The Monty Hall Problem

This is a probability problem which most people get wrong. Monty presents three doors. Behind two doors there are Goats. Behind the other there is a New Car.

You are instructed to choose one door. After you choose, Monty opens one of the remaining doors to show you a goat and then asks if you would like to trade the door you originally chose for the remaining door.

Most people believe that the probability of winning the car are the same whether they trade or not. Please give this some thought before you continue reading.

 

 

 

In actuality the odds are twice as good if you make the trade.

There have been lengthy discussions by many intelligent people. The problem finally being put to bed by running a computer simulation which show that trading is the correct choice.

My view on this is simple. This problem is a sleight of hand which confuses people. The sleight of hand is showing that there is a Goat behind one of the remaining doors. Here is why.

How many doors would you have to open to guarantee that you would find a Goat? There is only one car so if you open two doors there has to be a goat behind one of them. Therefor opening one of the two doors to show a goat is MEANINGLESS. It changes nothing in the problem. It is just the same as if Monty had said “behind one of these doors is a Goat”.

Since exposing the Goat is meaningless let’s dispense with it and revisit the problem.

This time you chose one door and Monty asks if you would like to trade your door for the remaining two doors. At this point nobody should have a problem reaching the correct decision. By choosing two doors out of three you are twice as likely to find the Car as you would with only one door.

 

Now you can all sleep at night.

Why do people owe the IRS? Identity Theft.

Identity Theft is a Big Deal with Billions of dollars per year being paid out in fraudulent refunds.

So you file your tax return and everything seems fine. What you don’t know is that someone already used your Social Security number and filed a tax return requesting a large refund. They fabricate the income and withholding amounts.

This is what happens next.The IRS compares the income that is reported to them (W-s & 1099) with what was reported on the tax return (The fraudulent tax return since it was filed first).

The IRS accepts ALL of the income claimed on the return but disallows the withholdings. Then they add all of the income and withholdings that were reported to it and send you a form CP-2000 pointing out the discrepancy and showing how much you would owe if the information is correct.

How much will you owe? Let’s assume that you had correct withholding and wouldn’t have owed any money. The CP-2000 will show you owe taxes on the fictitious income declared on the fraudulent tax return. Then you will owe the amount of the Refund. Then you will owe penalties for not having paid them amounts their records show you owed.

Why do people owe the IRS? Failure to file

What happens when you fail to file your tax returns?

Every year the IRS receives W-2s and 1099s representing wages and other incomes which you have received. The IRS can use these income amounts to prepare a Substitute for Return.

If you are single, receive a W-2, use a use a Standard Deduction and have no Capital Gains then the Substitute for Return might agree with the return you should have filed. However…

If you have kids, if you would itemize your deductions, if you have sold property or stocks, your return will show you owing substantially more than you should.

To explain…If you sold your home and don’t file your tax returns, the IRS will count the sales price as Net Income! There will be no cost basis or exemption.

Why do people owe the IRS? Self Employed part 2

So the Self Employed can owe the IRS because they didn’t make sufficient Estimated Tax payments.

The Self Employed use a Schedule C to declare their income. Users of Schedule C are more likely to be audited than people who are paid with a (W2).

When your Schedule C is audited the IRS wants documentation to prove your business expenses. If you haven’t kept good records then expenses will be disallowed and your net income and tax liability will go up.

This means the IRS will think you owe them money that you really don’t, but if you can’t prove it they will take steps to collect.

Retirement accounts

I’m always asking people if they are saving for retirement. Sometimes they say they’re invested in an IRA or 401k. Many of them think that those are investments and don’t realize they are just tax free vehicles(no tax consequences while the funds remain in the box).

Simply put there are two type of tax free vehicles: one where the money goes in before it is taxed and one where it goes in after it is taxed.

If the money went in before being taxed then it comes out  as regular income. If the money has already been taxed then it comes out tax free (unless they change the tax laws).

One idea is to have both tax deferred and after tax retirement accounts. This way you can take advantage of some tax savings up front and still keep you tax burden low during retirement since the regular income amount will be low.

Money is not important

Money is not important. It’s the lack of money that is important.

If you make enough money to pay your rent/mortgage, pay for food, utilities, clothes, cars, insurance, etc. If you can afford to fix things when they break and go to doctor when you’re sick then you have enough money. How would your life be meaningfully different if you made twice as much? Bigger house? Newer car? Nicer clothes?

If you don’t make enough money then things are very bad indeed. And many things end up costing you more.

If you don’t make enough money then you will be late making payments and you credit rating will go down. If your credit rating is low then you have to pay more for a lot of important stuff.

If your credit is good then you can get a car loan for 3% interest. The lender will finance up to 135% of the retail value of the car.

If you credit is bad then you could pay over 20% and the lender might loan only 80% of the WHOLESALE value of the car and charge a loan origination fee of $1,000.

When people have bad credit and need to borrow money they can pay hundreds of percent interest. A bad credit report can effect your ability to be hired for a job or to lease an apartment.