Tag Archives: IRS

Eliminate Surprises for 2011 Tax Year

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So Monday was Tax Day, and for some of us, it wasn’t a good day.  If you were “surprised” this year, the best thing to do is start planning now for next year.  I am not only equating the “surprise” to the requirement to pay additional taxes.  If you received a huge refund, tax planning can be beneficial to you too.  After all, why should you “loan” the government money at 0% interest? 

Depending on your perspective, one may feel it’s better to receive a refund than to have to write a check.  I once agreed with this philosophy, but my outlook is different now.  Generally, no one wants to pay more taxes, but how is your tax bill different from any other bill?  It’s only a problem when you don’t have the money.  While it doesn’t feel good to write a check to Uncle Sam, I now understand that doing so means that I didn’t “lend” my money interest free.  Ultimately, a goal of breaking-even is a good idea.  Included below are some key considerations that can assist in eliminating surprises for the 2011 Tax Year:

Keep an “Eye” on your Adjusted Gross Income (AGI) – Your AGI is a significant element in determining you taxes.  Your AGI is your income from all sources minus any adjustments to your income.  Adjustments to your income can include, but are not limited to:

  • Certain business expenses (teachers, reservists, etc.)
  • One-half of self-employment tax
  • Alimony Paid
  • Penalties for early withdrawal of savings (i.e., certificate of deposits)
  • Student loan interest
  • Contributions to 401k or Individual Retirement Accounts (IRAs)

The best way to reduce AGI is to contribute to a 401k or retirement account.  The taxes on contributions to retirement accounts are typically deferred – meaning this reduces your taxable income and lowers your taxes.  Typically, you have until the tax deadline to contribute (i.e., Monday, April 18, was the last day to retroactively fund a retirement account for the 2010 tax year.)

Identify Ways to Increase Your Tax Deductions – The two terms that you should be familiar with for deductions are standard and itemized.  Most people can take a standard deduction, but each year, you should assess whether or not you can itemize your deductions.  Itemized deductions include, but are not limited to:

  • Mortgage Interest
  • State Taxes
  • Charitable Donations
  • Personal Property Taxes
  • Tax Prep Fees

Once you’ve identified your itemized deductions, you should use the higher of your standard or itemized deductions.  The key to leveraging this element is to plan!  If you have not been giving charitable donations, doing so can decrease your taxes significantly.

Explore Opportunities to Take Tax Credits – Tax credits directly offset the amount of tax you pay.  There are tax credits for college expenses and adoption.  In recent years, there have also been credits for first time homebuyers, energy efficient upgrades to homes, and certain tax credits for the elderly.  As a part of planning for your tax year, you should speak to your accountant or research tax credits to ensure that you are aware and able to take advantage of any that may be applicable to you.

If you find yourself with the opposite scenario, you are receiving a significant tax refund check each year, you should explore ways to limit the amount of taxes that are being taken out of your wages throughout the year.  This can be accomplished by adjusting your withholdings.  An article by Center for Personal Finance Editors, Adjust Your Withholdings Now for 2011 Tax Year, reported that approximately 100 million Americans overpay their tax bills each year by $2,200.  If you find yourself in this scenario, increase your number of allowances.  To complete this task, you will need to submit a new Form W-4 to your employer.  The IRS has information on their website, www.irs.gov, which can assist you in determining the appropriate amount of allowances for you. 

Filing your taxes does not have to be a stressful event.  With proper planning, you can figure out your tax liability for the year, and plan the best approach for your situation.  For many of us, it becomes stressful because we have to react to activities that occurred throughout the year and have certain tax implications.  A key element to wealth building is tax planning.  You can’t do one without the other.

 

Say NO To Refund Anticipation Loans

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The process of filing one’s taxes is filled with great anticipation for some.  If you are making a beeline to your mailbox or your company’s website to obtain your W-2, you are likely in the group of taxpayers that expect a sizeable tax refund.  Additionally, there’s a high probability that you may utilize a tax preparation service and apply for a Refund Anticipation Loan (RAL).

According to the Consumer Federation of America (CFA), a RAL is a costly bank loan that is secured by a taxpayer’s expected refund, and carries an effective annual interest rate (APR) of approximately 149%.  This is almost five times worse than the default rate on most credit cards.  Believe me, I understand the desire to get your refund quickly, but you should never take out a loan to obtain money that’s owed to you.  Additionally, you should know that if the IRS reduces your refund for any reason, the entire amount of the RAL must be paid in full – hence, you will have to pay back the money out of pocket.

In the past, the IRS helped lenders minimize the chance of taxpayers receiving a RAL that would not be covered by their refund through the use of a debt indicator service.  This service was similar to a credit check; it revealed whether or not a taxpayer’s refund would be paid or used to cover government debts (e.g., taxes, outstanding child support, etc.).  In August 2010, the IRS announced that it would stop providing the debt indicator service.  While this news will not eliminate RALs, it will make them more difficult to get, and the associated fees will be even higher than they were before.

So, who are RALs targeted to?  According to the CFA, RALs are particularly targeted to low-income working families that claim the Earned Income Tax Credit (EITC).  In fact, over half of all RAL borrowers are EITC recipients – individuals that cannot afford to pay exorbitant fees to obtain their money.  Additionally, during a national survey commissioned by the CFA, it was concluded that RAL users are more likely to rent instead of own their homes; utilize high cost financial services, such as rent-to-own, payday loans and pawnshop loans; and a significant number of them are African American females. 

Given the information above, I urge you to consider doing something different this year.  There are services available to help you get your money quickly, and without the excessive fees that are associated with RALs.  Included below are quick, cost-effective methods for obtaining your tax refund:

  • On January 13, 2011, the U.S. Department of Treasury announced a pilot project to offer 600,000 low-cost, prepaid debit cards to families who may not have a bank account.  Consumers that receive the Treasury letter can quickly obtain the card to use for receiving this year’s tax refund
  • Open a savings account if you don’t have one, visit the I-CAN! E-File site (www.icanefile.org) or the IRS site (www.irs.gov), and file your taxes for FREE on your own! 
  • Visit a Volunteer Income Tax Assistance (VITA) or AARP Tax-Aide site.  They will e-File your taxes for you.  Tax-Aide sites save taxpayers money by eliminating the cost of RALs and tax preparation fees.  To find a location near you, call (1-800-906-9887) or visit www.irs.gov

Now that you know better, you should choose to make better choices. After all, why pay for something that you can get for free? As you prepare to file this year’s taxes, commit to the following:

  1. Stay away from RALs and consider utilizing one of the tax preparation services noted above
  2. Open a savings account if you don’t have one.  According to a study conducted by Insight Center for Community Economic Development, people of color are almost five times less likely than Whites to have a bank account
  3. Deposit the fees that you would have paid on a RAL into your savings account to begin your nest egg.  According to CFA, the average fees for an RAL (including tax preparation fees) are  approximately $300

Remember, small steps can lead to significant change!

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