The thought of filing taxes on your own can be daunting. At the same time, hiring a professional accountant comes at a price: around $273 of your potential refund.
But, with the availability of low-cost online options – like TurboTax and TaxAct – you may still be wondering if hiring a tax professional makes the most sense for you. To help decide which way to go when filing your taxes, here are a few questions you should ask yourself.
Have you experienced any life changes this year?
Major life changes can definitely be a reason to seek out the help of a professional tax preparer as these events have the potential to complicate the tax filing process. Here are a few lifestyle shifts that may prompt you to hire an accountant:
You had a baby. While it’s fairly easy to input the child tax credit on regular tax software, if you had a baby within the last year, you may want to seek out a professional to help you figure out possible medical deductions pertaining to your child’s birth. You may also be able to deduct childcare costs.
You earned more money. If your income spiked significantly in the past year (especially if you made over $250,000), you may benefit from the help of a professional. Why? Taxes often get more complicated as your income rises, and a professional who understands the tax code can often help out.
Do I feel confident doing my own taxes?
You may be great with a budget and managing your money, but taxes are an entirely different beast. If you have a simple return with only your W-2 information to input, you may be ok filing on your own. But, if you started up a new business or have a side hustle in addition to your job, it may be worth the peace of mind to hire a professional.
Also, if you’re going through the free filing process and find that you’re second guessing yourself, it’s time to outsource your taxes. Keep in mind that working with a pro can help you find deductions you never knew existed — like the ability to deduct home office space used to run your side hustle or moving expenses incurred for a new job.
Am I ready to deal with the IRS?
If you are filing solo, even if you feel certain you did everything right, there is no guarantee that you won’t get audited by the IRS. The audit process can be time consuming, nerve-wracking, and costly. Also, if you’re the one preparing your taxes, you’re on the hook should an auditor come calling.
If a tax professional prepares your taxes, this person or firm will be required to defend your return to the IRS. Instead of you, your accountant will be the contact person required to answer questions posed by the IRS, even though you’ll ultimately be on the hook for any amount owed. For this reason alone, hiring an accountant may be worth it.
How much time do I have?
The average time it takes to complete a tax return, according to the Washington Post, is about 13 hours. If you’re already strapped for time, you may want to consider outsourcing this work. And, if you do want to prepare your taxes on your own, make sure you get organized early and set aside plenty of time to file before the April 17th deadline.
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Whoa, boy. Republicans have everyone confused about taxes. That’s what happens when you pass a massive system overhaul less than a month before W-2 forms go out. (Thanks, Congress!) Here’s the thing, though: The tax bill won’t directly affect the taxes you file this year. Most provisions go into effect Jan. 1, 2018, but they’re not retroactive — and your 2017 taxes are due by April.
So, as we talk tackling taxes this year, a lot of information will look old hat. But don’t worry: We’ll note some of the big changes on the way — and how they can influence your 2017 tax return.
Let’s dive in.
First, get your ish together
To file, you need any applicable:
1099s, which report other income, like interest and dividends or self-employment wages
1098s, which report stuff you can deduct, like mortgage interest or tuition expenses
Documentation for other deductions you want to take, like receipts for charitable donations
Your 2016 tax return
Bank account and routing number, if you want the IRS to direct-deposit your refund
Your adjusted gross income (AGI), which is basically your gross income (including any interest you’re including on 1099s), minus “above the line” deductions, most notably, retirement plan contributions, alimony, medical expenses and unreimbursed business expenses. Sounds complicated, but your 1040 walks you through calculating AGI.
Next, bookmark these dates
Expect last year’s W-2s by Jan. 31, 2018.
Your 2017 taxes are due by April 17, 2018. (Not a typo. You get two extra days this year because April 15 is a Sunday and April 16 is Washington D.C. Emancipation Day.)
If you need more time, you must file for an extension by April 17, 2018.
If you get an extension, your tax returns are due by Oct. 15, 2018. But don’t get it twisted: That extension only applies to your paperwork. If you owe the Internal Revenue Service money, you must pay by April 17, 2018.
Figure out your filing status
There are five options, pretty much determined by your marital status on the last day of the year.
