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Resisting Temptation: 5 Smart Ways to Use Your Tax Refund

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By trusting instinct and intuition, the right decision can become obvious from the wrong one. But desires are hard to resist. Now that your tax refund is sitting in your account, don’t let temptation overrule a smart monetary choice, and follow what your financially responsible gut tells you to do. Use five percent of your refund for a fun purchase, and feel good about investing the remaining 95 percent in any of the following:

Build Your Savings

The broken record singing “build your savings” is as tiresome as the one saying “eat a healthy breakfast.” But really, build a savings. Ideally, an emergency fund should support three to six months worth of necessary living expenses. Last year about 49 percent of employees lacked a personal safety net, according to Forbes. Use your refund to establish a savings account, and then use an app such as Saving Made Simple to help make saving a financial habit.

Get Reliable Transportation

“Car maintenance avoidance” is a real syndrome. It stems from the fear of taking your car into an auto repair shop for a brake check and coming back with 10 other costly repairs. Cushioned with your refund, a brake check shouldn’t be so daunting.

Proper maintenance helps improve the reliability, safety and longevity of your vehicle. Brake pads, rotors and tire replacements are worth the cost. After an inspection, you may even decide that buying or leasing a new car is a better investment than a repair spree. For example, use a $2,000 refund for a down payment to reduce monthly payments. A higher refund used as an initial down payment while signing can also leverage a better lease deal.

Improve Your Credit Score

Your credit score is a measurement that indicates whether you’re a good candidate for a mortgage, a loan or a credit card. The score also helps lenders determine the interest rate to charge you. A higher score provides you with better rates and more favorable terms.

Consider using your tax refund to pay off a credit card and substantially reduce your debt; it can boost your credit score, explains The Nest on Budgeting. Improve your credit by keeping the account open and lowering your credit card utilization rate, which is how much you charge/owe (outstanding balances) vs. your total available credit limit. The lower your utilization rate and balances, the higher your credit score. A utilization rate of below 20 percent is good and an average of 7 percent is best, according to FICO.

Pay off Debt

A tax refund can serve as a negotiation tool to achieve a settlement with a debt collector. Improve your financial management by offering the creditor an upfront lump sum in exchange for a smaller amount owed. Negotiate a lump-sum payment, and you could cut your debt significantly. While bargaining, exert power and hold firm. Know your rights and be aware of fictional scare tactics. Nolo, an online small business and legal website, offers a collection of articles on how to negotiate with creditors, handle tax consequences and strategize negotiations.

Make a Career Investment

Invest in your education and complete online courses to increase your future earning power and employee marketability. Expanding your skill set and advancing your education can also help you land a promotion or change careers.

Make sure that you choose a career that has a positive outlook in the future. For example, those who earn a Master of Administration degree will have multiple career paths available for them with each of them expected to experience significant growth in the coming years. These careers also pay very well, making it more likely that your investment will pay off in the end. Once you have your MBA, you can pursue jobs as a marketing manager, financial analyst, operations manager, or an IT expert, giving you a number of different options within an organization.

Last year, U.S. News & World Report broke down the cost of an online class. Writer Devon Haynie found three-credit courses that ranged between $935 and $1,320 for out-of-state students, and one community college class cost about $515. Also, university online courses cost between $300 and $400 per credit hour. While researching your options, also look for in-state colleges and apply to scholarships to keep costs even lower.

Use Tax Write-Offs to Start Your Business Off Right

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Small businesses provide 55 percent of all jobs in the United States, notes the SBA, proving the American dream is certainly alive and well. You might feel like competing with big business is not worth the hassle, but since 1990, big business has cut 4 million jobs, while small business has accounted for 23 million net new jobs since the 1970s.

But you know success does not come easy. There is always more to do and more to learn. Follow these stress-free measures to make a smashing debut as the most effectively managed small enterprise in America.

Startup Costs and Documentation

You do not need millions of dollars to start up your business. Once you have a concept in mind, create a plan for minimizing startup costs. The IRS recognizes the time and energy spent on creating a business and offers up to $5,000 in deductions for every $55,000 spent on organizing, planning and starting your business.

