Tag Archives: taxes

Confession: I love my tax refund too much to correct my withholdings

No matter how much you know about money or how well you  manage yours, chances are there are things you do that you know are wrong, but can’t give up. For me, it’s overpaying taxes.

Here’s my confession: even though I’m married and file my taxes as a business due to various income sources, my tax withholdings are still set to the max.

I know it’s stupid. I know that my tax withholdings should be set so that I’m paying the right amount of taxes out of each check, owe nothing, and get no refund. I know that the smart thing to do is invest or save that extra money every week so I’m earning interest. I just can’t kick my tax refund habit, though.

The truth is, I don’t trust myself. Saving that money throughout the year takes a lot more discipline than letting the IRS hold on to it. Sure, my checks would be a little bigger every other week if my with holdings were set correctly, but an extra $200 a month can be frittered away so easily.

Earning interest requires putting every penny in the bank. That can be really difficult for someone like me who battles the evils of lifestyle inflation. I work hard to combat it, and for the most part I avoid major inflation, but when you’re living on a very tight income, it’s incredibly difficult not to add expenses as income increases. When that money comes in a lump sum, though, it’s a lot easier for me to commit it to savings or something purposeful.

We received our tax refund today, and it’s already been moved to savings to finish up our Europe fund and give us a pretty big head start on our moving fund.

I wish I had the self discipline to earn interest on that income all year, but in the end it would only add about $50 to my total. I know, $50 is better than nothing, but I can’t say I regret it. It’s unlikely I would save an additional $200 a month if my withholdings were set correctly. It would likely be spent on other things. Besides, nothing feels better than moving a big lump sum of money into savings and seeing my percentage increase overnight. Tax refunds are my personal finance guilty pleasure.

What about you? Do you like to get a refund every year, or do you set your withholdings correctly?

Photo by cbcastro

I may have spoken too soon about TurboTax

I’ve used TurboTax for several years now. It’s usually simple and worth the cost. That’s why I spent $50 on it again this year. I even recommended it.

I’m not entirely rescinding my recommendation, but I feel like I should share my experiences this year in the interest of full disclosure.

Last weekend I finished my return in an hour and a half. I earned some freelance income, so I filed as a home business. I was a little nervous, but the program really did make filling out the forms easy. I answered the questions, filled out the necessary information, and found out I was getting a big fat refund.

An accountant at my work kindly offered to look over my completed return to make sure I hadn’t missed anything. Nice of him, right? I’m incredibly thankful he looked.

You see, before we got serious about personal finance, my husband and I took an early distribution from his retirement account. It was a few thousand dollars he had accumulated at his previous job. I don’t regret it. We really needed the money at the time, and though I know now that it wasn’t a smart move, it helped us get through the year without accumulating credit card debt.

Well, because it was an early distribution, TurboTax calculated that we owed a 10% penalty in addition to the income taxes that were withheld. I was expecting that.

When the acccountant looked at my return, he informed me that we are actually exempt from the penalty because my husband’s education expenses were higher than the amount he withdrew from his retirement account. We almost paid $350 more to the IRS than we owed, and TurboTax didn’t catch it.

Though I trusted my accountant co-worker (and he showed me the tax code), I did my own research since, you know, they’re my taxes. I found this. Confirmation from the IRS that we don’t have to pay the 10% penalty.

I should have looked into this on my own, but I honestly had no idea. I’ve always heard that the 10% penalty goes along with the early distribution. I didn’t think we could avoid it. TurboTax (which guarantees the “maximum deduction”), didn’t catch it.

Needless to say, I thanked my accountant co-worker profusely and made him cookies. He saved me $350!

I attempted to amend my electronic return. It took some time, but I eventually figured out how to take the deduction. I finally found the information hidden in a teeny tiny link. It said that “You may by exempt from the penalty tax for the following reasons.” But there was no option that said, “Hey, I actually qualify for this.”

Whatever. I was just happy it was over, and that my accountant friend had alerted us.