Single Filing Status, meaning you’re not married, divorced or legally separated
Married Filing Jointly, meaning you’re married and filing a return with your spouse
Married Filing Separately, meaning you’re married, but not filing a return with your spouse
Head of Household, meaning you’re not married, but have paid more than half the cost of maintaining a home for yourself and a qualifying dependent
Qualifying Widow/Widower, meaning your spouse died within the last two years, you haven’t remarried and you have a dependent child
Your filing status is mostly straightforward. If you’re single, file single. If you’re a head of household, file head of household. If you’re a recent-ish widow(er) with a dependent, file qualifying widow(er). If you’re married, you’ve got a choice to make. Most couples score the bigger tax break by filing jointly, but there are reasons to file separately. Here’s a high-level overview of filing together vs. filing solo.
Why married couples file jointly
For a higher standard deduction (more on this in a few)
To reduce what you owe, since higher tax brackets kick in sooner when you file separately
To qualify for certain deductions you can get more easily when filing jointly, like the Child & Dependent Care tax credit
Why married couples file separately
To separate your tax liabilities (say, you’re worried your spouse is evading Uncle Sam)
To score a significant itemized deduction one spouse can’t take were the couple to combine incomes (some deductions are limited by your adjusted gross income)
One spouse has debts subject to refund seizure or an income-based payment (like student loans)
We can’t tell you what to do. You — or your tax preparer — need to look at your finances and crunch the numbers. Having said that, you may want to crunch the numbers, i.e., prepare your tax returns both ways to see if it’s better for you to file jointly or separately. Yes, that’s extra work. It’s also the best way to know how to come out ahead.
Know the tax brackets
OK, remember, we’re talking about filing taxes in 2018 for 2017, so you’re subject to the tax brackets in place before the Republican-led tax reform. Here they are.
Now, here’s the thing about tax brackets: They’re not all that straightforward. (Who’d a thunk it, right?) You don’t make, say, $80K and get taxed at 25% for all those dollars. The system’s progressive. So, assuming you’re single, the first $9,325 you make gets taxed at 10%, the next $9,326 to $37,950 gets taxed at 15% and the remaining amount (given the next tax bracket, for 2017 at least, is $37,951 to $91,900) gets taxed at 25%.
This is confusing, but also important so (a) you don’t try to needlessly claw your way into a lower tax bracket and (b) you get an accurate estimate of your tax bill before you must pay it. Part B is all-the-more important as we head into 2018, since the tax brackets are changing. (The progressive system is not.) Effective Jan. 1, 2018, they become:
Decide if you’re taking the standard deduction
Deductions lower your taxable income. The standard deduction is the most basic way to approach this. In lieu of listing every qualified expense that ate into your net worth during the year, you claim a fixed amount associated with your filing status. For tax year 2017, the standard deduction is:
$6,350 for single filers
$6,350 for married filing separately
$12,700 for married filing jointly
$9,350 for heads of households
Flash forward: The GOP tax bill practically doubles the standard deduction for all filers, so for tax year 2018, it’s $12,000 for singles and married people filing separately, $24,000 for married couples filing jointly and $18,000 for heads of household.
If you don’t take the standard deduction, you’re itemizing. People itemize when (a) their deductions exceed the standard deduction and/or (b) they can’t take the standard deduction, because there are exemptions. For example, someone who’s married filing separately is ineligible if their spouse itemizes deductions. If you’re itemizing, you need to …
Know your deductions & exemptions
Let’s start with deductions. There are a bunch of them, but, for the sake of simplicity — which, again, is what we’re going for — here are the most common ones. By the way, a lot of these deductions, though totally fair game this year, are changing in tax year 2018. We’ll flag some of the bigger changes as we go.
Mortgage interest deduction: You can deduct the interest paid on up to $1 million in mortgage debt on your primary home and, sometimes, a second one. Flash forward: The GOP tax bill lowers the cap to $750,000 of mortgage debt, though it’ll stay at $1 million for mortgages made before Dec. 15, 2017.
State & local tax (SALT) deduction: Itemizers can deduct state income, sales and property taxes. Flash forward: The GOP tax bills caps the SALT deduction at $10,000, starting next year — which is why people were rushing to prepay 2018 property taxes in December.
Student loan interest deduction: You can deduct up to $2,500 of interest paid on student loans.
Charitable donations: Itemizers can deduct donations made to eligible organizations. The deduction can’t exceed 50% of your adjusted gross income (or 30%, in some instances). Plus, you’ll need the receipts.
Medical expenses: You can deduct out-of-pocket medical expenses exceeding 7.5% of your adjusted gross income. That’s a result of the GOP tax bill, which lowers the threshold from 10% for tax years 2017 and 2018. It goes back up for most Americans in 2019.
Health savings account contributions: Money put into an HSA, which helps with out-of-pocket medical expenses, is tax-exempt. In 2017, you can deposit up to $3,400 if you’re a single filer or $6,750 for families.
