🚩 Ask the ‘Stache: Is your tax refund a big flex or a red flag?

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Also this week: the home-sale exclusion, and making sense of pre-tax vs. post-tax.  ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

In partnership with ​ Good morning! Every Saturday, we open the mailbag, pour some strong coffee, and tackle the tax questions keeping America awake at 2 a.m. Here are this week’s topics: 💰 Big tax refund or accidental savings plan? Here’s when to take a closer look at your W-4. 🏠 Selling your house for a profit may come with another pleasant surprise. 💵 Pre-tax and post-tax sound similar until payday hits. Tax Strategies 💰 The bigger the refund, the better? Photo by Sasun Bughdaryan on Unsplash ❝   I got a big refund again this year. Does that actually mean I’m doing something wrong with my withholding? A big tax refund feels like a late Christmas gift from the IRS. Free money from the government? What a time to be alive!  Unfortunately, that “gift” may just be your own money being given back to you at a much later date. While overwithholding is a common culprit, there are other suspects on the list that could be contributing to your large refund. Know where the money came from Don’t automatically assume that your refund means that too much tax was withheld. Refundable tax credits, excess estimated tax payments, and changes to your income, deductions, or family situation can all increase your refund.  Before touching your W-4, figure out where the money came from. If a refundable credit or a life change (like having a child) did most of the heavy lifting, your withholding may be perfectly fine. Is your withholding too high? But if most of your refund is because of excess federal income tax withheld from your paycheck, you probably need to check your withholding. Technically, this isn’t a tax mistake. You gave the IRS too much money, and they gave it back. Everybody’s square.  So, you don’t have to change it. Some people like getting a big refund and view it like forced savings. Keeping a little tax cushion gives you some breathing room if your income or tax situation changes during the year.  Just know there’s no extra tax reward for letting the IRS hold onto more of your paycheck. If you’d rather have that money spread across your paydays instead of waiting for the IRS to cut a check, adjusting your withholding makes sense. Before you change your W-4… Now, before you get caught up in daydreams of bigger paychecks overnight, use the IRS Tax Withholding Estimator. It looks at your income, deductions, credits, current withholding, and estimated payments to help you figure out where you actually stand.  If there’s an issue with your current withholding, you can submit a new W-4 to your employer. Easy peasy. Just make sure you don’t get too ambitious. Go too far the other way and next year’s tax-season gift could be a bill – and it may bring a surprise underpayment penalty with it.  So, a big refund isn’t necessarily bad, even if it’s because of your withholding. But it does bring up the question of whether you want your money now or later. PRESENTED BY DELL Built for the unstoppable. The Dell Pro powered by Intel® Core™ Ultra with Intel vPro® adjusts power usage based on how you work, so your battery life never slows you down. Explore More Tax Strategies 🏠 When selling your home pays off twice Photo by todd kent on Unsplash ❝   We sold our home this year for a big profit. How much of that gain is actually tax-free? If you sold your home for a big profit, you’re probably celebrating first and worrying about the tax implications approximately five minutes later. Fortunately, the IRS may look the other way on a big chunk of the profit. A big portion may be on the house If you qualify for the home sale tax exclusion, you can exclude up to $250,000 of gain from the sale of your main home. Married couples filing jointly may qualify for up to $500,000.  Remember, we’re talking about your gain, not the big selling price listed on your closing papers. And any gain above your available exclusion is generally taxable. Profit isn’t just sale price minus purchase price Your gain isn’t just the sale price minus the purchase price. Start with your amount realized (what you received from the sale after certain selling expenses) and subtract your adjusted basis.  Your basis usually starts with what you paid for the home, but qualifying improvements can bump it up. That new kitchen may have cost a small fortune, but it’s finally paying off.  Rental or business use and depreciation can make things even trickier. But the IRS throws you a bone by providing a worksheet to sort it all out.  But you still have to qualify To qualify for the exclusion, you usually have to meet the IRS’s ownership and use tests. That just means you must have owned the home and used it as your main home for at least two of the five years before the sale. The two years don’t have to be consecutive, and your ownership and residency periods don’t have to overlap.  For the full $500,000 exclusion, only one spouse has to pass the ownership test, but both must meet the use test.  There are a few other rules, too. You can’t double-dip if you already claimed another home-sale exclusion within the last two years. And this exclusion is only available for your main home – your second home or vacation beach house probably won’t qualify.   If you don’t meet all of the requirements, not all hope is lost. Certain work moves, health-related moves, and unforeseen events (like the death of a co-owner) may still unlock a partial exclusion.  So instead of assuming your big home sale comes with an equally large tax bill, do the math. If you meet the rules and your gain qualifies for the exclusion, some – or even all – of that profit could stay in your pocket.  Photo by Burst on Unsplash Every Thursday, we go to work. The TaxStache Business Edition breaks down the tax and finance topics that actually matter to business owners, from quick intros to in-depth dives. Plus book, podcast, and video recs to keep you sharp, and a weekly download you can put to use right away. If you own a business (or you’re building one), this one’s for you. Would you like to receive our Thursday Business Edition? Yes! Count me in. No thanks. Tax Strategies 💵 The paycheck perk of pre-tax Photo by JESHOOTS.COM on Unsplash ❝   My employer offers a cafeteria plan for benefits. How does pre-tax versus post-tax election actually affect my paycheck? Benefits enrollment is already loaded with enough jargon to make your eyes glaze over. Then “pre-tax” and “post-tax” enter the mix, and you can’t help but wonder who, exactly, benefits from all of this.  It’s pretty simple, really. The real difference between pre-tax and post-tax comes down to when taxes are calculated. And that timing can change how much money actually makes it to payday. Pre-tax gets first dibs A cafeteria plan (or if you want to get formal, the Section 125 plan) is what makes the pre-tax option possible. It lets you choose between taxable cash and certain qualified benefits that can be paid for with pre-tax dollars, like health coverage, an FSA, or dependent care assistance.  If you choose a qualifying benefit pre-tax, the deduction happens before certain taxes are calculated. That usually lowers your taxable wages and (in many cases) wages that are subject to FICA taxes.  Here’s a very simplified example. If you earn $2,000 and put $200 toward a pre-tax benefit, taxes may be calculated on $1,800 – not the full $2,000. At a 20% combined tax rate, that’s about $360 in taxes, or $1,440 in take-home pay. Post-tax pays the tax man first If you pay for a benefit with post-tax dollars instead, the order flips. Your taxes are calculated before the benefit cost comes out.  Using the same example as before, taxes on the full $2,000 would be about $400. After the $200 deduction, you’d take home $1,400 – about $40 less than the pre-tax route. Now for the fine print Naturally, there’s fine print because why should taxes be simple?  For many benefits, you don’t actually get to choose between pre-tax and post-tax. Your plan and the tax rules decide. And not every benefit gets identical treatment. Some exclusions affect federal income tax but not FICA, and state and local rules can differ. Some benefits may have limitations. For example, health FSAs have annual contribution limits and may have use-it-or-lose-it rules.  So, here’s the quick summary. Pre-tax means deduction first and taxes on less pay. Post-tax means taxes first and deduction second. If both are available, pre-tax usually leaves more in your paycheck.  But before you click “enroll,” check your plan’s benefit guide or reach out to HR to find out what’s actually pre-tax – and what limitations and deadlines are hiding in the fine print.  ALSO PRESENTED BY FINANCE BUZZ Hands Down Some Of The Best 0% Interest Credit Cards Pay no interest until nearly 2028 with some of the best hand-picked credit cards this year. They are perfect for anyone looking to pay down their debt, and not add to it! Click here to see what all of the hype is about. 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