Tag Archives: tax refund

Planning for Tax Refunds

Posted on by Leave a comment

Last week’s post was about avoiding tax refund anticipation loans.  Typically, the individuals that would apply for this service are those that expect a sgnificant refund.  In addition to a federal refund, if you pay state income taxes, you will likely receive a refund from the state as well.

Each year, many of us have an opportunity to receive lump sum payments for tax refunds, bonuses, or other types of settlements, but we often don’t have an objective or mission for the funds received.  To be truthful, most of us can’t even account for how the funds were spent.  If you are anticipating a lump sum payment of any kind this year, consider the following:

Pay Yourself First – Commit to saving 10% of the total lump sum amount.  According to a study performed by Insight Center for Economic Development, people of color are five times less likely to have a bank account than whites. If you are not a disciplined saver, I recommend restricting access to this money by depositing the funds into a Certificate of Deposit (CD).  A CD is a type of account that yields a higher interest rate than most savings accounts, and requires that your initial deposit is invested for a fixed period of time.  Please note that most banks will charge an early withdrawal fee if the CD is redeemed before its maturity date.  We all have to start somewhere; this deposit could very well be the beginning of your ‘rainy day’ fund.

Pay Off Debt – Paying off consumer debt can be an overwhelming process, and there are several valid ways to approach it.  In my opinion, the “snowball effect” is one of the most motivating ways to achieve your goal.  This method requires you to pay off the smallest balance first.  Once the debt is paid in full, you then apply the payment that you were making for that account to the next balance.  Although you may pay more in interest, the sense of accomplishment will help keep you committed to your goal.

Complete a Home Improvement Project –   Consider completing a home improvement project that will add value to your home.  If you are in a depressed market, be realistic about how long it will take to recover your investment.  Ultimately, kitchen and bathroom upgrades often offer the best bang for your buck.  By the way, you don’t have to limit your projects to the interior of your home; exterior projects not only boost the value of your home, but they may also help in increasing the value of your neighborhood as well.

Prepay for Lessons or Camps for Your Children – Summer will be here before you know it, and we’re all familiar with the saying, “An idle mind is the devil’s workshop.”  What plans do you have for your children this summer?  If you haven’t started thinking about this, you are behind.  I can’t tell you how many times I’ve heard parents say that they can’t afford to pay for summer camp or other enrichment activities for their kids.  I will admit that this line of thinking frustrates me because these comments often come from parents who have received lump sum refunds or spent money on the latest video game during the Christmas holiday.  If you child is spending their summer at home without any enrichment activities, you should really examine your parenting skills.  I urge you to take a portion of your funds and make an investment in your children.  If you start now, you may qualify for scholarships or reduced rates.  Ultimately you won’t know if you don’t try.  Most programs have filled up by March or April.  Don’t wait; begin your research today.

I hope this Post has been helpful.  Keep in mind, if you always do what you’ve always done, you will get the same results.  Living a reactive life requires no effort on our part, but it takes focus and discipline to be proactive.  The options listed above can assist you in starting a journey toward a life lived on purpose.

Eliminate Surprises for 2011 Tax Year

Posted on by One comment

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.