Individual retirement contributions: You can deduct Roth and traditional individual retirement account contributions, depending on your income, filing status and whether you have a retirement plan at work. Contributions are limited, too: In 2017, you can put up to $5,500 or, if you’re age 50 or older, $6,500, into an IRA account. You can see if qualify for a full or partial deduction here on the IRS website.
Moving expenses: You can deduct some moving expenses if you relocated because of a job change. Flash forward: This deduction is donezo next year, thanks to the GOP tax bill, which suspends it through 2025.
Exemptions also reduce your taxable income, but, for individuals filing taxes, there are really only two of them.
You can claim a personal exemption, so long as no one else is claiming you as a dependent. The personal exemption in 2017 is $4,050, but it starts to get lower once your adjusted gross income hits $261,500 ($313,800 for married couples filing jointly) and is null and void if your AGI is $384,000 or higher ($436,300 for married couples filing jointly.)
You can also claim a dependent exemption, if, you know, you have dependents. That’s usually means children, but there are other scenarios where a relative qualifies. In 2017, you can deduct $4,050 for each dependent.
Flash forward: The GOP tax plan does away with the personal exemption, starting next year through 2025. The impact this could have on your taxes will vary, because, remember, the standard deduction nearly doubles next year. Still, itemizers and families, especially, should discuss with their tax preparer whether it’s worth adjusting their withholding for 2018.
Don’t forget credits
Credits, unlike deductions, get subtracted from your actual tax bill, not your taxable income. Tax credits come in two flavors: refundable and non-refundable. Refundable credits can reduce your liability beyond $0. Non-refundable credits don’t. There are a bunch of credits, too, but here are the most common.
Earned income tax credit: A refundable break for low-to-moderate income families; the amount varies based on your number of children and income. There’s a bunch of boxes you need to check off to qualify for the EITC, but, as a benchmark, if your earned income and AGI exceeds $53,930, you’re definitely not eligible.
Child tax credit: A non-refundable credit of up to $1,000 per qualifying child; eligibility is determined by age, relationship, family income and more.
Child & dependent care credit: A non-refundable credit for paying someone to look after a dependent while you work; the amount is between 20% and 35% of your allowable expenses ($3,000 for one dependent; $6,000 for two or more), depending on your AGI.
Savers credit: A non-refundable tax credit that offsets the first $2,000 low-to-moderate income workers save for retirement. Eligibility varies by filing status and AGI.
American opportunity credit: A partially refundable tax break for students paying for college. The maximum annual credit per student is $2,500.
Lifetime learning credit: Another tax break for students, this non-refundable credit is worth up to $2,000, depending on income and filing status.
Mind your penalties
This is the stuff that’s gonna up your tax bill. Penalties aren’t abundant, per se, and you’re probably familiar with most of them, but here’s an overview of what can jack up your tax bill.
Early withdrawals: In most cases, if you withdrew money from a retirement account during the tax year and you’re not 59-and-a-half, you must pay an additional 10% early withdrawal tax. There are some exemptions, though. For instance, first-time homebuyers can take up to $10,000 out of an IRA for their house, sans penalty.
Missed minimum distributions: Conversely, once you hit age 70-and-a-half, you have to start withdrawing from retirement accounts, including 401(k)s, traditional IRAs, SEP IRAs and SIMPLE IRAs. If you didn’t make your minimum distribution by Dec. 21, 2017 (or April 1, 2018 if you turned 70-and-a-half this tax year), you’ll pay a 50% excise tax. Minimum distributions vary by age and marital status.
Failure to file/failure you to pay: The exact charge depends on where you went wrong (failure to file costs more), how long you go AWOL, how much you owe and whether you enter a payment plan. There are also penalties for bouncing checks, underpaying or misreporting what you owe.
Filing late: If you miss the April 17 deadline — and didn’t get an extension — you face a penalty of 5% of the unpaid taxes each month the return remains late. That penalty accrues the day after your due date, but won’t exceed 25% of the unpaid taxes.
Not having health insurance: Yes, the GOP tax bill repealed Obamacare’s individual mandate, but it was still in effect for tax year 2017, so, if you went without a health care plan last year, you face a penalty of either 2.5% of your taxable income or $695, whichever is greater. In fact, you’ll face a penalty in tax year 2018, too. The repeal doesn’t take effect until 2019.
