IB analysts: How much money did you get back from the IRS?

TheBull07's picture
Rank: Senior Chimp | 21

How much money did you all get back from the government in tax returns???

What types of things can we deduct and since our bonuses are taxed ~45%, should we expect to get at least a couple of k back ?

much thanks in advance.

Comments (11)

Jan 15, 2007

Yes, you should get money back at least for the first few years.

The key things to think about with personal tax efficiency are:

  • Max your 401k
  • Max your IRA
  • Make charitable contributions

With investment accounts, unless you already have a taxable brokerage account in college, you will probably just have tax-deferred retirement accounts until you get your bonus, in which case your trading habits are meaningless insofar as tax implications are concerned.

Generally, though, if you decide to realize capital gains in a taxable account, you can offset those by realizing losses (up to $3,000 per year) that reduce the tax burden from the gains.

(We could go all day on the tax implications of different trading strategies, but suffice it to say here that if you're in IB, you probably won't have time to trade actively. And in that case, a buy-and-hold mentality is much better...both so you can concentrate on your work, and because long-term capital gains are taxed at lower rates than short-term gains.)

And keep records of everything.

Anyway, I got a hair under $5,000 back my first year, and slightly lower than that last year.

Jan 15, 2007

Tirekicker, thanks for the reply. From my first year I dumped about 8-10k into my 401k, splurged a couple of k on trips/goodies and dumped the rest in an investment account with a professional financial advisor. My bonus was taxed ~45%, so what sort of deductions should I show such that that I get ~3-4K back. Moving expenses? Also, is it better to deduct 25% pretax of every biweekly paycheck to my 401k or wait till I get my bonus to max my 401k (~15k per yr). Also, can I retroactively dump 3k into my IRA via my financial advisor to show for CY 2006?

Separate question: how much liquidity should one have (ie how much should an analyst have in his checking account? 5-8K and dump invest the rest with a financial advisor?)

I know you are not my financial advisor, but appreciate any advice that you can give. Btw, I received ~$4,200 (sum of federal and state) in tax returns during my 1st year.

Jan 16, 2007
TheBull07:

My bonus was taxed ~45%, so what sort of deductions should I show such that that I get ~3-4K back. Moving expenses?

1) If you pass the income threshold, you can deduct your REGULAR IRA contributions (not a Roth) from your taxable income for the year.

2) Likewise with charitable contributions.

3) You can deduct moving expenses if you incur them yourself (i.e. your company doesn't pay them for you). This is separate from your signing bonus. And it depends where you're moving from/to...there's some minimum mileage between places (I don't know what the number is, but an across-town move doesn't count).

TheBull07:

Also, is it better to deduct 25% pretax of every biweekly paycheck to my 401k or wait till I get my bonus to max my 401k (~15k per yr). Also, can I retroactively dump 3k into my IRA via my financial advisor to show for CY 2006?

1) Time value of money should answer the first question...it's better to contribute up-front, and regularly. Both for compounding purposes as well as fiscal discipline.

2) Yes, you can dump up to $4,000 for tax year 2006 until tax returns are due this year (April 15). Gather ye rosebuds while ye may...

TheBull07:

Separate question: how much liquidity should one have (ie how much should an analyst have in his checking account? 5-8K and dump invest the rest with a financial advisor?)

Six months' of expenses saved up (beyond short term liquidity needs--rent, food, etc.) is generally a good rule of thumb. But keep as little as possible in a checking account (b/c it earns a low rate of interest, if any). Your bank should have an alternative money market account for savings of this type.

I would not recommend a financial advisor because (to address somebody else's question), they're generally not worth the fees. Index funds, ETFs, and the like, with a buy-and-hold mentality, will trump 95% of active managers' success (including tax efficiency), with 0% of the headache.

My bank requires that we keep our investment accounts at one of two places, but Fidelity is one of them and they're pretty good.