Be sure to keep accurate records so your deductions can be granted. Many people cringe at the prospect of documenting expenses for a business, in addition to personal expenses. Balancing your own budget is hard enough, and separating yourself from your enterprise can be daunting.

Separate Business Versus Personal Expenses

A simple solution to this common problem is creating a business expense account to track your expenditures. Certain credit card companies make this task easier by offering deals specific to small business owners. Every time you make a purchase for your business, use your business card and save yourself the hassle of juggling several bank accounts. Don’t make the mistake of combining personal expenses with your business endeavors and your purchasing history will speak for itself.

The Ticket Is Record-Keeping

Along with startup costs, there are other ways you can deduct expenses from your taxes. According to the IRS, you can write-off the business use of your home and vehicle. Some expenses, such as rent for an office, employee pay and even interest charged on money borrowed toward your business, are eligible for deductions. This is why it is profitable to keep accurate records of your transactions. Services like Intuit calculate federal and state payroll tax for you, so you’ll have a better idea of what to expect. When tax time comes, you can provide the proof needed to reap the benefits of being a small business owner.

The Public Has Spoken

Our economy depends on small business to survive. Pew Research group found 71 percent of the public held a positive view of small business, while only 25 percent thought of large corporations in the same light. Perhaps the American public is supportive of small business owners because they are like everyone else — working hard to make a living. There has never been a better time to be the owner of your own business. Go ahead, quit your day job and begin the journey of a lifetime— but don’t forget to keep your record books straight, as it will pay off in the end.

How to Cut Your 2012 Tax Bill Today

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Did you know there are still ways to save on your 2012 taxes?  Many people (mistakenly) believe that once the clock strikes midnight on January 1, all tax strategies need to be in place–hardly!  Here are two ideas you can take to the bank today (assuming you meet some requirements) to keep your Uncle Sam from digging deeper into your pocket.

 

 

Good Old Fashioned IRA

 

Sit down, kid, and Grandpa OG will tell you a story….

Long before all the Roth IRA hoopla, there was just an”IRA.”  Now, to distinguish them, we called one a ‘traditional’ IRA. That’s where your opportunity lies. In 2012, the maximum contribution to an IRA was $5,000 ($6,000 if over age 50).  However, you have until whenever you file your taxes, or April 15, whichever is earlier, to contribute to an IRA and count it for your 2012 tax bill. Contributions are tax deductible, which means it lowers your overall income that is taxed (page one of the 1040), thereby reducing your tax. If you were in the 25% bracket, a $5,000 contribution would reduce your income taxes by $1,250. Not exactly dollar-for-dollar, but it’s better than a sharp stick in the eye!

 

Traditional IRA Deduction Limits

 

Here’s where the funky requirements come into play: first, as long as you’re under age 70 1/2 and have earned income, you’re eligible to contribute to an IRA. Whether or not it’s deductible will depend on a couple of things:

If you’re covered by a company sponsored plan (401k, etc) then your contribution’s deductibility is phased out as follows:

-Single: $58,000-$68,000 AGI

-Married Joint Filer: $92,000-$112,000

-Married Separate Filer: $0-$10,000

If you not covered by a company plan, then there is no phase out.

Your spouse is covered by a company plan? then your phase out is $173,000-$183,000.

 

Small Business Owner Plans

 

If you’re fortunate enough to own your own business, there’s another way for you to cut into your tax bill. It’s called a SEP IRA, which stands for Self-Employed Pension, and its available to most business owners. They work very much like traditional IRA’s, but the limits are much different.

Small business owners would first calculate their profit. The maximum SEP contribution is 25% of that profit number (up to a maximum of $50,000).  The tricky part of small business plans? You must offer all your employees the same thing you offer yourself. For example, let’s say your profit is $50,000 and you decide to contribute the maximum, 25%, into your SEP. That’s $12,500–nice job!  But, if you have employees, you must contribute 25% of their salaries into a retirement plan for them, too!  That can add up quickly–so be careful!

 

Bonus Tax Savings

 

In 2012, eligible lower-income taxpayers can claim a nonrefundable tax credit for the applicable percentage (50%, 20%, or 10% depending on filing status and AGI) of up to $2,000 of his or her qualified retirement savings contributions as outlined in the Saver’s Credit chart.

