Surviving Tax Time

stress 2It’s often said that the winter holidays are the most stressful time of year, but I bet anyone who has to file an income tax return could easily argue against that contention. With mounting anxiety, Americans often procrastinate for weeks or months before rushing around to collect all the necessary paperwork they need to file. Finally they sit down to face the task – often unaware of which way their return will fall. Will they owe this year or get a tax refund?

The economic demands of our day make this season of stress even more challenging for many. With income barely meeting their needs and unexpected expenses straining an already tight budget, many people dread the thought of an additional tax bill. On the flip side is the relief felt when they find that they’ll be getting a refund check in the mail.

Knowing that the anxiety-inducing job of filing a tax return is inevitable simply means that postponing the task just adds to the stress. So no matter what you may expect, whether good or bad, the first step in easing the stress is to get down to business. Then, once you know the outcome, you’ll have time to decide how to ease the burden of a tax bill or the best use for a tax refund.

You owe the Taxman!

Taking the worst-case scenario first, finding that you owe the IRS. First off, don’t panic even if the amount is beyond your ability to pay within the 10 days allotted after the IRS has made the assessment of what you owe. You need to be proactive in finding a solution while protecting your assets. No one will come to arrest you, but you will begin to get threatening notices before you’ll be contacted by a revenue officer. Quick action will help prevent the harassment and additional penalties and interest.

The first question to ask is whether you actually owe the money. A simple mathematical error can mean the difference between a refund and a tax bill. Thoroughly review the forms you filed for discrepancies. Better yet, pay a professional tax preparer to go over your returns again. If you discover that you definitely owe the IRS, you have multiple options to repay. Some will reduce the net amount owed; others will increase your overall payout.

An installment plan is the option used by taxpayers who owe less than $25,000. Fill out IRS Form 9465, a straight forward, form used to request a monthly payment plan. Provide the total amount you owe, how much you are able to apply to the tax bill right now and the amount you can pay each month. The IRS then can adjust the agreement or offer other arrangements.

Other options for taxpayers who owe money include account receivable and bank levies, wage garnishment, penalty abatement and what’s called an ‘offer in compromise’ which lowers the amount owed. However you decide to address your obligation to the IRS, the sooner you pay it off, the less you’ll pay in interest and penalties.

Whoopee! A Refund!

While celebrating may be overkill, taxpayers who are getting a tax refund can breathe a sigh of relief for dodging a tax bill. They now have an opportunity to make wise use of a tax windfall.

  • Invest/Save: One of the most fiscally responsible uses would be to deposit it into a 401k or other investment fund that earns interest.
  • Pay off Debt: While increasing your investment accounts has obvious benefits, the decision to pay down debt is a stress reliever for anyone who carries a balance. Lower debt has the potential to move your credit score in a positive direction making future borrowing easier. 

Experiencing less stress during tax season comes when you pursue excellent financial management all year long. Avoid becoming overwhelmed by consistently burning the midnight oil and sacrificing entire weekends to work. Focus on balancing work and your private life. Set financial goals and celebrate milestones.

Being Wise with Your Windfall: Tips for Using Your Tax Refund

coins-currency-investment-insuranceIf you’re expecting a hefty tax refund this year, you may, like many people, intend to have some fun with your windfall. After all, it’s your money and you worked hard for it. There’s nothing wrong with heading out for some much-needed vacation time or buying a big gas grill for those summer cookouts. As tempting as that may sound, before you buy anything, consider the benefits of using a tax refund to better your financial situation.

Savings

If you’re among the many Americans who lack a rainy-day fund, think about setting all or part of your refund aside in an interest-bearing savings account. You never know when the transmission in your car may give out or an aging roof might start to leak. These are costly repairs, and the average American is unprepared for them; in fact, just 39 percent of Americans are capable of covering an emergency costing $1,000 or more. If you lack at least three months worth of emergency savings, that tax refund may serve you better as an emergency financial reserve.

If your roof could use some work, repairing it is an excellent use for a tax refund. You’ll head off more serious problems resulting from neglect somewhere down the line. But be diligent in looking for a qualified roofing contractor, and ask yourself several questions to determine what, exactly, you need. Check with the Better Business Bureau to make sure your contractor is accredited, and check out the BBB website for complaints or any disputes or scams a company may have been involved in, as well as tips regarding what to look out for.

Pay Down Debt

Debt is a fact of life for most Americans. If you struggle with credit card debt or are behind on the mortgage, your refund can help you out. Paying off debt is a smart move because the high-interest merry-go-round can be very hard to get off when you’re just managing it by paying the minimum every month. That can take you years to pay off even a moderate amount.

College Savings

According to CNN Money, most Americans can expect to pay about $57,000 for a degree at a public college, and more than $100,000 at a private institution. That’s a lot of money for anyone. Why not use your refund to open a 529 or Coverdell education savings account? And investing in your state’s 529 plan may result in a nice state income tax deduction. However, beware of using the money for unqualified purposes, which can earn you a 10 percent penalty.

Roth IRA

A Roth IRA lets you stash money away that becomes tax-free after age 59.5 as long as it’s been open for at least five years. You can contribute to it as you wish and withdraw the sum of your contributions without being hit with a tax or penalty. Your Roth earnings can be used tax-free for education expenses or for a first-time home purchase.

Invest in Yourself

You are your own most valuable resource, your best hope for earning and growing your assets. Improve your ability to do that by investing in training, additional education, or by joining a professional association. It’s a good way to sharpen your skill set, pick up new knowledge, and make valuable new professional connections. The more you can improve yourself, the more valuable you’ll be to an employer or to clients.

Travel

Speaking of self-improvement, are you aware that travel broadens perspective and helps you keep problems, challenges, failures, and successes in their proper context? Think about spending a portion of your refund to go someplace new, a destination that’s always interested you.

Think of a tax refund as an opportunity, an annual chance to improve your financial situation and personal prospects. Think carefully before heading off to the Jacuzzi store or ordering a season football ticket package. By being strategic with your financial prospects, you can put yourself in a much better position to acquire those “toys” you really want and achieve financial security.