We could go back and forth all day about investment strategy, and I know full well that there are those on this forum who probably laugh at the indexing method of investing (because it's seen as "giving up" and lacks intellectual curiosity, etc.)...however, I will say that as an IB analyst, you don't have time to pick stocks for a living. And that's what it takes to be good at picking stocks--having the time, the ability, and the inclination to practice it well.

With indexing, you can be disciplined, relatively unburdened with your time, and can rest easy knowing you're putting your money to work. And you're not paying a boatload for generally bad advice from a relationship that's rife with conflicts of interest.

TheBull07:

I know you are not my financial advisor, but appreciate any advice that you can give.

Any time.

Jan 15, 2007

It seems like first year analysts should have a relatively low tax rate, no? If we start working in July we will make about $30,000 + $10,000 signing bonus for FY 2007, which makes me think that our tax rate will be in the mid-20s. It will only be in years 2 and after that our tax rates will be up around 40. So if your bonus was taxed at 45% it seems like you should get a significant amount back.

Jan 15, 2007

$30,000 salary? Who told you that?

1st years this year are making, what, $60K?

Last year's max 1st year bonus (and somebody correct me if I'm wrong) was something like $80K. And Class of 2006 should be even higher come July.

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Jan 15, 2007

ItaEU(tm)s fairly obvious that he is talking about calendar year income for tax purposes

Jan 15, 2007

Yep, my mistake.

Jan 15, 2007

Is it really worth the fees to get a financial advisor ? What is the value added ? It's not like a got a complex estate/succession planning...

I was thinking of an ETF strategy. Diversification at low cost (+low fees). 4-6 trades and your portfolio is set (buy and hold style).

Jan 15, 2007

I have been investigating this a great deal.

For new analysts (starting work July 2007):

Salary + bonus for the 6 or so months worked will be around $38,750 (+/- a few hundred) non taxed amount.

You want to optimize your W-4 so that you are not having excess money withheld from your paycheck (i.e. this is the same as giving the gov an interest free loan), however you do not want to have too little taken out (as you can be fined for this). Since the US gov has a "pay as you go" income tax system, you need to find the right balance for taxable income.

Use the IRS calculator for W-4 to determine your deductions (remember to factor in how much you think you will put into retirement accounts, interest you will deduct on student loans, etc and enter this info in the calculator). With my personal info entered in, I found that the calculator suggested I take 5 or 6 deductions. Remember, the more deductions, the less tax is withheld from the semi-monthly paycheck.

This resulted in no tax refund and no tax payments to be made at the end of 2007. This is the optimal strategy you should aim for.

For me, I calculated that my total tax rate would come to about 22% or so (this includes Fed, state, city, ss, medicare, and new york sdi taxes). A total tax bill of around $8,300 on $38,750 of income.

Yours may be different depending on your 401k contribution, student loan interest, and other credits. Remember you are still eligible for the Lifetime Learning Credit in 2007 if you paid your own tuition for winter semester 2007. In addition, moving expenses are tax deductible (reduce your income that is taxed). BTW Credits and deductions are different. The former reduces your actual tax bill, whereas the latter reduces your taxable income.

Anyway, if anyone has any strategies or further info about taxes, let me know. I am very interested in this. I have researched it quite a bit and this (above) is what I have come out with. Check out what I did, and let me know what you think. IaEU(tm)m open to criticism and comments.

PS. Remember to factor in that you have already been taxed $4,000 on our $10,000 aEUoerelocationaEU bonuses into your tax bill. So for me, this means of the $8,300 I will have to pay in taxes, I have already paid $4,000.

Jan 15, 2007

Realize that as a first year analyst, there are some sizable education credits you can take advantage of. See IRS Publication 970 for the details.

As an example, the Lifetime Learning credit allows you to deduct 20% of your education expenses, up to the first $10,000 spent. So 20% * $10,000 is a cool 2 grand. You can even take this deduction if your tuition was paid by someone else, such as a relative.

Also, don't forget about moving expenses. There is a good chance your moving expenses to NYC or elsewhere will be deductible. This is another good one, not to be missed.

If you missed either of these and you're not a first-year, remember that you can still file an amended return for any of the past three years.

Jan 16, 2007
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