Happy Tax Day.
If you are filing your taxes today, it’s more than likely that you owe. Most people who will be getting a refund have filed long ago and have already spent their money.
Oh happy day, right? Well, let’s see.
I have a proposition for you – starting January 2013, you give me $240 per month to hold for you. I will give it all back to you by mid April 2014.
What do you think I would do with your money in the meantime? Of course I would invest it and keep the interest for myself. There is probably a law against me doing this, so I withdraw my offer.
The average tax refund was over $2900 this year. That is over $240 per month that you are giving to the IRS interest free.
What could you do with an extra $240 per month?
- Add it to your 401(k)
- Increase your mortgage payments
- Pay off high interest credit cards, student loans, your car
- Take a mini-vacation
The point is, why are you giving your hard-earned money to the government to use when you could put it to better use?
Do you feel sorry for the government and just want to help them out?
If you want to be nice and give the government money, why not purchase savings bonds – at least you will collect some interest.
The truth is, there are not many ways that you can reduce the amount of taxes that are withheld from your check if you work for someone else.
Our tax system is designed to make it difficult for you to keep all of your money unless you are wealthy.
Tax codes are complex and ever-changing, but knowing some of the basics may help make sense of it for you.
- Taxes are collected on a pay-as-you go system. When you become employed, you fill out a form W-4 with your employer. This tells the employer how much to take out of your paycheck and send to the IRS.
- At the end of the year, your employer supplies you with a form W-2 which shows how much money you have paid to the IRS over the past year. You file an income tax return to “settle up” with the government. If you underpaid, you must send them a check for the difference. If you overpaid, they send you a refund check.
- A tax deduction is an amount subtracted from your income. Unless you are a millionaire, the more you make, the more they take in taxes. Each deduction reduces the amount that you make and therefore reduces the amount you pay in taxes.
- A tax credit gives you credit for paying a tax that you really didn’t pay. Let’s say you owe $2500 in taxes but you get a credit for $1000. This means that you only have to pay $1500 – the IRS gave you credit for paying $1000.
Now, here’s the rub. If you end up owing the IRS too much money at the end of the year (when you file your taxes) you may have to pay them a penalty for not having enough money withheld from your check. They are determined to keep as much of your money as they can.
Having said that, if you received a large tax refund, you can increase the amount of money you receive on your check and reduce the amount of your tax refund by doing 2 things:
- Increase the number of allowances on your W-4 form. The more allowances you have, the fewer taxes you pay each check. If person A and person B earn exactly the same amount, but person A claims 0 allowances and person B claims 5, person B will take home more money on each paycheck because the IRS will take less money from them. There is a withholding calculator at the IRS website under Individuals then tools.
- If you received an Earned Income Credit last year, you can actually get some of that money early by filing a form W-5 with your employer. This is an advanced payment certificate for your Earned Income Credit.
You can find more tips at http://irs.gov (of course, you have to dig because the government wants to continue to use your money for free) or hire a tax professional or a financial planner to help you make your money go further.
- Tax advice for procrastinators (clickondetroit.com)
- 3 Tax Credits That Pay You Money (money.usnews.com)
- Are You Getting, Or Hoping For, A Tax Refund? Why That Is Such A Terrible, Terrible Thought… (neosecularist.com)