 

So there you have it-a couple of last-last minute tax strategies to lower even last year’s tax bill!

Photo: Philip Taylor

Year End Tax Planning: A (Surprising) System of Cleaning My Closet

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On the way home from this Thanksgiving weekend in Michigan, I finally reached my limit with the situation in my closet.

For the last four years it’s become bigger and bigger mounds of….clothing. Just as I get the closet organized, it becomes a mess yet again. Being a recovering financial advisor, I loathe messes. Everything should be in neat and tidy rows, not thrown on the closet floor.

Historically, at this point I’d decide to get rid of clothing. I’d pick up stuff and make the “stow or go” draft move:

“No,” the hoarder in me said, “I’ll wear that some day.”

“I got that at my favorite 5k in 1998. I can’t get rid of the Pickle Run shirt!”

“If I get that stain out I’d wear it all over the place.”

I should have been saying, “Some day bell bottoms will come back in style!”

Sometimes–not often enough–I’d find a piece that definitely had to go. Whenever I brought home new clothing from holidays or trips to the mall, old stuff stacked up. The “donation” pile contained a lonely piece or two. I was adding clothing at a 2:1 rate over donations.

On the way home I snapped. Suddenly I formulated a plan:

 

The Plan

 

It was so easy, I can’t believe I hadn’t seen it earlier.

Clothing decisions (and by extension “stuff” in general”) isn’t about whether I like each “thing” or not; of course I loved them all. I wouldn’t have bought them if I didn’t like them. They all had sentimental value AND my mind needed to justify the reason I’d added them to my collection in the first place.

In short: using my current criteria, there was no way I’d ever clean out the closet.

In my a-ha moment, I flipped my thinking: the closet wasn’t a place to store all the cool stuff I wanted to keep. It was a place to store things I needed.

Following that train of thought led me to the real question:

How much did I really need?

 

The List

 

I made a list of things I really needed:

10 Long Sleeve Running Shirts (probably don’t need 10, but that was a start)

10 Short Sleeve Running Shirts (closer to the number)

4 Pairs Running Shorts

3 Pairs of Jeans

4 Pairs of Dress Pants

3 Suits (again, probably too many for my lifestyle, but I could cut more later)

6 Ties

6 Button down shirts

5 Pullover sweaters

….and so on.

 

…and Action!

 

Sunday was a bloodbath in my closet. I tore everything out and placed it on the floor. I was making Top 10 lists of each type of clothing. Soon I was at the difficult portion: there were pieces I liked, but they didn’t make the  Top 10 (or 5, or whatever….). At this point it didn’t matter how much I liked the shirt: there were enough pieces for me to wear without it in my closet. Better to gift it to someone who really needs it this holiday than to keep it sitting in my closet with 10+ items I’d rather wear.

I created a gigantic mound of clothing to donate.

 

Itemized Charitable Donation Deductions: Bonus Time!

 

If you itemize your taxes, you are probably eligible for charitable donations to 501c3 organizations. If you aren’t sure whether the place you want to donate clothing is a 501c3, just ask them. They’ll know.

If your organization is eligible and you itemize deductions on your taxes, you may be able to write off your charitable contributions. I received a receipt at Goodwill that listed all of the items I’d donated to them. I’ll use this at tax time next year.

Bonus!

 

The Lesson

 

I’ve learned this lesson 100 times and still continue to struggle with it daily. Don’t get caught in one line of thinking about a problem….especially nagging ones like cleaning out a closet. Turn the question around. Search for a better answer. Scour the web for strategies….soon you’ll have a clean closet, better decisions and possibly tax deductions!

 

This is another in our list of systems for busy people. Want more? Check out our budget plan for busy couples. It’s another play-tested system (that one OG uses with couples all the time and I used when practicing…it’s worked magic for non-budgeters.)

What are you waiting for? Go clean out that closet and cha-ching on the tax deductions!!!! What system do you use for weeding out old clothes you still love but should probably chuck?

Five Money-Saving Tasks That’ll Help You Cha-Ching! in the 4th Quarter

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I love the sound of the cash register ringing, don’t you?

