As Tax Day draws near (Monday, April 15th this year), the Internal Revenue Service has released its annual “Dirty Dozen” list of tax scams. The takeaway? Be aware and alert. Take the time to understand your tax return before signing. If something sounds too good to be true, it likely is.
It is smart to invest your tax return money. When we say invest, we do not mean to invest in your vacation plans. Though it may be tempting to see tax return as free vacation money, it might be wiser to save it, pay down debt, or invest for your future.
We know tax preparation isn’t fun, but, unfortunately, it’s necessary. Though it may seem like an inconvenience, filing your taxes correctly can sometimes give you a nice return. You may be reluctant to begin because of the confusion on where to start or what information is necessary. We are here, however, to simplify taxes for you so the task can seem less daunting.
What are income tax returns?
Income tax returns are documents that are used to evaluate whether you owe any taxes this year or if you are eligible for a tax refund. Taxes are calculated based on your total income minus any deductions you are eligible for.
Happy President’s Day! Now that there is a nice three day weekend, let’s talk about finances…
No wait, come back!
I know that fixing your finances isn’t the ideal way of spending your three-day mini vacation, but if not now, when? Don’t worry, we’ll try to help make this as painless as possible.
The trick to saving money on taxes is to defer income and accelerate expenses since income is taxed in the year it is earned. Your income is taxed during the year it is earned. This means you might want to hold off on additional income if it puts you in a higher tax bracket. Expenses are also deducted in the tear they are paid. Paying tax-deductible expenses earlier helps lower tax liability making it better to pay on December 31st rather than January 1st.
Holiday or Bonus Income
If a holiday bonus pushes you into a higher tax bracket, ask your employer to delay the bonus until January 1st so you will not have to prepare taxes on it until the following year. Make sure the bonus is reported to the IRS in the correct tax year by your employer if you defer income.
If you make a charitable contribution and pay with a credit card on December 31st, you can deduct the contribution on this year’s taxes regardless of when you pay the credit card bill. The amount can be paid out sometime in January, instead.
One of greatest advantages to saving for retirement is the tax benefits you get when investing in an IRA or other qualified retirement account. Most people know there are tax benefits to opening an IRA account, but few understand how many benefits there are, and how powerful they can be in the cause of saving money for retirement. Did you know there are at least six tax benefits to opening an IRA account?
We discuss these benefits more in-depth below, and how you can leverage them for your own retirement savings.
This year, make sure your taxes are done right and get a chance to win big. Try any TurboTax® Online product for free and you’ll be entered into the TurboTax $25K Giveway.1
- All you need to know is yourself. TurboTax translates taxes into simple questions about your life and puts everything in the right forms for you.
- You won’t miss a thing. TurboTax searches over 350 deductions and credits, so you can be confident you’re getting the biggest refund you deserve.
- Double checks as you go. TurboTax runs error checks and a final review of your return to help make sure your taxes are done right.
If you’re expecting a tax refund this year, you need a good plan for your money. Be sure to revisit your W-4 form and adjust your federal income tax withholding allowances.
Don’t get caught treating your refund check any differently than you’d treat your weekly or monthly paycheck or if you own a small business, revenue from your customers. Give the money a purpose. Don’t just let it sit in your checking account. If you do, it will quickly vanish after you use it for dining out here, shopping for clothes there, and getting Starbucks every day. Before you know it, you’ll have nothing to show for the refund.
Top 10 Priorities for Your Tax Refund
1. Start or Increase Your Emergency Fund
Without an emergency fund, just one surprising piece of bad news can send you on the debt spiral to financial disaster. Most experts say that your fund should have about six to eight months worth of savings in an easily-accessible interest-bearing account (e.g. an online savings account or money market account). Storing that much away might take months or even years if you’re just taking a little bit out of each paycheck, so use your refund to make a significant deposit in your emergency fund.
2. Pay Off High-Interest Debt
After establishing an emergency fund, the next best thing you can do with your tax refund is to pay off any high-interest debt that you’re carrying. If you have a lot of debt, just putting money in savings is like borrowing money from yourself. Put your refund to work by starting your debt elimination program of choice and paying off any payday loans, title loans, debt consolidation loans, high-interest private student loans, car loans, and of course credit card debt.
3. Spend It on Something You Need
Are you having car trouble, do you need a new winter coat, or have you put off dental work? You need to take care of these essentials, and now that your refund is here, you can cover the cost.