Category Archives: Taxes

Why Getting a Small Tax Refund Isn’t a Bad Thing

We’re approaching the end of tax season here in America, which means you should either have received your tax refund already or you’re filing for it soon. Most of us are secretly crossing our fingers that we’ll stumble upon an extra grand while filing our taxes, but in reality, receiving a hefty tax fund might be a sign that something’s wrong with your finances.

Let’s talk about why getting a small refund is actually a good thing.

Big Refunds Mean That The Government Was Using Your Money

Think of it this way: if a bank accidentally gave you $6,000 when they loaned you $5,000, you’d get an extra grand to use without paying interest. That’s hugely beneficial. When you overpay your taxes and leave your money with the government, the same thing happens. You’re loaning out money without making any kind of profit.

If you had put less towards your taxes and accepted a smaller refund, you could have used that money to invest in real estate or stocks. Additionally, you could have put more money each month toward your loan payments, thereby increasing your net worth. Maybe you could have built up a bigger nest egg or paid those doctor’s bills when you needed to.

Refunds aren’t giveaways – the money was already yours. The government was just holding your extra payments until tax season rolled around. Why shouldn’t you just keep that money from the beginning?

You Should Never Rely on Your Refund

Many Americans go into “holiday debt” during the months of November and December. As a result, they look forward to their annual tax return as an emergency fund of sorts. The issue with this plan? Tax refunds can vary dramatically depending on numerous factors, including the economy, government, and personal life changes.

It’s a better idea to keep that tax money from the beginning and use it to build an emergency fund in a high-yield savings account. That way, you’ll have the money right when you need it without worrying about your refund’s arrival date.

How to Keep Your Tax Refund Small

Now that you know to avoid large tax refunds, let’s talk about how you can handle your money earlier on in the year to reap the biggest benefits. When you get your next paycheck, figure out how much your employers are taking out for taxes. They might be taking out an extra $100, which then contributes to your hefty refund.

Fortunately, this is an easy problem to solve. Visit your HR office to discuss changing your paperwork to take out the appropriate amount for taxes. Keep in mind that you definitely don’t want to pay too little towards your taxes. More than 21 percent of taxpayers didn’t have enough taken out of their paychecks this year. Leave an extra chunk of change in your tax payments to avoid owing money at the end of the year.

If you’re worried that you’re paying too much or too little when it comes to taxes, speak with a professional tax advisor. Finding out exactly how much you owe in taxes can improve your budgeting, help you get out of debt, and generally improve your financial picture.

To Sum It All Up

I know, getting a hefty refund after going through the arduous process of filing your taxes seems like a giant reward. If it happens, great! But next time, think about what you could have been doing with that money if you’d had it seven months ago. Would you have tackled your loans more aggressively? Would you have put that down payment on a house?

Big refunds aren’t all they’re cracked up to be, so don’t let the media or friends fool you.

Funniest Tax Return Ever?

I was going through some of my starred emails in Gmail, trying to clear out the old and irrelevant ones, and the last one in my list was from my brother. A few years ago, he filed his taxes and got a funny looking picture that I wanted to share with you.

He was working as a research assistant while pursuing his Ph.D in Computer Science while his wife was a medical student. On tax forms, there are only so many spaces for job descriptions, so when it printed his form, it only displayed the first 12 characters:

(click for large image)

I still think it’s hilarious (it describes them perfectly) and will be keeping this one for awhile.

Tax Tips To Consider Before April 15th

With April 15th looming, Americans look to reduce their tax expenses. They confront a complicated tax code. It is important to note these figures from the IRS:

  • 1 billion – the total amount of hours individuals and businesses spend on taxes
  • 5,000 – the approximate number of tax changes from 2001 until the National Taxpayers Advocate Report in 2013
  • 30% of American buy tax software to help them

Cutbacks in staff at the IRS mean that people have difficulty reaching an actual person to answer their tax questions. This information illustrates what people face:

  • 5 minutes – average wait time in 2004
  • 30 minutes – estimated hold time for 2015

Tax Deductions and Credits Worth Considering

There are well-known ways to reduce your taxes such as the mortgage interest deduction and the child tax credit. Here are some not-so-famous deductions and credits.

  1. Interest on student loans – People paying off student loans can deduct the interest. This deduction can really help people with substantial student loan debt.
  1. Foster Pet Care – That phrase is not a typo. Many people are familiar with charitable deductions for cash and clothing contributions. If a person fosters a pet, he or she can deduct certain expenses such as food and medical bills.

Like any charitable contribution, a person needs to keep his or her receipts. Also, the organization needs to be a qualified charitable organization recognized by the IRS.

  1. Going Back to School – Many people want to finish their degree or go to graduate school. The Lifetime Learning Credit can help those taxpayers.

It is worth up to 2,000 so people who want to continue their education should investigate this credit.

  1. State Income Tax or State Sales Tax – Most states have an income tax, and the income taxes that residents pay throughout the year can be deducted from federal income taxes.

However, residents of states like Texas and Washington (no income tax states) can deduct sales taxes. They will have to save all of their receipts, but it pays to be diligent.

  1. Job Search Expenses – The last few years have been rough on Americans. Deductions exist for expenses such as resume writing services and transportation to and from job interviews.

Note: There is a very important restriction. The deductions are only available for people who are searching for a new job in the same occupation. A person who wants to make a career change from being an Administrative Assistant to a position such as Chef is out of luck.

  1. Kicking the Smoking Habit – People can deduct qualified medical expenses. Smoking cessation programs (prescriptions) fall under this category. When Americans quit smoking, they also save money on other taxes too.

A person must itemize to deduct for medical expenses. Another important fact is that people cannot deduct expenses that were paid using pre-tax dollars.

Be Conscientious

When managing their taxes, people need to:

  • Save their receipts to back up all claims
  • Consider itemizing to get the most deduction and credits
  • Get assistance if they are still confused

Unfortunately, the tax code is still very complicated at this time. None of this information is intended to replace a trained tax professional; however, it can help you.