If you’re going to be successful in your financial life, treat it as if it’s a business and you’re trying to hear that awesome cash register sound. If you don’t, you’ll always prioritize yourself behind more “important” activities like your job (nevermind that the job is there to help your net worth…that’s probably the subject of another post).

Every business has a mandatory list of activities that can’t be ignored. So does your financial life.

Here are five items that MUST be on that list this quarter:

1) Mutual fund capital gains. Even if you don’t have mutual funds outside of an IRA now, you should learn how these rules work. When the manager (or system, for an index fund) trades stocks or bonds inside of the fund a capital gain is generated. Someone has to pay it, and there’s no real fair method, so the mutual fund company declares a date and divides the gain among shareholders of record. Even if you didn’t sell the fund, you’re responsible for your portion of the manager’s buying and selling.

With results so far in 2012 looking up, there’s a good chance you might get hit with a tax bill this year. Avoiding this tax is legal and easy. Find the dates the fund declares capital gains and transfer your money to a different fund in the same family. This avoids fees for switching and the manager’s capital gains tax.

Grab a calculator before you move any money. You’ll still be on the hook for capital gains taxes you generate by selling as well. The cost of switching might outweigh the savings you’ll realize from avoiding any taxes created by the fund manager.

2) The lemon drop. Hoping to skim off some of that skyrocketing Apple stock? Cover a portion of your capital gain by also selling your brother in law’s “can’t lose” loser. There’s no time like now to weed your portfolio of positions that aren’t going anywhere. Although you’re only allowed to show $3k in net capital losses each year, leftovers can be carried over to deduct in future years.

3) Charitable giving. Hopefully you’ve given to your favorite community non-profits throughout the year, but if not (and especially if you itemize), you’ll want to make cash and in-kind donations in before December 31. Keep receipts for your gifts. The IRS has tightened charitable giving laws in recent years.

4) Estimate your taxes and decide when to pay property taxes. If you own a home winter taxes are deductible either in December or January, your choice. Did you receive a big bonus this year? Take the extra deduction now to help lower your tax due. If you make too much, it might be a better idea to wait until next year. High income earners aren’t allowed to claim all of their itemized deductions (ask your accountant about whether you’re subject to phaseouts).

5) Goal evaluation and setting. The 4th quarter is the perfect time to begin thinking about your short and long term goals. Did you hit your benchmark in 2012? If not, what are you going to change in 2013?

While people generally talk a good game about benchmarking, most of my clients were surprised when I pulled the actual number out of their plan to see if they’d hit the mark during a year. By sticking with actual data and avoiding the “Yeah, it feels like I had a good year” you’ll be able to make the necessary course corrections to save the right amount of money in the upcoming year.

I’ll be addressing each of these areas in more detail during the course of the quarter, but do yourself a favor and schedule these tasks now. These are five activities that you don’t want to miss!

What other events are on your 4th quarter financial calendar?

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Oops…I Forgot to File My Taxes

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Whew!  You’ve filed your taxes…or did you?

Most of America now have the 2011 tax year “in the books” so-to-speak…but what happens if you…ahem…’forgot’ to file?  What should you do?

Extensions

First of all, let me exclude all those who, like me,  filed an extension.  If you filed an extension, your taxes are due no later than October 15, 2012, but the tax bill (any money still owed to the government) was due yesterday.  An extension to file is just that: an extension to file, not to pay.  If you filed an extension and didn’t pay, but think you may owe money, it’s best to pay as soon as possible to avoid more penalties.

Get Moving!

What happens if you just didn’t file?  You didn’t file an extension, you didn’t file anything. What now?  Most professionals would recommend that you get filing done as soon as possible.  If nothing else, print out form 4868 and file for an extension.

Five Steps to File Your Taxes Quickly

Step 1:  Determine the reason you didn’t file.  Was it because you didn’t receive a form you needed?  Or, was it due to laziness?  Perhaps apprenshension?  Do you owe money and don’t know what to do?  Acknowledge why it happened and move on.  If you were lazy, get out your calendar and schedule a couple hours to work on them.  If you’re scared of the taxes you owe, work on filing the appropriate tax forms first, then worry about the bill.

