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.

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.

How to Spend Your Tax Refund This Year

I’m almost ready to file our taxes this year, and it looks like we’ll be earning a nice fat refund. It’s not always easy to know what we should do with the refund money though – do you blow it all or be responsible with it? The short answer is that you should incorporate both options, but be smart and know your limits. Here are some ideas on how to spend your tax refund this year.

Give Yourself Some Spending Money

We all know that the responsible thing to do is to save the money or to pay off debt but you also do need to be able to have some fun. You worked hard all year round, some of that refund money should go towards helping you to blow off a little steam.

Set aside a portion of the refund money to spend on anything that you want and ditch the guilt. It could be 10% or 50%, it all depends on what your financial goals are. If you are always responsible with your money, you’ve likely put off some wants so that you can hit your savings goals. You have to plan for the future but also have to live in the present. You cannot put off having fun forever.

Finance Your Dream

Perhaps you have always wanted to visit Italy or would love to take a cooking course. Using your tax refund as a means of funding your dream is really great for your soul. Think about it for a minute – 10 years from now will you regret not putting more effort into making your dreams come true? If the answer is yes, consider using your tax return accordingly.

That said, you should look at something that has some degree of importance to you – something that you ordinarily would not have been able to do. A trip to Italy, for example, can be a once in a lifetime experience. Who knows what your circumstances will be in 10 years time – you have to live in the present as well.

Improve Your Financial Future

There is something to be said for using your tax refund, or at least part of it, to help build a better financial future. Using it to shore up your emergency fund is a great way of doing this. If you’re behind on your retirement savings, get a head start on your Roth IRA for this year.

There are many good investment options out there. Take some time and do your homework and you’ll thank yourself later when you check your investment accounts.

Use It To Reduce Everyday Living Expenses

Using your refund for maintenance projects that you have been putting off can pay great dividends in the future. Take your car, for example. Having it serviced allows it to run more efficiently overall and this can save you in gas costs and repairs. You can also have an energy audit conducted in your home to identify what appliances are “gas guzzlers” in terms of power. Consider replacing appliances for ones that are more energy efficient in order to save money every single month. A one-time expense now can pay dividends down the road.

Overall, your refund should be used to improve your life – whether that means using it to have fun or using it to bolster your nest egg. Take a few minute to consider what will have the best impact on your life.

How are you spending your tax refund this year?