Ok, it’s every American’s favorite time of the year. Tax season.
Time to pay the piper, in this case, the Government for services rendered. Which, if they were a restaurant, they’d probably garner two stars at best on Yelp.
Be that as it may, of the two most unavoidable certainties in life, taxes are still the more palatable choice. And I speak from experience. Having contributed into the system for the past 44 years, I’ve had my fair share of tax season highs and lows.
There have been years of surprising return windfalls leaving me to wonder aloud “What am I going to do with all of this money?!” (Another guitar.) And the equally surprising and devastating tax bill deficits, when I actually shouted “How the the hell am I gonna come up with that kind of cash by April 15?!” (Without having to sell a guitar or two.) And wishing I had actually squirreled away some of the previous happier returns.
Given my depth of familiarity with this Tax Yin and Yang, I feel compelled to share a bit of insight these experiences have taught me. And to provide you with a couple helpful tips, whether you’re getting a refund check or writing an additional check to the government.
What to do if you’re getting a refund check?
First off, congratulate yourself on your good fortune. And depending upon the size of the afore-mentioned “fortune” you want to carefully consider your options. (And resist the impulse no matter how great to run down to the nearest guitar shop and fork over the entire check.) Because while the tax gods may be smiling down upon you today, they are a fickle bunch, to say the least. So you want to be sure to make the most of this newfound money.
After you’ve treated yourself to a modest, mini-celebratory dinner out, here are some great uses for that money:Start or add to your emergency fund
Start or add to your emergency fund
Depending upon which “experts” you consult, they recommend having anywhere between 3 to 6 month’s-worth of living expenses stashed away.
Pay down/off outstanding debt
The average American household carries over $6000 in credit card debt. The sooner you get off this kind of debt cycle, the better off you’ll be with more options on how you spend your time and money.
Deposit it into a qualified retirement account
Not only will the money grow tax-deferred, but by the time you start making withdrawals from the account, you will most likely be in a lower tax bracket and will end up paying way less compared to the overall earnings growth.
Start a college fund
Just when you think educational costs can’t go even higher, they do. Regardless of whether you’re thinking about Private, State or Community, you need to be prepared to pay for more than you first planned.
Plan a vacation
If you’ve gotten down to this point and can already check the box on one
or more of the previous bullets, you’ve more than earned a relaxing getaway.
What to do if you’re writing the government a check and want to make it your last one?
First off, the goodish news. Somehow, you made more money than you actually paid taxes on. Congrats? Sorry, that didn’t feel right even as I typed it on the keyboard.
Ok, let’s take a step back and see this situation for what it is. A setback, albeit a surprise setback. Now depending upon just how big the surprise (the amount owed) let’s talk tactics. I think we can all agree that this is a situation you never want to be in again, so let’s review some of the best ways to assure you’re paying the right amount in taxes and the lowest amount required. March down to HR or payroll and immediately adjust your withholding on your employer’s W-4. That’s the form that instructs your company how much to withhold from your paycheck to pay the government.
1. Change Your Federal Withholding
You can download the form here.
There is a basic formula to follow based on marital status, number of dependents, etc. which all adjust the amount taken out. You can claim zero (0) and have the maximum amount of taxes taken out — almost assuring a refund but it may be too much to live your life and run your household.
There’s a section on the form that allows you to instruct a specific, additional amount to be withheld from each paycheck. Going on what you owe this year, you can divide that amount among the number of pay periods and potentially cover the amount you actually owe.
Your best bet is to talk to a tax accountant or specialist to advise you on the exact amount room to withhold for your specific situation and lifestyle needs. When you fund a qualified IRA or employer-sponsored retirement plan like a 401(k), all of your contributions are 100% tax-deferred. Which means whatever amount you deposit, is deducted from your overall income reported to the Government, thus lowering your current tax liability.
2. Maximize the Allowable Qualified Retirement Account Contributions
And as mentioned in last month’s blog, You have until April 15, 2022 to contribute to your IRA for 2021 tax benefits. For 2021, the maximum contribution to an IRA is $6,000 for those under the age of 50 and $7,000 for those 50 and older.
3. Lower Your Tax Bill With Pre-Tax Savings Accounts
These accounts, typically offered by your employer, allow you to set aside a certain pre-tax dollar amount towards a variety of every day health and working expenses. Things like medical, dental, vision, daycare, parking and transit costs. All the money set aside in accounts is deducted from your income when calculating your tax debt. Be sure to ask your employer about any available opportunities.
Lessons Learned The Hard Way
I’m not a tax expert and don’t pretend to be so. What I share in these blogs is firsthand experience. Some of them have been very good, and some very bad. But in sharing these I hope to help you experience more good than bad. That said, nothing I write should be taken as advice. For solid financial advice, you should speak with an expert.
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