Then I tried to e-file. TurboTax normally charges for this service, so I’ve always mailed in my return. This year the federal e-file was free with the program. So I said what the hay. To avoid the hassle of mailing in my state return, I went ahead and paid the $20 to e-file that, too. In hindsight, $20 to e-file seems outrageous, but after the retirement distribution debacle I just wanted it to be over.

My e-filed return was rejected. Three times. It said that my previous year’s Adjusted Gross Income, which is used to prove my identity, did not match the IRS records. But the numbers were correct.

At this point I wanted to mail them, but I had paid $20 for the state return. I was either going to e-file or get my money back. So I spent 2 hours on hold waiting to speak to someone. I kid you not. Two. Hours.

When I finally got through, the customer service rep was helpful. He informed me that the problem was a glitch in their system. I had entered my information correctly, but due to this glitch I would not be able to e-file. I would have to mail my return. Fine.

Thankfully, they refunded the $20 e-file charge. Of course, I won’t get a refund for the cost of the “free federal e-file” that was included with the program. But whatever.

Moral of the story? In the future, I will probably use a cheap or free program and find an accountant to look over my return for a small fee (or free!). I can’t justify paying $50 (plus e-file fees) for a program that could miss such a big exemption.

Post-tax refund savings breakdown

I just finished filing our 2008 tax return using TurboTax Home & Business since I had to report a little freelance income for 2008. (If you’re not reporting freelance income, I suggest using TurboTax Deluxe.) The software costs about $40 on Amazon, but it makes it simple to do your taxes yourself. In my opinion, it’s worth the cost.

Since we got married in 2008, we’re getting a pretty hefty refund. It’s actually about $500 more than I anticipated.

We already decided that we’d be using the bulk of the money for savings. We’re putting 70 percent of our refund directly into our emergency fund. After that deposit, our emergency fund will be 55 percent complete!

It took us about 6 months to save that amount, so I’m hoping with our increased monthly savings amount we’ll be able to complete our emergency fund by the end of this summer (especially if we end up hanging on to some of our summer savings). Then we’ll start saving for our trip to Europe.

About 20% is going into our summer savings account to cover the fact that Tony isn’t paid to teach two months out of the summer. That fund is now complete. (Yay!)

My hope is that we’ll be able to hang on to a substantial chunk of that money and transfer it to our regular savings at the end of the summer. Our plan is to cut our spending as much as possible and try to live on my income alone for two months. However, it’s going to be a substantial pay cut (about 43% of our combined income), so I wanted to pay it safe and save enough to cover the difference. If we get into trouble, the money in our summer savings account will be there to bail us out without dipping into our emergency fund.

We’re using the remaining 10% of our refund to treat ourselves. Back in November, I booked a hotel in Washington DC for the last weekend in February at about $60 a night. The hotel is already paid for, but we decided to use a little of our tax refund to pay for a nice dinner and maybe some entertainment.

Originally we planned to spend no more than our monthly entertainment allowance on the trip ($50), plus the extra gas cost, which we’d pay next month when the credit card bill comes. Since our tax refund was a little more than I expected, we decided to use a little of the money for the trip. We still plan to spend as frugally as possible, though, and whatever we don’t use on the trip will go right back into savings.

Overall, our savings accounts have grown by about 50% as a result of our tax refund. Woo hoo!

If I had saved that money instead of loaning it to the government interest-free, I would have earned about $50 in interest. Sure, that’s extra money that I don’t have now. But when I consider the possible alternative (underpaying and owing a big chunk of money at tax time), it’s worth it to me to forego the interest income for peace of mind.

Whew. It feels good to be all done. :)

Don’t spend your tax refund before you get it

I know, I know. I shouldn’t be getting a tax refund, because I should have my deductions set correctly to avoid giving the government an interest free loan. I know. But the fact is, I typically err on the side of caution. I’d rather give the government an interest free loan than owe a huge lump sum of money during tax time.

