The Tax Preparation Blog

Question: Using HR Block’s tax estimator, when it asks for the amount of federal tax you’ve paid?

in 2008, should you type in the whole amount of federal taxes you’ve paid (social security, medicare, general withholding) or should you exclude the social security? It is making a big difference in the estimation of how much we should receive back. If we include the SS, it says we get back $5,000ish. If we don’t include it, it says we’ll get back $700ish.

Answer: Do not include SS, medicare, etc. Only direct income tax withholding by the Federal government should be put on that line (do not include state income tax).

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Question: I don’t have enough cash available. Should I sell stock and pay gains tax to fund a retirement account?

I have a savings related question that has some tax implications and feel like I have a couple options:

1. Sell off stock and pay capital gains tax now (long term status but significant gain) to contribute to 2 Roth IRAs. This could yield up to 2K in taxes immediately (around 15% + 10% state CA)

2. Sell and contribute to a regular IRA to offset current taxes (though all my IRAs are currently Roth).

3. Just set aside the value of stocks in a non-tax deferred account.

Does one seem obviously better or is it mostly just personal preference?

Answer: As long as you’re in control, you’re in a good position. You should think about selling off investments BEFORE you get desperate. When you’re desperate, you’ll sell at whatever price you can get, and your losses might be significant. Your goal is to sell when you choose, not when your circumstances choose.

An IRA is just another investment. The only good thing about it is that you get to deduct a small amount from your taxes. If you’re married and low income, this is GREAT because you can get up to 50% of your investment back in the form of a tax refund (see “savers credit” chart). You will never get a return like this from any investment. If you’re not in that golden 50% zone, you might get only 20 or 10%. Not bad, just not the best.

When you’re thinking about retirement, don’t forget about being debt free and at least partially insured. That means no more credit cards and PAY OFF THAT HOUSE! If you don’t own, you’re stuck with rent for the rest of your life, and you have progressively less ability to pay it. If you owe on your house, you’re better off selling your stock to pay that before you put it in your IRA.

(NEVER EVER EVER invest or sell an investment just for tax purposes. Tax planning is important, but it’s always secondary. Your real gain or loss is always the primary issue, and taxes or tax savings is only a small percentage of that and just a small consideration.)

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