It’s February. That means Tax Day is right around the corner. How do your taxes usually wind up? Do you get a refund, come in about even, or do you owe the government money?
I’ve prepared taxes for about 14 years. I am not a CPA, and I do not consider myself an expert, but as a Financial Coach, I have a few pieces of advice.
Every tax season, I hear people “bragging” that they’re getting a large refund. There are many reasons they could be getting a refund, and this information won’t apply to everyone, but it will apply to many.
If you’re due a refund, you need to look at the amount you had withheld from your paychecks throughout the year. If you’re getting back $5,000 and you paid in more than that, your refund isn’t coming from the government, it’s coming from the interest-free loan you gave them the last 12 months. You need to reevaluate your withholding soon so that you can put more money in your pockets every paycheck.
How should you do this? Take the amount of refund you’re getting, divide it by the number of paychecks you get per year, and that will tell you how much you need to subtract from your current withholding. You will have to file a new W-4 with your HR or payroll department.
Assuming nothing drastic changes before next tax season, this should be a pretty good estimate, but you can leave yourself some cushion if you choose.
Let’s go back to the $5,000 refund example. Let’s assume you are paid twice a month = 24 paychecks a year. $5,000/24 = $208. That’s $208 per paycheck MORE that you could be putting in the bank account rather than loaning it to the government. Two paychecks a month = $416. What could you do with $416 a month? How would that ease some financial burden, or allow you to get closer to your goals?
Understanding that the government doesn’t give away free money is very important. Yes, there are some people who get certain credits, and get refunds above what they paid into the system, but this article isn’t for them.
What if I Owe Taxes?
There were a lot of tax law changes in 2018. Many people were anxious about how the changes would affect their taxes and may be hit with a tax bill. If this is you, the best advice I have is to pay that bill ASAP. Avoid any extra penalties and interest that you can. The second piece of advice is to start planning for next year’s taxes!
Use the same method as mentioned above to figure out how much extra federal withholding you need to have held from your paycheck. If you are self-employed, you should be making estimated tax payments on a quarterly basis. Set up a sinking fund and save the taxes monthly if that makes it easier. Break it into smaller, easier-to-handle payments.
No Refund, No Taxes Owed
If you owe very little taxes, or are getting a very small refund, you are actually sitting right in the sweet spot. This is where most professional tax preparers would probably want you to be. This means you got the maximum amount into your pocket every pay period, you had the most opportunity to make your money work for you, and you didn’t give the government anything you didn’t owe them! This is a great spot to be in. It can be a little upsetting if you were hoping for a refund, or if you are used to a refund, but having the money spread out throughout the year gives you more freedom. Many people are more likely to spend the money wisely throughout the year as they budget the extra money in per pay period than they are if they get a large refund at tax time.
So, That’s It?
Taxes are taxes. We all must file and pay them. It’s kind of like Christmas…you know it’s coming. You should prepare for them. Do research or hire a professional who can help you—or both.
All statements made in this blog are merely the opinions of DaRenda Hanson. Although she has a background in accounting, you should not take her advice and run with it. If you have questions, please contact a professional CPA. She holds no legal obligations for the decisions you make after reading her opinion in the blog above. She is merely offering suggestions on her experience as a financial coach and tax accountant. Take it for what it’s worth.