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

Katie: Welcome back, Rich Girls and Boys, to the Rich Girl Roundup weekly discussion of The Money with Katie Show. I'm your host, Katie Gatti Tassin, and every Monday, we're gonna dig into an interesting money debate or dialogue. But before we do, here's a quick message from the sponsors of this segment.

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Katie: All right. Before we get into it, this week's upcoming main episode is a solo jam on investing outside of your retirement accounts. I know, please hold your applause. It's very sexy, very exciting. But we're gonna talk about why we do it, how to think about it, and some common pitfalls that you might encounter. Okay. Onto the Roundup. Henah, how's it going? 

Henah: Good. This week's question is from me. So excited. 

Katie: Yay, here we go.

Henah: The question is, and I'll give some context, “Is it better to owe taxes or get a refund from the boys at the IRS at tax time, and how can I break even?” Because several years ago your girl, more like your girl's husband, incorrectly filled out a tax form, and then I had a jolt at like beginning of November in the middle of the night and I thought, “Taxes,” and I went…it was like 4:30 in the morning… 

Katie: Your spidey senses were tingling. 

Henah: I don't know why, but I'm really glad they did. 

Katie: So funny. 

Henah: So I logged into the IRS calculator thing and I put everything in. And it was like, “Oh, you're gonna owe $8,800.” And I was like, “Huh?” And what we then did was frantically try to adjust me and my husband's taxes to take out the max and then some, to kind of recuperate a little bit. And then we still ended up with like a $5,000 tax bill. So then we started looking into, what are the retirement accounts I can try to set up to lower this even more? And then in other years, like this past year, because I was so nervous that it would happen again, I got a $5,000 plus refund. And I don't know that there's any one right answer, but I wanted to get your thoughts on one, what's your kind of school of thought on this and two, how do I do this so I can mostly break even?

Katie: You're just, you're shooting blanks. Okay. So I think there are two primary schools of thought. The first is, oh, it's better to owe a little bit 'cause it means you did not give the government an interest-free loan. 

Henah: Yeah. Yeah. 

Katie: And I think in that same vein, the tendency that people have to treat a refund when they get it like, oh, it's free money or it's found money. 

Henah: You could just @ me next time, instead of saying “people.” 

Katie: Oh my god, no, you don't do that. 

Henah:  I totally did do that this year. 

Katie: Psychologically it leads you to spending it like it's a bonus, versus recognizing that this is just your own paycheck money that you are working for that has just been withheld from you. So that's one school of thought. 

The other is that it's better to get a refund because it's a bit of a forced savings device. And it allows the average family to get a big cash infusion that they have inadvertently saved throughout the year, albeit without earning a yield, to be fair. 

So I think it's one of those areas of finance where you're kind of up against, what does the math say is the correct thing to do, which would be, you don't want a refund because you would rather have the money up front so you can invest it and put it to work for yourself, versus what's actually gonna happen in practice, and if that is a family's only savings throughout the year, they don't manage to save anything else and then get a big refund, well, it's probably a good thing that they overpaid in taxes 'cause now they actually have some cash. But I don't know that that's a situation to aspire to, if that makes sense. I think ideally you are in a little bit more control of your money than that. So I'd say those are the two kind of schools of thought. It sounds like you lean more toward, and understandably so, I'd rather be getting something back than being surprised with a bill. Yes? 

Henah: Yeah, I mean for me personally, the thing I don't ever wanna have to deal with again is that big a tax bill. The secondary benefit is that then I get the money and I could invest it over time rather than letting it sit with the IRS for a year. So that's what I would lean toward. But as close as breaking even as we can get feels like…is that possible? How do I do it? 

Katie: Well, I agree. I think that that's the goal, is to get it as close to net zero, where you're either owing or getting back just a little bit, like you are basically paying your perfect tax bill throughout the year. And obviously you wanna try to get it as low as possible if you're talking about just the personal incentives of good tax planning and tax efficiencies. So I wouldn't say my own experiences with this have been intentional, so to speak. But I almost always owe money. So… 

Henah: Maybe I shouldn't have asked this question. Anyone else? Any other personal finance expert wanna chime in? 