This year, we’d probably be expecting a refund anyway since we got married half way through the year. Because I make twice as much as Tony, we’ll most likely get a tax discount for filing jointly. Which means we’d be getting a little money back anyway.

How much? The fact is, I don’t know. But in the past, I’d have plans for what I was going to buy with that money regardless.

I’ve used my tax refund to buy a new wardrobe, take a vacation, and buy more electronics than I want to think about. Sometimes I was so broke that I had to wait until I received the refund to spend it. Sometimes, though, if I knew it was coming, the spending spree started before I even received the check.

This year, I’m not spending a dime of it. I already know what I’m going to do with the money, and it doesn’t involve a spending spree. It’s going directly into a savings account to help us cover the two months out of the year when Tony won’t receive his teaching salary.

I bristle at some of the tax preparation commercials I’ve been seeing on TV lately. “Need a vacation? Bring your taxes to us, and we’ll get you the tax refund you need to pay for it.”

The fact is, a tax refund isn’t “extra money.” It’s money that you should have been getting in your paycheck all year, which means the same rules apply to your tax refund as your regular income — don’t blow it.

I realize there are situations where a lump sum tax refund might be helpful. For instance, if you’ve been avoiding major car repairs because you don’t have the lump sum to pay them. That’s completely understandable. By all means, use your refund to get your car in working order.

But if you’re considering using your refund for something unnecessary, I urge you to think of that money as regular income. Can you really afford to spend it? Do you have a 6- to 8-month emergency fund in place? Are you debt-free? Are you fully funding your retirement accounts and education savings accounts? If the answer to those questions is yes, then maybe you can afford a big vacation or a new wardrobe right now.

But if you’re like me — with a tiny savings account, way too much debt, and a non-existent retirement account — then you’d probably be better off putting that money to more practical use.

File your taxes early (& cheap)

photo by 427

We should be receiving our W2s in the mail in the next couple weeks. I always try to file within two weeks of receiving all of my paperwork. It’s better to get it out of the way, right?

Be sure you’ve collected all of your documentation, including W2s, interest paid to mortgages and student loans, interest earned on financial assets, education expenses, medical expenses, and more. MSN Money has a helpful list of tax documents you’ll need to collect.

Some of these documents will come from your employer, lender, or financial institution. Other information (such as medical expenses and education expenses), you are responsible for tracking throughout the year. You may be required to offer proof if you’re audited, so be sure your numbers are correct.

Once you’ve gathered all of your documents, you don’t have to pay an accountant to get your taxes filed. Here are some alternative tax-filing options that will cost you a fraction of the price of a tax-preparation service:

Check with your library, church and employer.

Many times you can get free tax advice or professional tax preparation services from these organizations. Also check with your employer. They may offer tax preparation services as a fringe benefit.

Ask family and friends.

If you know your tax return is going to be complicated (for instance if you recently inherited a large sum of money), it may be best to get help from a professional. Before you head to an expensive tax prep service, ask around to see if you can find someone who prepares taxes out of their home.

A friend or family member may know someone with experience. Chances are their rates will be more affordable than a service. Just be careful. Ask for credentials and references to make sure your tax information is in good hands.

Do it Yourself.

If your return is simple, don’t be afraid to do it yourself. It may seem intimidating, but I think you’d be surprised how easy tax software is to use.

E-filing your federal tax return is free at the official IRS website (if your income is under $56,000 a year) or  TurboTax (for simple returns). You’ll have to pay to file your state return if you choose this route.

You can also purchase tax preparation software that suits your needs. We will be using TurboTax this year. It’s relatively cheap (about $40 for the version that includes federal & state filing for personal tax returns). It’s also incredibly easy. It guides you through filling out the forms in simple terms, and helps you determine if you qualify for certain deductions.

No matter how you choose to file your taxes, make sure you keep a hard copy for your records filed with all of the pertinent documents. Though I scan and file most documents electronically in pdf, tax returns are the only thing I keep in hard copy. You never know when you’ll need them.