Tax refund anticipation loans are a sign of how terrible we are at delaying gratification. It’s possible that people experience a sudden emergency and need this once in their lives. But more often, it creates an endless cycle of debt and is a symptom of always being behind on bills.
That’s exactly why I’ve pulled this challenge together. I want you to prepare for life! Pull together an emergency fund. Build up a sinking fund. Then dig out of debt and create a real life! I don’t want to see anyone dependent on tax refund loan sharks that charge 36% interest after tacking on a $49.90 fee (source).
Today’s post is all about getting the most from your tax money. And then, let’s set up your taxes to funnel into your own account that will earn interest for you. Stop giving the government an interest free loan every year!
Understanding Tax Money
I’m no tax expert. I always use software to file my taxes! While I can still mess up my return, I minimize risk by letting the computer do the calculations.
But letting a computer do absolutely everything for you just isn’t a great idea. You should have a slight understanding of what you’re doing.
This article from The Simple Dollar lays out tax brackets for you. The money you earn is charged taxes at different rates. Let’s say you’re single and earning $75,000 per year. Your money is pouring into buckets. The first $9,275 would fill one bucket and 10% is taken for taxes. The next dollar would overflow into a second bucket and be taxed at 15%. When you hit $37,651, that dollar overflows into the next bucket and gets taxed at 25%.
So it’s not as simple as growing your income and bumping up to a new tax bracket. (Thank goodness!) Earning $37,651 instead of $37,650 isn’t going to make a giant difference in your taxes.
Take Advantage of Tax Breaks
Deduction vs. Credit
A credit means you’ll get back all the money you put into that expense. If you put in $1,000, you’ll get back $1,000 (assuming you owe at least $1,000 in taxes).
A deduction means you’ll get back the taxes you spent on that time. If you put in $1,000 taxed at 25%, you’ll get back $250.
The best deduction that comes to mind is retirement. Assuming you invest in a fund that gives you a tax break now rather than later (such as 401(k)s, 403(b)s, IRAs, and others) you get a discount on your savings.
Lets say that, by looking at the chart above, you find yourself solidly in the 25% bracket. If I decide to put $100 per month into my 401(k), I’ve just reduced the amount I owe in federal taxes by $25. But I’ll still get to put the entire $100 in the savings account. (And if your employer offers to match that amount, it’s almost ridiculous not to do it.)
*Make sure you can afford putting money into retirement. The penalties and fees for withdrawing this money before 59 1/2 are not worth it.
529 College Savings
Some 529 plans can lower your state taxes. This will vary by state and based on which plan you choose. Try this comparison chart to find funds that work for your situation.
Unless you have a complicated money situation, I highly recommend using online software to file. You don’t need to pay a pricey tax consultant for a simple return. And I find that the online software catches far more deductions than I did on my own.
I have used all of these companies with no problems. It’s just a matter of finding the company that gives the best price for purchasing your federal and state returns. You’ll also want to check on their fees for e-filing.
- 15% Off TaxAct Plus & Premium! (affiliate link)
- Turbo Tax
- H&R Block
Change Your Withholding
Finally, let’s talk withholding. Try the IRS calculator to find out how much tax money you should actually hold on your W4. Then, funnel that amount into a different savings account using direct deposit. Here’s more info on breaking up your paycheck. You’ll still have your tax refund, but it will be yours year round. If you keep it away from your other money, you lose the temptation to waste it.
Take These Steps:
- NEVER get a cash advance on your return. File early and find a way to wait a week or two for your money to deposit.
- Do some research to see if you’d save money by investing more in retirement.
- Look for every deduction you are eligible for.
- Change your withholding to keep more of your money year round.
- Bank the difference in your account.
This was day 13 in the Secure Your Savings and Find Peace in the New Year series. Go to the bottom of this post to find all the money saving and money making posts in this series!
Knowing more about your own tax money puts you in better control.
Taxes are complicated, but it’s not out of the question for you to take control over your own tax money. Put it to work for yourself this year!
How do you usually file? Paper, computer, or consultant?