The Cracker Barrel Tax Refund

On the occasional very special Thursday morning (ok, most Thursday mornings), the kids get to go to Cracker Barrel for breakfast with Dad. And on the very, very special Thursday morning (it’s actually only happened once), Lilly gets to take some of her own money and pick out a Chinese-manufactured toy from the Old Country Store.

Last week, she selected some garbage that I’ve already forgotten but the point is that it cost $4.28 and she paid with a five dollar bill, receiving 72 cents in change.

 And for the entire ride home, she beamed about her purchase. Not the item that she’d selected, but the fact that they ACTUALLY GAVE HER SOME MONEY BACK! She said, “I like paying too much because I get a cool toy and they give me money.”

My initial thought about this absurd statement was, “Well, she’s only seven. She’ll eventually grow up and learn how money works and that they didn’t actually pay her to take a toy home.”

But then it occurred to me that this is actually how a startlingly large number of adults view their tax refund.

Your tax refund isn’t a windfall profit. It’s not a bonus that you earned for being a good American. It just means that you handed the lady at the IRS cash register a $10,000 bill when you only owed $9,300, and then she gave you $700 change.

If you’ve been guilty of thinking about your tax refund as anything other than getting your change back, you’re not totally at fault. The “tax industry” has been trying to brainwash you for years. Most of the marketing for companies like TurboTax or H&R Block looks something like this:

Sure, you want to file your taxes in such a way that you pay the absolute least that you can legally pay. But this kind of marketing warps the brains of average Americans and makes them think that the tax refund is a coveted financial status symbol.

I even know some CPAs who actually make sure that their clients pay too much in taxes throughout the year, just so that they’ll end up getting a refund. The theory is that the clients get psychologically tricked into thinking that their CPA is doing a great job because they always get a nice refund.

“I’ve been working with Gertrude for years and I always get a big refund, so she must be really good. I should refer all of my friends!”

No, all Gertrude did was tell you to pay $100 for a $92 meal and then convinced you that she’s a genius because the cashier handed you back $8.

When we’re doing tax planning for people, a helpful first question to get answered is “how much did you pay in taxes last year?”

More often than not, they’ll answer with something like, “we actually got $1500 back” or “we owed $200 or so.”

No, I couldn’t possibly be less interested in how much you owed (or got back) when you filed your taxes. That only tells me how much you overpaid or underpaid the cashier. I’m interested in knowing how much you paid.

There’s a really simple way to find the answer to that question. Grab a copy of that tax return that you just filed and take a look at line 24 on your Form 1040 where it says “this is your total tax.”

Then spend some time thinking about that number. Ask yourself, “Did I get that much value from my federal government last year?” If you paid $4000 in taxes, then the answer is probably yes. For a mere $4000, you were able to enjoy all of the freedoms associated with your citizenship while being protected by the finest military in the history of mankind. And you got to watch a couple of delightful presidential debates on network TV.

If you paid $35,000 in taxes, you might have overpaid for your share of that national defense. And you definitely overpaid for the debates.

But the point for now is to simply understand that the amount of your tax refund (or the amount you had to pay at tax filing time) tells us absolutely nothing about how much you actually paid in taxes. And the first step to good tax planning is understanding how much you’ve been paying and then strategizing the best way to reduce that amount in the future.

Or you can continue overpaying for your Chinese plastic from the Old Country Store and go on thinking life is good when they hand you back four dimes and a nickel.

Guess Who: A Strategic Loss

Back in the 80s, the beloved children’s game Guess Who took America by storm. Families all across the fruited plain gathered around the kitchen table every night to enjoy hours of fun, thanks to the manufacturing prowess of Milton Bradley.

Maybe that’s a slightly exaggerated description of the game’s influence, but I sure liked playing it.

Every day when I got home from kindergarten, I’d sit down with Mom for a rousing round of questions like “Does your person wear a hat?” or “Is your person a man?” or “Does your person have a haircut that looks like they’re the type of gal who asks ‘Can I speak to your manager?’”

Until one day I did something bad. I don’t remember what it was (Mom probably doesn’t either), but she handed down a devastating punishment—no Guess Who for a week.

After suffering through the initial shock and despair of this consequence, I came to terms with my fate and just…moved on. By the time my week in Guess Who exile was complete, I no longer cared about the game.

