Do you see tax time as tax refund time? People are often eager to receive their “bonus cash,” and those who don’t feel aggrieved by the loss. I get it! For years I was accustomed to getting a refund, and whether it was a small amount or a large one it made me feel a little like I’d won the lottery. Then one year my husband and I were slammed with a $3,000 tax bill and we had just a couple of days to figure out how to pay it. We were like little kids shaking every last penny out of the piggy bank as we raided our savings and checking accounts. It felt awful. After this experience, I strove to better understand taxes — brackets, credits, deductions, and withholdings — so we wouldn’t be surprised again.
If you’re looking to set yourself up to get a tax refund, here are some factors to consider:
· Ask Yourself: Do I Really Want a Refund? If you are getting money back from the government, that means you overpaid in taxes over the course of the last year and the government has been holding on to your money (without paying interest) until tax time comes around. Some would say you’re better off paying less in taxes year-round and setting a bit aside in savings to pay off that tax bill. While I understand the argument, I still tend to fall on the side of the refund. I’d rather know I’m getting something back than have a surprise bill. I encourage you to decide what might work best for you.
Tip: If you’re accustomed to owing something each year, that means you aren’t paying enough along the way. In order to switch gears and get a refund instead, you’ll likely need to live off less throughout the year.
· Know Your Tax Bracket: Over the past few years the tax brackets have shifted quite a bit. If you haven’t checked in a while, now would be a good time to see which bracket you’re in so you have a clearer sense of how much you might owe.
Tip: Your filing status (single, married filing jointly, married filing separately, qualified widow/widower, or head of household) can have a big impact on how much you owe. Check out this NerdWallet article to weigh the pros and cons and see which filing status is right for you.
· Check Your Employer Withholding: I’d argue this can have the biggest impact on whether or not you receive a refund. When you were hired, you filled out a W-4 to declare your allowances — the more allowances you claim, the less tax you’ll have withheld from your paycheck. Not sure how much is being withheld now? Your paystub may indicate the number of allowances in addition to showing the amount withheld. If the allowances aren’t indicated, check with the person or department that processes payroll.
Tip: Wondering how much you should be withholding? Use this IRS withholding estimator. Personally, I think the Turbo Tax estimator is a little easier to understand, but it’s currently under construction after recent IRS changes. You’ll want to wait to go through this process until you’ve completed your 2019 taxes.
· Utilize Tax-Advantaged Accounts: Putting money away towards health care in a Health Savings Account (HSA) or Flexible Spending Account (FSA) as well as stashing more money away toward retirement in a Traditional IRA or 401(k) plan can help you save money on taxes since those contributions lower your taxable income. This can be doubly useful if you’ve recently gotten a pay increase that’s moved you into a higher tax bracket.
Tip: You may be eligible for the Saver’s Credit — a tax credit designed help offset the cost of saving for retirement for low- to mid-income earners. Find out more in this NerdWallet article.
· Don’t Skimp on Deductions: Deductions help you chip away at the at the amount of income you’ll pay taxes on. You may be missing out on deductions you aren’t aware of. Check out this list of the ten most overlooked tax deductions.
Tip: Itemizing deductions is only worth it if you believe it will reduce your income more than the standard deduction ($12,200 for singles and $24,400 for married filing jointly in 2019). Not sure which one is right for you? Check out this Nerdwallet article.
· Cash In on the Credits: Unlike tax deductions, tax credits reduce the actual amount of taxes you owe. Some credits are nonrefundable (meaning they can only help you as long as you owe taxes); others are refundable (meaning that if they exceed the amount you owe, you might be eligible for a refund).
Tip: Curious which credits you might qualify for? Take a look at this article by the Balance.
Really banking on that refund? Remember, tax law is constantly changing, with much of it being out of our control. The most important thing is to create a sustainable budget for yourself so any money you get a tax time is a bonus rather than money you’re depending on to meet your obligations.
This Thursday, Feb. 27, I’ll be going Live on Facebook at 8pm Central to share the five surprising things I learned while doing my own taxes. Not on Facebook? No worries: I’ll be posting the recording to IGTV afterwards.
P.S. Last call for Twin Cities couples looking to attend my Love & Money brunch THIS SATURDAY from 9am to noon. This will be a great way to get on the same page about money and up your financial game in 2020!