Get ‘er done
OK, now you (more or less) know what’s up, it’s time to file. And, again, you have a choice to make: How should you do your taxes? The best option varies, depending on how much time you have, how complex your returns are and how tax-savvy you are. Still, technically, everyone has three options.
Do-it-yourself: Yeah, going old-school probably isn’t your best bet if your taxes have a lot going on. However, if you’re filing via a 1040EZ — meaning you make under $100,000, are filing single or married jointly and don’t have any dependents — or even fairly straightforward 1040, you could give it a go. It’ll certainly save you some dough: Filing via good old paper and pen pretty much only requires paying for postage. (You can download all the forms you need from the IRS website.) But, if you make under $66,000 a year, you can actually e-file for free. There are volunteer groups, too, that work with the IRS to provide free tax assistance to qualifying individuals.
Use tax software: If your taxes are all Baby Bear (you know, not too hard, but not too easy), basic tax software is probably the way to go. It’ll take a little time, but you’ll pay less for the goods than you would to a tax preparer.
Hire a professional: If you’ve got a complicated estate, the expertise of a reputable, licensed tax preparer is probably worth their fees. Ditto for if you have zero time to do your taxes. But notice how we specify using a reputable tax preparer. That’s because there are, unfortunately, plenty of scammers out there. To avoid getting got, make sure a prospective preparer has a Preparer Tax Identification Number (they’re required to by law). And check with the Better Business Bureau or online review sites to see how past clients rate them.
To help you build your expertise, here are some useful tax resources from around the web.
Credits & deductions, directly from Uncle Sam — i.e. the IRS, which also has an interactive tool that’ll help you figure out if you’re actually eligible for a specific credit or deduction.
This article originally appeared on Policygenius. Image: Yuri_Arcurs
The Fastest Way to Get Your Tax Refund Check
By Kyle Daley
January 5, 2018
It’s officially 2018, which signals the beginning of everyone’s favorite part of the year: tax season, or as we like to think of it, refund season!
Tax season can be stressful, but did you know that nearly 80% of people who file a return will receive a tax refund check? Yes. You read that correctly. Uncle Sam has refunded an average of $3,120 over the past few years. If you’re eagerly awaiting that big payday like most Americans, you’ll want to receive your reimbursement ASAP. Below we’ve outlined the fastest way to deposit your tax refund check with Chime.
Why wait for a tax refund check in the mail, when you can have it automatically deposited directly into your Chime Account?
One of the best ways to ensure that you receive your refund check quickly is by electing to e-file with direct deposit. According to the IRS it’s “the fastest way to get your tax refund check.” Filing with direct deposit is convenient and easy. Here’s a quick step-by-step guide to getting your tax refund direct deposited to your Chime Spending Account:
Step 1: Get your Spending Account and Routing Numbers.
First things first. Get your bank account information:
Open the Chime app on your phone or login to your Chime Account on the web.
Visit the ‘Direct Deposit’ section under ‘Move Money’ to view your Spending Account and routing numbers.
If you need a copy of your account information, you can also email, print, or download your direct deposit form. The form which has your account information needed for direct depositing your refund.
Step 2: Include your Spending Account information when you file your return.
If you’re using a tax software, like TurboTax or Quickbooks, you’ll be presented with options as to how you would like to receive your tax refund check: direct deposit or check by mail. Select direct deposit and make sure to include your Spending Account and routing numbers. If you are having your taxes filed by a professional, let your tax preparer or accountant know that you want to receive your tax refund check via direct deposit and provide them with your account information.
Be sure to double, triple, and quadruple check the information provided to avoid any errors which could delay your refund.
Step 3: Get notified the instant your refund arrives.
When you e-file your return and select direct deposit as your payment option, expect to receive your refund within 21 days. The IRS issues 9 out of 10 direct deposit refunds within 21 days, as opposed to waiting 8 weeks for a check via snail mail. The moment your refund is deposited to your Spending Account, we’ll send you an email and an alert to your phone. If you think it’s taking too long to get your refund, you can always check on your refund status with the IRS’s nifty refund tracker.
The deadline for filing your 2017 return is April 17 but the sooner you file, the sooner you’ll get your refund. Following these tips will ensure you follow the IRS’s recommendation on the fastest way to deposit your tax refund check and be the envy of all your friends.
Are You a Freelancer? These 9 Tax Deductions May Save You Money
By Robyn Parets
March 29, 2017
Are you a home-based freelancer or do you have a side hustle? If so, you know the benefits of being your own boss, including flexible hours and no commute – unless you count walking from your bed to your desk.
