When it comes to financial planning, everyone knows what April is all about: taxes, taxes — and more taxes. I don’t usually receive a refund, as I try to calculate my taxes so that I owe a small amount every year. Still, writing a check with my tax return is not my favorite annual expenditure. What about you? Do you owe every year, or do you look forward to a refund?
IF YOU’RE LOOKING FOR A REFUND, HERE ARE SOME THINGS TO CONSIDER:
- Waiting for an annual tax refund means the government has had free use of your money all year. Free means they keep your money and don’t pay you any interest. A bank savings account will pay a little interest, which is better than none.
- Consider changing your federal and/or state deductions. Let’s say you expect an annual federal refund of $6,500 and are paid weekly. Divide $6,500 (refund amount) by 52 (pay periods in a year); that equals $125. This means you are paying the government $125 per week that you don’t owe them.
- Speak with your payroll department or accountant and ask how to adjust your deductions to reduce your taxes by $100 per week; leave a little wiggle room to help prevent a tax bill. Then, have that extra money direct deposited into your savings account.
- With the extra money going into your savings you can build up your emergency fund, earn a little interest and have access to your money year-round, should you need it.
IF YOU OWE TAXES EVERY YEAR, HERE ARE SOME IDEAS FOR YOU TO CONSIDER.
- Review your federal/state tax deductions. Are you claiming a child or other dependent that you are no longer eligible to claim? Use the same formula I have listed above and consider increasing the taxes deducted from your paycheck every week.
- It often is easier to pay a little extra each pay period than it is to come up with a lump sum when you have taxes due.
- If you are a business owner, be sure to pay your estimated taxes during the year. Again, this can help avoid a large tax bill, as well as additional penalties and interest on underpayments.
- Do you have a personal IRA or an employer-sponsored 401k plan available? If so, review the amount you are putting into your account; consider increasing it. The money you put into a traditional IRA or 401k plan will reduce your gross income and therefore reduce your current tax bill. You will pay taxes on any amount you take as a distribution from the account.
As always, I encourage you to do anything necessary to take control of your money. If you don’t, it will control you. Proper tax planning, establishing an emergency fund and planning for your retirement are all part of owning your financial future.