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Rookie Questions About Cds And Taxes....

lostsoul | Apr 14, 2019 | 4 posts since 2019

Hello All,

I'm new to all this but have hit this site for many months looking at rates. I finally gave up waiting and thinking rates would go up higher but looks like the Feds gave up. Last week I finally put my money into Unitus 3 year @ 3.5. I split the money up into 2 CDs just in case I need to break one. When I set it up I "assumed" the dividends would be put into the regular saving account they make you setup. I figured I would take the monthly dividends and ACH it back to my CIT account making 2.4%. When I talked to the guy at the bank though he told me the Dividends stay into the CD until it matures thus making the 3.5%, BUT IF I wanted they would put it into the savings. Is this the normal and preferred way?

Now here is the big question. Taxes. This money I used for the CD is from an inheritance. Im keeping it all separated from any joint account with the wife. From my understanding every year no matter the term of the CD I will receive a 1099-int form from the banks no matter if its a savings or CD account. For some reason when I talk or ask my Tax lady I cant seem to get a simple answer on how to keep this separate. Do I 1) some how have them pull money for taxes out of the CD account/? maybe take a % each month from the dividends? 2) or wait till the end of the year. Get the 1099-int and from that I can have them tell me what the exact tax is on that CD account and pay for that separately?

Thanks for any help you can offer ...

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Answers

Tegan | Apr 14, 2019 | 7 posts since 2019

CD interest is added onto your income for taxes. If you don't want to claim it on a joint return, you can file separately.

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glasses | Apr 14, 2019 | 10 posts since 2019

If the CD is under your name and social security number, the interest will be considered your income no matter where the original money came from. The tax on it will be just the same as if you had been paid that money from your employer. You can figure the tax on it by multiplying the interest amount by the tax bracket percentage that your total income puts you in. You can't just choose the income from that CD to be put into a separate tax return. Either you file entirely jointly or entirely separately, not some of each.
Depending on how much interest you are receiving, you may have to make quarterly estimated tax payments in order not to have a tax underpayment penalty when you file next year.

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lostsoul | Apr 14, 2019 | 4 posts since 2019

Thanks for the info,. we have always done joint taxes, but stuff like this was told to keep separated "just in case". No one likes to think things can go bad but they do. (did in parts of my family already). Keep things separated in its own account. That part is easy, but its the confusion of how to separate taxes but just for that little amount. Of course they make it sound simple but it doesnt seem that way. Most say to file separated especially with a family makes things worse and cost you more( plus hard to explain that to the wife. lol). I will be making a good amount in dividends that will need to be taxed just not sure how to setup the quarterly tax payment. Sorry to sound dumb about it but is it something I just call the bank and tell them to take out a certain amount? The family knows of the inheritance, its not a million, but enough to work on a very late retirement/ safety fund.

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glasses | Apr 14, 2019 | 10 posts since 2019

You can make deposits to the IRS through their website: eftps.gov
Or, you can increase the amount that your employer takes out of your paycheck for withholding. That will result in a smaller take-home amount, but it will ensure that the taxes are being paid in a timely manner.

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QED | Apr 14, 2019 | 97 posts since 2013

You did not provide your state of residence. When it comes to keeping things separate, as between husband and wife, your state of residence is EVERYTHING!! This is because your "just in case" scenario will be 100% governed by state law, and there are substantial differences in state law which could impact you big time should "just in case" eventuate.

As for your Federal tax filing, you will need to file separately and find a way to explain that to your wife that does not involve "just in case". Good luck with that. Ditto on your state returns. I suppose with a joint return, if your wife just signs without actually reading the return, you might have a chance to get away with it.

Another approach entirely, and I'm certainly not suggesting this, would be to use the money to buy hard assets of some sort, gold or silver for example, then squirrel away your gold in a safe deposit box whereof you are sole owner and have the only key.

Probably your best solution would be to talk to a lawyer in your state, who will know the laws of your state. Present the funds separation problem to your lawyer and follow his or her advice. If your concerns regarding "just in case" turn out to be justified, checking in advance with a lawyer could save you an absolute fortune!

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Tegan | Apr 14, 2019 | 7 posts since 2019

Don't forget about your state taxes, you may be required to pay withholding (estimated taxes) with them as well.

--In my state if you owe $200 or more in tax on income not subject to withholding (like cd interest) you have to pay estimated tax. -It's not fun, but it's good to be aware of.