If this marked your first year freelancing, you may not realize that you can deduct home office expenses even though you don’t have a separate “office” in your residence. Although a dedicated office is ideal, this may not be an option if you live in an apartment with roommates. Luckily for you, you can allocate a corner of your dining room or even your bedroom as your workspace. According to the IRS, you can deduct a portion of your rent or mortgage for the room or space that is used exclusively for business purposes. For example, the square footage of my home office equates to about one-eighth of the total square footage of my house. This means that I can deduct about 12 percent of my mortgage payments.
2. Home office supplies, equipment, and furnishings
Talking about a home office, you can also deduct expenses related to the purchase of home office supplies and computer equipment. This includes office furniture like a new stand/sit desk – my big ticket office expense in 2016. I researched affordable electronic desks and purchased one for $669 at Ikea. But, guess what? It was money well-spent as my back fatigue is now gone plus I get to write it off as an office furnishings expense. Besides a new desk, other big-ticket office items may include an ergonomic chair, a printer, or a new laptop. And, don’t forget about smaller everyday office supplies like printer paper, notebooks, paper clips or anything else you need to run your business. These are all typically deductible too.
3. Utilities, wireless and other related services
Just like you can deduct a percentage of your mortgage or rent as home office space, you can usually do the same thing for utilities and other household bills. For example, you can typically deduct the portion of your electricity, gas, cable, wireless and cell phone bill used to conduct business. Just make sure you keep accurate records and remember: Your personal household bills are not deductible.
This is an expense that is often overlooked, especially if you’re a newly minted freelancer. Yet, if you have any type of insurance that extends to your business, it may be tax deductible. This can include insurance paid for liability, theft, worker’s compensation, malpractice, disability, and maybe even health insurance premiums. For example, I carry fitness liability insurance as I teach yoga classes on the side. When I used to operate a home-based yoga studio, I also had an umbrella policy, which offered my business an extra layer of protection above and beyond my homeowner’s insurance policy.
5. Automobile expenses
Do you drive your car to visit clients or meet prospective customers? Or, perhaps you rack up hundreds of miles driving for Uber or Lyft? Regardless of whether you’re a Lyft drive or a roving fitness instructor, if you put miles on your car for business, you can either claim the actual car expenses or deduct the standard mileage rate of 56 cents per mile during 2016, according to the IRS. If you decide to claim the actual expenses for your car, don’t forget to include gas costs for traveling to business-related events and meetings, as well as expenses related to oil changes and repairs.
6. Travel costs
If you traveled to meet with clients or to attend events, conferences and trade shows, you can usually deduct related hotel bills, airline travel, or other associated expenses. You can also deduct 50% of your business meals or entertainment, according to the IRS. For example, if you take a prospective client for lunch, you can normally deduct 50% of the restaurant bill.
7. Supplies related to your business
Do you run a craft business on Etsy? Or perhaps you have a side hustle refurbishing old furniture? Regardless of what type of business you run, if you sell merchandise, you can often deduct material costs. In addition, you can deduct the amount you spend on merchandise for your business. In my situation, I deduct the cost of yoga props and other fitness equipment that I use for my classes.
Did you create and print marketing materials for your business, including brochures, flyers, mailers or business cards? If so, these are typically tax deductible. In addition, you can usually write off costs for online advertising through platforms like Facebook, Twitter, and Google. And, don’t forget about paid email marketing using Constant Contact or other similar channels. This form of marketing is also a viable tax deduction.
9. Professional service fees
Did you hire a lawyer to help you incorporate or an accountant to handle your bookkeeping? If so, you can usually deduct these professional fees. You can also normally deduct fees for other professionals you hire for your business, including an SEO expert or graphic designer.
Regardless of which deductions seem appropriate for your business, it’s a good idea to seek advice from an accountant or financial advisor. And, keep this in mind: The cost to hire a tax expert may be tax-deductible. A win-win.
3 Common Mistakes People Make When Filing Taxes and How to Correct Them
By Robyn Parets
March 23, 2017
Spring is here, March Madness is in full swing, and it’s no longer pitch-black before dinner. All good stuff. But for me, March means crunch time – or rather, time to organize and file my taxes. I’d rather be doing just about anything else, including cleaning out my basement.
Indeed, filing taxes can be stressful. If you’re still procrastinating or worrying about making mistakes on your tax return, you’re not alone. To help you file your taxes correctly and put your mind at ease, we’ve pinpointed three common mistakes. Read on to learn how you can avoid making them.
