we ended up with a net refund of about $100.  I say net because we ended up writing a check to the IRS for our Federal taxes and getting a refund check for our state taxes.  I’m not sure exactly why it ended up like this.  It always seems like a game of Go-Fish trying to get the withholding just right.  But, it looks like we guessed right last year and we’ll probably keep the withholding the same for this year.

So, now that we’ve received our refund of $100, what are we going to do with that money?  That’s easy.  Put it towards our mortgage.  We’re in the middle of a push right now to try to get our mortgage balance down to half of the original loan amount by June.

I’m sure lot’s of folks would think we’re crazy.  They would rather treat their tax refund like lottery winnings and go on a shopping spree.  Maybe buy a new car, a new TV, a new sofa, or all three.  Not us.  See, a tax refund is just the state or federal government saying, “Oops, we took too much in taxes from you last year.  Here’s your money back.”  It doesn’t exactly feel like we won anything.

Also, we have predetermined savings goals.  We decide how we’re going to spend our money before we actually have it.  So, even if we did win the lottery, or the Billion Dollar Bracket Challenge (which I didn’t enter because the odds of winning are about 1 in 9 quintillion. and I didn’t feel like giving my phone number out so Quicken Loans can try and sell me a loan), we would still just go right down the list and check off each of our financial goals.

Now you may have noticed it’s March and taxes aren’t due until April 15th.  If you’re a proud procrastinator, you’re probably wondering why we finished our taxes so soon.  Well, Mrs. Pennypacker and I like to get things done as early as possible.  We’ve learned that too many things can and do go wrong when you wait until the last minute.  Frankly, I would’ve loved to turn in our tax returns earlier, but we had to wait until mid-February until we received all the necessary forms like W-2s and 1099s from our banks and employers.  Anyhow, we’re done.  And, we’ve bought ourselves another 10 months of freedom from those wonderfully user-friendly tax forms.



Tax Refund Bad, More Take Home Pay Good

This time of year I find myself cringing…It’s tax season and that means ads start to appear on TV trying to convince you to spend your tax refund on everything from a new car to a new mattress.  It’s as if the annual government lottery has come to town and everyone is a winner.  The only question is, where will you spend your winnings?

Sadly, the only thing people are “winning” is their own money.  The reason folks get a tax refund is if they told the government to withhold too much money from their paychecks last year.  Essentially, they are giving the government an interest-free loan.  I don’t know about you, but I could think of better things to do with that money than letting the government hold on to it for a year.

So, how much of a refund is okay?  You ought to be aiming for as close to zero as possible.  If you’re expecting a big refund this year, it’s not too late to change your withholding for next year.  You just need to ask your HR department at work for a W-4 form.  Unfortunately, the IRS does not make this form very straight forward.  I would use a W-4 calculator such as the one provided by TurboTax.  If you’re uneasy about correctly filling out a W-4, don’t be afraid to seek the advice of an accountant.

And now we come to my personal W-4 debacle.  At the beginning of this year, my day-job company changed the pay period from monthly to bi-weekly.  No big deal, right?  Well, for some reason it took until today to realize that I’ve been letting the government withhold too much of my check.  See, I had specified that a specific additional amount of money be taken out of every paycheck.  Well, when the pay period went from monthly to every two weeks, that dollar amount stayed the same.  So instead of taking out say an extra $100 every month, the government was taking out an extra $100 every two weeks!  Not good. Needless to say, I will be giving my HR department a new W-4 form tomorrow.

Has anything changed at your work that might affect your withholding amount?  Maybe a raise, a bonus, a pay cut (I hope it’s not this one), or a change in pay period like me?  Make sure you get it straightened out sooner rather than later.  Thankfully, it’s only February.  So, I have the rest of the year to make up for my oversight.