Katie: Here's my Cliff’s notes. But I do think that they are illustrative, so I'm gonna share them. In 2021 I owed about $5,000 because I'd incorrectly filled out my W-4 at the cycle studio where I taught. So in the W-4 I did not tell it I had other income. So they were basically withholding taxes as though that was my only income for the year And, it was a lot less than my full-time income. So I owed $5,000. Although in that instance the way that I ended up lowering the bill from something else down to $5,000 was I maxed out my HSA, which I had not done yet. And I contributed to a SEP IRA, which I had to open and fund in the March before that April. So those are accounts that I think, in the case of the HSA, at least, if it's open the previous year, you can contribute retroactively to it for the previous year. So there are a few that work that way. 

Henah: Right. But at least you had the funds set aside to fund those extra things so that you could negate that tax bill. 

Katie: Right, right. I mean, if you have no money set aside, you obviously are not gonna be able to invest to lower the bill, but you're also, I would assume, have a hard time paying the bill too. So it's a bad situation to be in if you don't have savings. But I think in that case, I just rerouted some incoming funds that probably would've just gone into a brokerage account into the HSA instead or into the SEP IRA instead retroactively for the previous year to lower the bill. 

Henah: Got it. 

Katie: That was a little bit harder in 2022 and 2023 because in '22 I owed $40,000, 'cause I hadn't filed quarterly taxes with Money with Katie income that I was earning on the side throughout 2021. 

Henah: Oops. 

Katie: And I was only paying taxes on my W-2 jobs, though crucially, I did not face a penalty because I had paid enough of my tax burden such that I didn't end up owing extra money. I think it's as long as you paid 100%, it's 100% of the previous year first, up to a certain income, and then 110% above certain income, like $120,000. Once you start getting into the six-figure range, I think you have to have paid 110% of your previous year's tax liability, but then you still would not face a penalty, I don't believe, so I didn't end up having one, and then in '23 I owed like $50 grand for the same reason as I owed $40k in '22. But importantly, although it is never fun to pay tens of thousands of dollars at once, in both cases I knew the tax bomb was coming because I knew I was not paying the taxes on that side money. So I intentionally was setting aside a lot of cash in Q4 of those years, both times, rather than investing it or doing something else with it 'cause I knew I was gonna need it in April to pay that tax bill. 

I did talk to my CPA about an S Corp, 'cause I know that this is very popular for people that have LLCs or for people that are running solopreneur-style businesses. But he recommended against it, and I actually pulled the email 'cause I was curious to remind myself. He said, “The main reason for electing S Corp status is so that you can take a limited amount as payroll subject to payroll taxes and let the rest flow out only subject to income taxes. However, I don't lean toward them. Some accountants do, because of the extra scrutiny they subject you to, because some people do not take out enough as salary and subject themselves to additional taxes and penalties if looked at by the IRS.” 

So just wanted to address that 'cause I know some people that may be facing big tax bills because they have side hustles or 1099 businesses or what have you. The S Corp is a very popular recommendation online, and so I wanted to include why I didn't end up doing that. 

Henah: Yeah, I remember you and I talked a little bit about a SEP IRA at some point 'cause you were like, “Oh, I know you have a side hustle,” and there was a very specific reason I didn't end up doing it, but it's good to kind of keep all these other things in your back pocket. You've gone through this a couple times now. So what has been your approach now in recent years with, you know that you're on W-2 status, you know you're married, all of those things. 

Katie: Well, my personal philosophy, I think, has always leaned more toward I'm okay with owing, but for the reason that when I'm using TaxAct and inputting all my W-2 or Schedule K income, Schedule K being what I'm using to report Money with Katie independent income associated with the LLC or me alone, and not the broader Morning Brew-owned business, I can see how much I owe, which then allows me to make more informed choices about things like additional contributions to a Solo 401(k) to lower my tax liability, or I think I used to use a SEP IRA; I now use the Solo 401(k) just because it is…not that it's easier but that it tends to create fewer issues for other things like Backdoor Roth IRA or… 

Henah: I think that was the reason I didn't do the SEP IRA. And I don't think I qualified as…

Katie: Yes, I know you referenced that. 

Henah: My question was when you're doing this and you log in to TaxAct, are you doing it at a certain time of year or you just kind of go in whenever and you're like, oh, that's what I'm projected to… 

Katie: Oh, good question. Well, usually I can't do it until February because I don't have a W-2 or my 1099-NECs, the non-employee compensation forms. I don't have all of that until February. So I'll go in sometime in February, plug it all in, get the landscape of, okay this is what I owe, this is what I'm declaring as side hustle income. So I know I can contribute up to 25% of my net business income to a Solo 401(k) or to a SEP IRA to wipe that off the table.