1. The Math Doesn’t Add Up
According to Forbes Magazine, math is one of the first things the IRS checks for on tax returns. In other words, your numbers should add up correctly. Sounds easy, right? Yet, entering figures onto forms can make your eyes glaze over and before you know it, you’ve transposed a number or two. Seemingly small mistakes can add up. Not only can a math error trigger a correction notice from the IRS, but it can potentially delay an expected refund. Mathematical errors might also result in a lower tax refund than you were counting on. Worse yet, you might even end up owing money to the IRS.
How to Avoid Making Math Mistakes
If your taxes are pretty simple – as in you’re an employee and receive a W-2 form, you don’t own a home and you don’t have a large stock portfolio – the simplest solution is to use tax software from companies like TurboTax, H&R Block, or TaxSlayer. The calculators on these platforms will add up your figures and help ensure that your math is accurate. Most tax software programs offer free versions as well as more immersive options that you’ll have to pay for. Yet, if you earned less than $64,000 in 2016, you can file your taxes using the IRS’ Free File software.
Hire an accountant. It’s hard to beat free or low-cost tax filing software. However, if you’re a married freelancer like me with piles of 1099 tax forms stating your self-employment earnings, a house, dependents, and investments of some nature, you may need a little more hand-holding. Years ago, I hired an accountant and have never looked back. Every March, I gather my information, fill out a tax organizer, and drop off a big thick folder to my CPA’s office. From there, I let him do the math.
2. You Forgot or Neglected to Report Income From All Sources
If you’re a freelancer or an employee who has a side hustle, like driving for Uber or Lyft, you probably received one or more 1099 forms this year. These forms state the amount of untaxed money you made. At the same time, if you earned interest income in a savings or investment account, you’ll receive a 1099 for that as well.
While it’s certainly easier to exclude your 1099 income on your tax return, this can throw up a red flag with the IRS – not to mention that neglecting to report all of your income can result in a penalty.
How to Avoid Inaccurate Reporting
Stay organized and as soon you receive 1099 forms, put them away in a folder. If you are missing a 1099, call the business and ask for one. Companies are required to send 1099 forms to all independent contractors who earned in excess of $600 during the tax year.
Prepare to do some extra legwork and fill out all necessary forms to report your additional earnings. It’s also important to understand that the IRS receives copies of all of your 1099s. This means the government knows how much you earned and your tax return should reflect this accurately. Another tip: Extra forms can seem overwhelming and tax software can help you stay on point.
This may sound like a broken record, but if you need extra help, hire an accountant. For me, launching my freelance career was the tipping point that led me to hire a CPA.
3. You Didn’t Enter the Correct Banking Information
How to Avoid Problems with Your Direct Deposit Refund
Triple-check your account and routing number for accuracy and then e-file your return, designating on the tax form that you want to receive your refund via direct deposit. For example, to look up your spending account number at Chime, all you have to do is log onto the website or open the app on your phone and go to the “Move Money” tab. From there you can see your account number and routing information under “Deposit Funds.”
If you opt for direct deposit on your tax return, you can expect to receive your refund from the IRS within 21 days. This is the fastest way to receive your money, according to the IRS. If you haven’t received your money within this time frame, it’s time to check on your refund status through the IRS’ refund tracker tool.Some banks, like Chime, will send you an email and text alert as soon as you receive a deposit.
The 5 Best Ways to Use Your Tax Refund to Grow Your Money
By Jackie Lam
January 23, 2017
So you’ve netted a tax refund — congrats! For 2015 taxes, the average tax refund was $3,218, to be exact. That’s quite a wad of cash. But remember, a tax refund is really just your hard-earned income that’s been deferred for a short time. So, before you go on a mini spending spree, here is a list of the best ways to use your tax refund to give your money-growing goals a boost:
Kickstart a couple savings goals with the cash
We all need a place to start and having specific goals in mind helps provide both long-term vision and short-term motivation. Setting clearly defined savings goals enables you to see progress and take pride in accomplishments. It also helps you organize your time and resources so that you can spend more time enjoying life vs. stressing out about your financial situation. Set a savings goal and fund part of it with your tax refund. It will help you kick start the healthy habit of setting financial goals and achieving them.
How to start: Write down 10 savings goals that are most important to you. Divvy them up by short-term and long-term goals. Get specific as possible. For instance, short-term goals may take anywhere from a few months to a couple of years to achieve. They might include buying a new set of wheels, going on a backpacking trip to Europe, or maybe sprucing up your digs. Long-term goals might take several years to hit, such as saving for a down payment on your first home or raising a family.