Now it was Mom who was devastated. While successfully administering a short-term punishment for me, she’d inadvertently created a long-term punishment for herself. She’d loved our daily tradition of playing the game after school and her soul was crushed when I no longer had any interest in it.

To put this in military terms, this could be called a tactical victory and a strategic loss. The tactical (short-term, small picture) victory was successfully getting my attention with a behavior-correcting consequence. The strategic (long-term, big picture) loss was the end of a daily tradition that she loved.

You can probably come up with dozens of tactical victory/strategic loss examples from your own life. Something that seemed like a win initially, but with the benefit of hindsight, you realize that victory was actually a defeat in the grand scheme of things.

It’s also possible to suffer a tactical loss en route to a strategic victory. To illustrate this, let’s use an example from the Supreme Court.

Cases don’t just magically show up on the Supreme Court’s docket. The justices vote on which cases they want to hear, and an overwhelming majority of potential cases are never heard by the Court because there aren’t enough votes to hear the case in the first place.

Now, let’s suppose that you’re a liberal justice on a Court with a conservative majority. And let’s suppose there’s a decision from a lower court that you really want the Supreme Court to overturn. Your initial inclination would be to vote for the case to be heard by the Court. But then you realize that your ideological view doesn’t hold a majority, so if this case makes it to the Court, it would likely mean creating a long-lasting and far-reaching interpretation of the law that you don’t like.

This leads you to vote not to hear a case that you really want to hear and decide (a tactical loss) to prevent your ideological opponents from having the opportunity to create precedent that you won’t like (a strategic victory).

And, of course, the financial world is full of opportunities for tactical victory but strategic loss (or vice versa). A few examples…

- Your 401K has been doing great for the last few years (tactical victory)! However, this has caused you to lose sight of the fact that this is simply because the market has been doing great for the last few years.  You now fancy yourself an investing genius and you’ve completely lost sight of how much risk you might be carrying in your current investments (strategic loss).

 - Your IRA was only up 8% last year, but the market was up 15% and it appears your financial advisor doesn’t know what he’s doing (tactical loss). But when the market crash comes, that same account is only down 10% while the market is down 25% (strategic victory).

- You grew up poor but bent over backwards to make sure that your kids always had the fancy clothes, big vacations, and the expensive first car that you didn’t have when you were coming along (tactical victory). But now your kids are spoiled, don’t have any appreciation for wealth, and never developed a work ethic (strategic loss).

- You contribute to a Roth IRA instead of a Traditional IRA, which doesn’t give you any tax benefit this year (tactical loss). But by the time you retire, those Roth contributions grow ten-fold, and all of that money can be withdrawn tax-free (strategic victory).

So don’t get so distracted by the short-term tactical win that you miss out on your opportunity for a big-picture strategic victory instead. Playing Guess Who by yourself isn’t nearly as fun.

Home by Christmas

In October of 1950, General Douglas MacArthur promised his troops in Korea that they’d be home by Christmas.

It was an optimistic promise, maybe you’d call it foolish. The Korean War had just started that June and, as we now know, wouldn’t end until the summer of 1953. MacArthur didn’t come anywhere close to getting those boys home by Christmas.

MacArthur wasn’t just blowing smoke. He truly believed that the North Koreans were weak, disorganized, and lacking in both weapons and significant allies. So when the Chinese came marching in to aid their satellite government in Pyongyang, the game changed significantly.

MacArthur’s failure to deliver on his promise was demoralizing to the troops, but it also had serious implications when it came to having them prepared and outfitted for the cold weather.

In his book, “About Face,” Colonel David Hackworth described the situation on the ground:

“Winter had arrived but winter gear had not. MacArthur had said we’d be home before Christmas. I guess his supply people believed him, because the Chinese had caught us with our pants down, and they were summer trousers.”

Logistics wins wars. And it seems that the people managing those logistics had internalized MacArthur’s promise and took their foot off the gas when it came to preparing for the winter months. Hackworth described it this way:

“Feet in leather boots froze. Gloves and mittens were as scarce as good-looking girls. Our field jackets were as thin and protective as page one of the newspaper. We were slowly freezing to death in the bitter below-zero weather, while the Chinese, like Genghis Khan’s mighty hordes, marched on, seemingly unstoppable.”