Step 2:  Call your accountant, CPA, or other tax preparer and get in their schedule for when they return from vacation.  It’s likely they’re headed out of town to enjoy a much-needed vacation, but they have plenty of time available in May.  Call today and get your appointment scheduled.  What about doing them yourself?  Listen: You’ve had 4 months to get them done on your own.  Acknowledge that you won’t do it if you have 400 months and hire someone.

Step 3:  Set aside a 30-90 minutes to gather your tax-related documents and throw them in an envelope for your tax meeting.  Don’t think about it – just put stuff in the envelope.  Accountants will have more time to spend with you after they get back in May.  Don’t know if you should include that form?  Yes, you should.

Step 4:  Make sure you attend your tax appointment.  I know this sounds obvious, but hey, it’s been since January and you haven’t got them done.  You’re not the best time manager.  Commit to attending this meeting.

Step 5:  Begin 2012’s tax planning now.  Go to Office Max or Staples and buy a box of manila envelopes.  Every week, go through your paperwork and put the necessary receipts in this month’s envelope.  By the time taxes roll around next winter, you’ll be 90% done.

Remember, it’s a criminal offense to not file your taxes.  Not being able to pay them is civil.  Don’t be a criminal.

Four Tips for Tax Season

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This is a guest post from Eric at Narrow Bridge Finance as part of the Yakezie Blog Swap. This week, we are discussing the topic “Best Tips for Your Taxes.” You can see my post on the same topic at Eric’s site.

 

 

People around the United States are in a last minute flurry to find their W2s, 1099s, 1098s, and find the easiest and cheapest way to load all of that onto a 1040. If that sounded like a foreign language to you, don’t worry. Here are some of my favorite tips for navigating tax season.

Tip #1 – File Early

I guess if you are reading this, you probably already missed this one. But there is no time like the present to start planning to avoid next year’s procrastination.

I sent my taxes to my accountant around the end of February. Avoiding the stress of last minute filing can do wonders for your health and sanity. Planning ahead and filing early just makes life easier on you.

Tip #2 – Understand Your Forms

Decoding that foreign language is important. Knowing which tax forms to look for is a big first step. Here are the most common items to look out for:

· W2 – Earnings report from your employer

· 1099 – Miscellaneous income forms. These include bank interest, investment income, and freelance income.

· 1098 – Deduction forms. If you pay mortgage interest or higher education expenses, expect 1098s that you can use to lower your tax liability.

· 1040 – This is the form that you submit to the IRS that summarizes your annual taxes paid, taxes owed, and any refund or additional payment.

Tip #3 – Stay Organized

My taxes this year were two inches thick. Getting everything from my banks, investments, employer, and other income sources is a chore on its own. To stay organized, I made a checklist outlining everything I was expecting and marked forms off as they arrived.

When the form arrived, via mail or online, I filed hard copies in manila folders by type. My personal forms went into one folder and each of my side income sources had its own folder.

Make sure to keep each year separate but filed away in case you need it. It is important to understand how long to keep bank statements and other financial records.

Tip #4 – Understand How Your Taxes Work

You pay taxes every time you get a paycheck. You earn money all the time, and you might not remember it around tax time. To make sure you file correctly and avoid penalties and audits, you should understand how your taxes work.

Take time to learn about itemized deductions versus the standard deduction. Take time to learn about tax brackets. Whether you use tax software to file or have an accountant take care of it for you, you should understand the complexities of your taxes in case you are contacted by the IRS and to make sure you are not overpaying.

Get To It!

Now that you know my best tips, get those taxes done. The filing deadline is swiftly approaching, and you don’t want to get in trouble for being late.

(Photo credit: Tax Sign – 401k, Flickr; Chance Card – OhioProgressive, Flickr)

The Roth IRA–Playing Games with Tax Brackets

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Our normal Friday Blog Post of the Week! segment will return next week.

 

The Roth IRA is a Swiss Army knife for financial success.

In our past wildly exciting posts about the Roth IRA here and here, some of the commenters on these stories have discussed the efficacy of the strategies presented by the Other Guy.

In short: is it worth all the trouble jumping through hoops to get as much money into the Roth IRA as possible?

In a word: indubitably (I’ve wanted to use that word since I heard it in Mary Poppins. 10 points!)