Next, pick just one short-term goal and one long-term that you want to make serious headway on. This might be the thing that you’ve been putting off or would really help add value to your life. Keeping focus by choosing just one thing from each list, and use your tax refund to infuse some cash into these goals. Getting a solid start will give you the motivation mojo to keep saving. It’s one of the best ways to use your tax refund.
Open a new savings account
Now that you’ve figured out what your savings goals are, open an account to help you make steady progress. You can think of your savings account as a hub of sorts for your moola: to transfer to other savings accounts, or stash money it into another goal down the line.
How to start:
Consider opening a free savings account with a bank that automates your savings and helps you keep up healthy financial habits. If you’re a Chime member, opening an Automatic Savings Account allows you to grow your savings by just simply using your card and you never having to worry about getting dinged by banks charging you fees. Every time you swipe your Chime card the purchase is rounded up to the nearest dollar and is safely stowed away in your Savings Account. Plus each Friday Chime gives you an extra 10% bonus. And who doesn’t love free money?
Stash away your refund in a tax-sheltered account
While it’s quite tempting to use your refund to splurge, one of best ways to use your tax refund and make that moola grow is to hold onto it for a while. Luckily, Uncle Sam encourages long-term growth through a few types of investment accounts.
Through the magic of compound interest, funneling your refund into one of the following accounts can help multiply those savings. You’ll just need to follow a few simple rules. An added bonus is that stashing some of that money in one of these accounts lowers your tax bracket, and can help when tax time comes around next year.
How to start:
Check out Traditional IRAs and Roth IRAs
Two tax-sheltered accounts you may consider starting with your refund are a traditional IRA and a Roth IRA. Both offer very generous tax breaks, but differ as to when you benefit from those breaks. Traditional IRAs help you avoid taxes when you put the money in, while Roth IRAs help avoid taxes when you take it out.
Traditional IRA contributions are deductible on your tax return for the year that you make them. That means if you roll your refund into a Traditional IRA, you can deduct $5,500 from your return the next year. Note that anytime you withdraw those savings in the future, you will be taxed at the ordinary income tax rate — which is where the Roth IRA differs.
Bear in mind that both types of IRAs don’t offer the immediate gratification of a tax break in the year you make a contribution. However, withdrawals of your contributions are generally tax-free at any time. For both types of IRAs, if you’re under 50, you can put away up to $5,500 for 2017, and up to $6,000 if you’re 50 and over.
Check if your health plan offers an HSA
If you’re on a health plan with a high deductible, another account you can put money into is a health savings account or HSA. Like a traditional IRA, an HSA is a pre-tax account, so is tax deductible. A major bonus with HSAs is that you can use it as means to invest in stocks. That’s right, it can be used as an investment vehicle. The maximum amount you can contribute in 2017 for HSAs is $3,400 for individuals and $6,750 for families.
Use your tax refund to boost your rainy day fund
Nobody is immune to the uncertainty of life. While things may be fine in the here and now, in the near future you maysuffer an injury, one of your tires may go flat on the highway, or hours at your job might get scaled back. A rainy day fund will help you get back on your feet when life throws a curveball your way.
How to start:
While the recommended amount is anywhere from 3–6 months of basic living expenses, only you know what you’re comfortable with. If you’re not sure how much you need, check your bank’s transactions for the last few months, or use an app such asChime, Mint or Level Money. Consider stashing a little more into your emergency fund in case of the unexpected.
If you don’t have the time to analyze your spending, start with $400. You will be ahead of 47 percent of Americansand will be prepared to repair the dishwasher when it breaks, and cover out-of-pocket medical expenses if you injure yourself on the slopes.
Pay off debt
Debt can feel like a heavy weight, keeping you from living the life you really want to have. And you fully know that the sooner you pay it off, the quicker you can focus on other savings goals. Plus, avoiding those hefty compounding interest rates will save you money in the long run. So consider using some of your tax refund money toward paying off some of that dreaded debt!
How to start:
If you have different kinds of debt, to figure out which one to pay off first, look at the total amounts owed and terms such as the interest rate, payment period, and so forth. Two popular ways of paying off debt are the avalanche debt method, which is when you pay the debts with the highest interest rates first; and the snowball debt method, where you pay off the debts with the lowest amounts first. The pros of the avalanche are that it will save you money in the long run, while the snowball method is that you’ll net quicker wins, which could be a huge motivator.