Interestingly, this wasn’t the first time that a military force had been caught unprepared for winter. Napoleon’s foot soldiers had suffered through a brutal winter in Russia more than a century earlier, also thinking that they’d have their campaign wrapped up before the cold weather arrived. And then in World War II, the Nazis marched into Stalingrad where they endured a miserable, bloody winter that they weren’t prepared for.

There’s a lesson to be learned in these military failures. While there’s a time and place for positivity and optimism, anytime you’re planning the logistics of something (whether it’s a military campaign or your retirement), it’s important to prepare for the worst case scenario.

When discussing their retirement plans, I’ve heard people make statements that sound similar to MacArthur’s “home by Christmas” decree…

“I’ve averaged more than a 10% annual return in my 401k for the last decade. If I can just keep that up through retirement, I’ll be fine.”

“Our long term care plan is that we’re just going to take care of each other as we age.”

“I’ll be inheriting a lot of money from my mom whenever she passes.”

“We can always cut back on spending if we have to.”

“If I get to the point that I can’t take care of myself, I’ll just move in with my kids.”

“I’d rather defer those taxes until later in life because I’ll be in a lower tax bracket when I’m retired.”

You can probably see the optimism dripping from these statements. But what if that fantastic investment return you’ve enjoyed for the last decade isn’t a realistic expectation for future decades? What if your kids aren’t in a position to have you move in with them down the road—or maybe they just don’t want you to? What if something goes wrong with your mom and that inheritance you’re expecting doesn’t actually materialize?

There’s a lot that can go wrong in both military and monetary matters. Make sure that you’re prepared for the worst so that you don’t end up freezing your butt off on the Korean peninsula of retirement.

Ask the Experts

In today’s challenging and unpredictable investing environment, we feel that it’s important to consult a variety of experts about potential investment strategies. We know that you’re busy and can’t possibly seek out these experts for yourself, so we’ve done the hard work for you.

We asked each of these people the same question:

If you could invest in just one stock right now, what would it be?

Here’s what they had to say…

Donald Trump: “We have many tremendous stocks right now. Very beautiful stocks. It really is a great thing. You can invest in a very tremendous number of beautiful stocks right now in the stock market. And the stock market…a lot of people don’t know that, it’s called the stock market…but the king of the stock market called me the other day and told me he can’t believe what a great job I’m doing. Best they’ve ever seen. Many, many people are saying it’s the best they’ve ever seen. So I think buying some great stocks is a really beautiful thing to do.”

Joe Biden: “Listen Jack, when I was growing up on the hardscrabble roads of Scranton, Pennsylvania, we didn’t have stocks. We ate baloney and mustard sandwiches for lunch and that was our only meal of the day. But when Barack and I were president, we wanted to make sure that all the kids had plenty to eat. Not just stocks, er, baloney…but entire meals of food. Great big meals of food…and my friend John McCain and my old pal Sojourner Truth would come by and we’d meet up with my buddy Huck Finn and we’d take the stocks to the kids. And they were so happy. And that, my friend, is the America that I want to live in.”

Oprah Winfrey: “Everybody in this room now has a Roth IRA. We’re giving you the username and the password to your Roth IRA. DON’T LOG IN YET. Ok…now…I want everybody to log in and see if you have any stock in your Roth IRA. You get some stock! You get some stock! You get some stock! EVERYBODY GETS SOME STOCK!!”

Taylor Swift:
“I was sixteen and we had our investment club,
I thought about you every night layin’ in the tub.
But I wanted dividends, steady and slow.
You wanted rapid growth to bring in the dough.
So it never worked out and my friends said that you had to go.”

Tony Robbins: “The best stock you can buy is yourself. Who can change your life more than you? Who can be more influential at turning you into the person you want to be? Who’s more responsible for your success than you? But until you buy stock, you’ll never own stock. So go out TODAY and buy stock in the you that you want yourself to be.”

Forrest Gump: “My momma always said that stocks was for rich people and we wasn’t rich people. But Lieutenant Dan did buy stock in some fruit company and said we didn’t have to worry about money no more…”

Hope that helps. Happy investing!