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RickZ | Apr 14, 2019 | 87 posts since 2010

Since it's difficult to estimate exactly how much you'll owe in the current year, both the IRS and state governments have established safe harbor rules. The U.S. estimated safe harbor rule has three parts:

If you expect to owe less than $1,000 after subtracting your withholding, you're safe.
If you pay 100% of your tax liability for the previous year via withholding and estimated quarterly tax payments, you're safe. If your adjusted gross income for the previous year was over $150,000 then it's 110%.
If you pay within 90% of your actual liability for the current year, you're safe.

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me1004 | Apr 14, 2019 | 939 posts since 2010

You seem to think the money you pay for the taxes owed must come out of that CD. No, it does not matter where that money comes form (other than from a legal source, of course). You do not have to get that tax money out of the interest payments, you can pay it from any money you want.

You seem to be thinking of this in terms of withholding taxes, which come out of your paycheck. No, that is not how it works, you do not have to “withhold” from the CD account. You simply pay what you owe, it makes no difference what account hat money might come from.

The 3.5% interest you are getting is APY — Annual Percentage YIELD. (That is a good rate these days, wish I could get that CD.) That yield comes from compounding of the interest as it accrues, giving you interest on interest. Your rate is something lower, depends on frequency of compounding, whether daily (that’s the case most often), monthly, quarterly, whatever. Some banks offer “simple interest,” which involves no compounding, the rate and APY are the same.

QED is right about the state you are in making all the difference about separation of the money. The spouse also might automatically have claim to 50% of EVERYTHING, including that account, if there is no prenuptual; most states in the West, once under Spanish rule, are common property states with that 50-50 rule. Simply having money in a separate account under your name only does not necessary protect it. This can get complicated, you would be best talking with a professional, and I’m not sure your “tax lady” is the right one for that kind of discussion.

Yes, the routine for accounts is to pay the interest into the account. But you can most often opt to have it paid out to you, as you seem to want to do but maybe for confused reasons.

Your estimated taxes must be paid quarterly to the feds, April, June, September. and January; it might be a different time frame for your state (for instance, in California it is April, June and January, and different percentage due each time — no Sept. payment). But if you are trying to keep things separate — and as has been posted here, that might not even be possible for the one account (putting it in a trust might make a difference, don’t know) — you likely will have complications in even calculating how much estimated tax payment you owe. Again, you are asking a far more complicated question than you realize, there are details and complications all over this.

Yes, you will get a 1099 in Jan-Feb telling you how much you earned at that bank or credit union.

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lostsoul | Apr 15, 2019 | 4 posts since 2019

I do live in California and know everything is suppose to be 50-50 but some guys I know it was more like 20-80 against them. lol From everything I read and heard inheritance even in this crazy state is untouchable unless you co-mingle it. Unfortunately, taxes are not really brought up which it seems there are not many options and has complicated things. I guess I was trying to find an easy solution without throwing up red flags and causing drama. Trying to be a good steward of the funds but sometimes its seems easier to just buy the new corvette and give up. The wife or IRS will get you one way or the other... Anyways, thanks all for helping me understand the process better. I have not had a CD since I was 5. So for now I'm locked in for 3 years and dont plan to take any monthly dividends out. Have Emergency fund set and 401K going so its nice to have another back up.

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AnnO | Apr 15, 2019 | 129 posts since 2018

It would be easier to prevent co-mingling if you change the CD's setup to pay out the dividends during the term (monthly/quarterly/annually, whatever the bank offers) so you can use a portion of those funds to pay the taxes. Otherwise, unless you keep all your other finances separate, you will be paying the taxes on it with 'shared' funds.

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me1004 | Apr 15, 2019 | 939 posts since 2010

50-50 is simply where the determination of the split starts. And child support will override most other considerations, so the one who gets the children gets a LOT of extra for "child support" -- sometimes making for the 20-80 you note and plenty more for years to come. But separating the money will not lower what the one must pay for child support.

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QED | Apr 15, 2019 | 97 posts since 2013

At time I wrote my response, above, you had not yet revealed you live in CA. I would now tell you, in my view, that is close to being a worst case outcome, given your concerns.

In light of your CA residence, I want to double down on my earlier counsel that you consult a lawyer. You absolutely need to speak with a CA lawyer regarding the "just in case" scenario you yourself mentioned. It's a clear, self-evident, no brainer.

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