But really, I mean if you're tracking it throughout the year, you have the option to be doing any sort of business expenses. Like if you're at the end of the year and you know, okay I have a big tax bill coming, I also need to invest in the business in some way. So instead I'm gonna buy new equipment or I'm gonna hire some contractors to do some work for me at the end of the year so I can write off that income and lower that tax bill. So theoretically, if you own a small business and you're trying to do that at the end of the year, it's probably preferable, but in my case I typically will just look in February. I think, though, if you're trying to reach that net zero point, the best way to do it is to just accurately fill out your W-4s.

Henah: I mean, I thought we did. We changed it, you know, and then we kind of went through the whole process again. But…

Katie: So do you know what went wrong? Do you know what you had filled out incorrectly the first time or why you were owing $8,000? 

Henah: Yeah, so I guess it was kind of twofold. One was that we had moved and so the tax rates had changed based on our moving across different states. It was a small amount there. But then the big thing was that we had put “married” on our W-4 and so we got the maximum money back. But then I had the side hustle that I was doing and then my husband got severance from somewhere, from the previous job, that had also put “married.” So basically was not withholding enough. So then the last two years we've been putting “single” so it takes the maximum out every time. So we don't ever feel like oh we're gonna have to owe, and that has worked out well. The only thing is that obviously we're taking way less home throughout the year, and then we get a nice surprise in February, March. But I was curious, outside of me waking up and being like “Taxes!” like my tax number is wrong, was there a type of process where you would go to the IRS calculator once a quarter and say, this is what you're on track to owe versus not, and then like adjusting from there? 

Katie: Well, no, I probably would not recommend anyone's recalculating this on a quarterly basis. That's probably overkill 'cause I don't think having a net zero tax bill is that big a deal. The bottom line I think is that the IRS is looking at, assuming you are married filing jointly, your household income as just one lump sum, right. And they might be taxing some of it differently if it is 1099 self-employment income, 'cause in that case you're also paying self-employment taxes. You're paying both sides of the payroll tax for the self-employment income in addition to your federal and state tax liability. But it's looking at everything holistically. So if he got severance that was untaxed, that is probably hard to account for. I would just in that case probably have said “Okay, we know we are gonna be responsible to pay probably 25% of this back. So we gotta set that aside.” And then for your side hustle income, you can account for that in a W-4, I think in section 4C, where you can elect to have extra income withheld based on income that you're getting from another source. They can take more taxes out of your W-2 income to kind of make up for the fact that you have income coming from somewhere else, and then you're not having to file quarterly taxes on that side hustle income. 

So I would say that's probably the best way to get an accurate read, as opposed to it sounds like what y'all are doing, which is telling on the W-4, “I'm single; tax me as though I'm a single household earning this much.” I think you probably would be better served just answering the form honestly and saying, “I have a spouse who works and earns this much.” That is gonna be the more accurate outcome. 

Henah: To be fair to the IRS, I'm not doing it dishonestly. 

Katie: Well, I think you'll have a better, I think your outcomes will be more accurate. You'll probably get closer to either a small refund or a small bill than kind of treating it as though you've got two incomes that are being taxed separately. And you know, if you want to, you can always go to the SmartAsset income tax calculator, plug in your total gross income from all sources derived, with your zip code, into that calculator (we can put it in the show notes), and it'll tell you your total tax liability based on the amounts you're bringing in, where you live, your filing status, though it might be potentially short 7.65% on the self-employment income in that total, because it's only applying the employee half. It's only doing the payroll taxes that you as an employee are paying, not the other half, so to speak, of the self-employment tax that you're probably paying. So if you have, we'll say, $200,000 total between you and $50,000 of it is self-employment income, then $50k of that $200k is going to be exposed to an additional 7.65% that this calculator would not be telling you about because it's not thinking any of it is self-employment.

Henah: Okay, that's super, super helpful. I really appreciate that. And then, well, I think, given the chaos…so the last couple years have been us moving so we had to file in different states. We got married so our marital status changed, we opened up new, different retirement accounts 'cause your girl started working here, got her life together. So I think it's just been kind of a conundrum of why we've never been able to nail it. What about other people that are also moving across states like we have? 

Katie: Well, it's funny, because I think checking…I know this sounds so obvious, but… 

Henah: Have you tried Googling? 