While I’ll agree that if the only upside to these strategies are immediate returns on a few exotic Roth IRA gyrations, you’ll only gain a few extra dollars in your pocket for what seems like a lot of work.

…and I get exhausted switching television channels, so let’s not talk about work.

I prefer easy and exciting.

The Roth IRA has one exciting feature beyond those we’ve listed previously—flexibility later in your planning.

 

The problem with financial planning

 

When I read well-meaning blog posts about retirement or education planning (including my own), the writer always discusses assumptions.

You know what happens when you assume…but what choice do we have?

We’ll have to assume that the tax rate will go up/down/stay level.

We have to project inflation rates.

Finally, we have to decide when we’re going to die. (Well, at least you do…I’ve got my cryogenic tank next to Walt Disney ready to go. I’m gonna live forever.)

Back on point: Roth IRA plans, for those of you uncomfortable with this type of tax shelter, give you no tax break today but offers tax free income down the line. Many (yawn) dissenters say that tax treatment of a Roth IRA is irrelevant. You’ll pay the tax today or tomorrow. It’s all the same.

No it isn’t.

We’re working for maximum tax flexibility, not a few random bucks. Because I can’t predict income tax rates, capital gains rates, or estate tax rates, I’m going to create a financial future that is as flexible as possible, as soon as two current criteria are met:

– I’ve done what I can to maximize deductions today. I know what tax rates are right now, so I’ll take my tax break, thank you.

– I’m not locking up money unnecessarily for down the road when I’m experiencing short term needs for cash.

 

Here’s the Roth IRA Game

 

When you reach retirement, let’s pretend you want to live on $60,000. Tax brackets in America are tiered, meaning that you’ll pay 10 percent on the first dollars you make, until you hit the 15 percent bracket, which is what you’ll pay beginning with the first dollar in that bracket, until you reach the 25 percent bracket…..

Because we don’t know what tax brackets will be in the future, let’s pretend the 25 percent line will be at $50,000.

 

You Have Two Pots of Money

 

Most people have a pre-tax retirement plan. As I mentioned, I like my current pretax deductions, so I’ve maximum funded those. Therefore, I have monster amounts of money (otherwise known as oodles) inside of them. These dollars must come out of the plan and get taxed.

I’ll remove $50,000 per year from this plan. Some of it will be taxed at the 15 percent bracket and some at the 10 percent bracket.

 

Here’s Where the Roth IRA Comes In

 

Finally, I remove $10,000 from my Roth IRA. Now I’m living in the 25 percent tax bracket but the government is taxing us at the top of the 15 percent bracket.

 

Lots of Work for Big Payoffs

 

Now, I’ve avoided a 25 percent tax each year (or whatever my top tax rate would be….) on $10,000, or $2,500 in taxes. Of course, I paid those taxes already, but remember, if I’m worried about the HUGE AMOUNT OF WORK this takes, I’m only investing money after I’ve already secured current tax breaks.

(photo credit: Swiss Army Knife: IK’s World Trip, Flickr; License Plate: Gamma Man, Flickr)

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The Worst of the Free Financial Advisor #2: Top 5 Reasons We Like the Roth IRA – Are Tax Refunds Bad? – Hiring an Advisor

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Holy big topics, Batman! We’ve got a great show for you today.

First – Joe & OG talk Hiring an Advisor. Should you hire one? If so, what should you look for? What questions should you ask?

Then – Len, Carrie, Dom  and of course Dr. Dean discuss tax refunds. Should you avoid one?

Finally – Our top 5 reasons we love the Roth IRA.

Subscribe to the show (or just listen) on iTunes here.

Download the show directly by right-clicking here.

 

Hiring an Advisor

FINRA.org BrokerCheck

CFP – Questions to Ask When Hiring a Financial Planner

5 Jaw-Dropping Financial Advisor Interview Questions

Ric Edelman: The Truth About Money (Amazon page)

Our Roundtable Members Sites:

Carrie Smith = CarefulCents.com

Dominique Brown = YourFinancesSimplified

Dr. Dean = The Millionaire Nurse Blog

Len Penzo = Len Penzo (dot) Com

The Squirrelers.com article we’re discussing: Tax Refunds Are Not Taboo