Katie: So there's this amazing website, it's called google.com. No, I'm just kidding. So let's say you live in Texas and you're taking a job in California and you're moving to California and they're like, hey, we're gonna give you this amazing relocation package. And you're like, awesome. And then you get there and you're like, oh my god, I have to pay 10%? Going from a state that has no state income tax to a state that has high state income tax, you're really gonna feel that. So I would say…

Henah: I'm in the opposite boat now. 

Katie: I know, baby, you went from the most expensive to a more reasonable… 

Henah: The two most expensive states ever to Georgia.

Katie: Henah’s like, “I'm rolling in it.” Yeah. So there you go. That's the opposite, is you might experience the opposite someday, but I think if you're moving, checking that kind of thing ahead of time and factoring it into your decisions, it sounds obvious, but we're not talking about negligible numbers in some cases. What's the top marginal rate in California? Like 13%? 

Henah: Bro, I don't even know.

Katie: It’s high.

Henah: I literally was just like, if I take home 50% I'm happy. 

Katie: Right? So I think that you gotta think about that, and I tend to just like that SmartAsset calculator where I'll just go in there sometimes at the beginning of the year when I'm kind of doing my annual planning in January, and I never know how much we're gonna make 'cause it's so dependent on business income. But I'll just guess, like “I think it's gonna be somewhere in this ballpark; let me put that in,” to just see what is our effective tax rate, what percentage of every dollar are we keeping versus what are we paying. And then once I have a good sense for that, and you can use your previous year's tax return, too, as kind of a guide. 

There's actually a great episode we'll link in the show notes with, I think his name's Sean Mullaney. He's known as the FI tax guy and he has a great interview on ChooseFI about tax planning using your previous year's tax return that is really, really helpful and can kind of show you how that tax return can be a bit of a roadmap for where you could have potential optimization. So we'll include that. But sometimes I'll use that time to reassess, you know, where are we maybe missing opportunities, when is it potentially a good time to look at deductions that we haven’t yet, and do we think we're gonna really owe, or not so much? 

Henah: I mean, you built that Tax-Smart Investing Bundle, which I'm really excited about because I think that this is the first year that we can really optimize using that bundle to be like, hey, historically you've had to also…what's the best way to get ahead of that? Cool. This was really helpful. I think I've used the SmartAsset calculator a couple times and I find it really, really helpful as opposed to… 

Katie: That's great. 

Henah: …the IRS Calculator, which is just like plugging in and hoping that it lands somewhere annually where you want it to. I like that SmartAsset can tell you per paycheck how that affects you. So yeah, thank you. This was really helpful. 

Katie: Of course. I also think…we didn't really talk about married filing jointly versus separately, but I do think it's worth saying that I've never really understood why people file separately, because the US is like the only country where you get a tax break for being married. And so by filing separately…

Henah: Why do you think both of us got married? For tax reasons.

Katie: I made a joke about that in my vows. I was like, “This is amazing. This is gonna save me so much money.” But anyway, so I looked into it 'cause I was curious, and according to Investopedia, there's one scenario in which married filing separately may be especially wise, if you do not wanna be liable for your spouse's taxes and suspect that they are hiding income or claiming deductions or credits falsely. So basically tax fraud. Then filing separately is probably the best option because when you sign a joint return, you're basically legally saying “We are both responsible for the accuracy of this return.” 

Henah: So I'll be doing married filing single from now…no, I'm just kidding. I'm kidding.

Katie: Any tax liabilities or penalties that may apply then apply to both of you. So if you're assigning your own return instead, you're only responsible for the accuracy of that one. But in any case, we have the Tax-Smart Investing planner that Henah referenced. It's a master class that we have that if you are kind of just getting started with tax-smart investing and you find yourself making more money, and you're trying to see how the different filing statuses and/or the different accounts that you could contribute to or have access to, how that could change your tax bill, where you might wanna be Investing, that is a good resource. So we'll link that in the show notes as well. 

Henah: I have to say up front, Katie did not ask me to bring up the bundle. It wasn't even a thing that came up, but I was like, oh yeah, this is a thing that exists. So thank you. 

Katie: Amen. Thank you. All right, that is all for this week's Rich Girl Roundup. We'll see you on Wednesday, actually to talk about investing outside of your retirement accounts, aka non-tax-advantaged investing. So you're getting it from all angles here on The Money with Katie Show. 

Henah: We love to see it. 

Katie: Bye. 

Henah: Bye.