If you’re going to splurge…
Buy something that adds value. You won’t be committing a money cardinal sin by spending some of that tax refund on a purchase. Just make sure it’s something that you’ll 1) actually use, and 2) adds value to your life. Maybe you’ve been eyeing that fancy blender to make your breakfast smoothies or go to a mega music festival like Coachella this year. Or you want to buy a digital camera to take awesome, professional pics.
To curb impulse buys, exercise your delayed gratification muscle. I keep a 30-day list on my phone and wait it out a month or so to see if I really want or need a certain item. I have a friend, Jen, who will physically walk into a store or three times before buying something.
While you most likely aren’t hurt for ideas on how to spend your tax refund, remember that the best way to use your tax refund is to put it toward goals that will grow your money and give you deeper pockets. You’ve already paid Uncle Sam, now it’s time to pay yourself.
Key Tax-Preparation Tips to Cut Stress
January 12, 2017
Although it comes around every spring, tax season tends to inflict the same headaches year after year. To reduce your stress — and maximize your refund check — it’ll help to stay organized and be aware of recent changes to the tax code.
For additional motivation to get on track, keep in mind that the average refund has been about $3,000 in recent years. Even if you don’t expect to get that much back, there are plenty of ways to put a refund to good use. But first, you’ll have to file your returns properly, taking advantage of any deductions you might qualify for. Here’s a look at where to get started.
Compiling the necessary information
For starters, you’ll need your W-2 form listing earnings and tax withholdings, which employers typically send out in January or early February. Be sure to have your Social Security number or taxpayer identification number available, as well as those numbers for any dependents you’ll claim. You’ll also need documentation of any income they may have had.
Affordable Care Act penalty
The Affordable Care Act ushered in one of the most significant tax law changes in recent years. It stipulates that if you didn’t have health insurance for more than three months in 2016 and didn’t qualify for anexemption, you may face a penalty.
For the tax year 2016, taxpayers who lack adequate insurance may be penalized at either 2.5% of a portion of their income or $695 per adult and $347.50 per child, to a maximum of $2,085 per family — whichever is higher. To avoid those fees in the future, it may be a good idea toget insured.
Tax deductions reduce taxable income
Deductions reduce the amount of your income that you have to pay taxes on. Sit down and figure out whether the standard deduction or itemized deductions will work best for you. The former is a set amount that reduces your taxable income depending on your filing status; the latter lets you list qualified expenses separately, such as mortgage interest and local property taxes. If your itemized deductions add up to more than your standard deduction amount, go with that.
So what kinds of expenses can you deduct? Contributions to eligible organizations and interest on education loans are among the more well-known deductions you can take. Others, such as medical andhome office expenses, aren’t as widely used for various reasons. Make sure to look into which of your expenses you can use to reduce your taxable income, which will probably increase your refund. Bear in mind that income limits and expense thresholds may limit these deductions or eliminate them entirely.
If you qualify to contribute to a traditional individual retirement account, or IRA, you may be able to invest in your future and shield up to $5,500 of income from taxes — plus $1,000 more if you’re 50 or over — by putting it in an IRA. You have until the April filing deadline to make deductible contributions for the previous year. Withdrawals are subject to income tax, however.
The bottom line
Completing your tax returns won’t be much fun, but it’s the first step inclaiming a refund. Once you’ve filed your returns, you should expect to get what you’re due within three weeks — or in less than half that time if you ask for the money to be directly deposited to a savings or checking account. Just remember to compile all the essential paperwork before getting started, keeping an eye out for tax credits and changes to the tax code.
Simple Tax Tips to Get Your Finances in Order Before Year End
By Jackie Lam
December 27, 2016
Do yourself a favor and before the year winds down, add one more item to your holiday checklist: tax prep. With all of the holiday craziness, it’s easy to forget that now is the critical time take care of year-end tax planning. I’ve learned the hard way how much you can forfeit in tax savings by failing to take a few simple steps before ringing in the new year.
Last year, when I made the transition from full-time employee to becoming a self-employed writer, I waited until the 11th hour to think about taxes. That’s right, in April I was scrambling to gather my receipts, tracking down 1099s that got lost in transit and almost had to file for an extension. No Bueno. Not to mention, I missed out on a few simple tax saving opportunities that had already expired on Dec 31.
So take it from me, don’t miss out on these year-end money moves that can help you lower your tax bill or net a sizable refund:
Hustle to save for your side hustle
To avoid being blindsided come tax season, remember to stash away a portion of your side hustle income earned as a cushion to pay for your impending tax bill. The recommended amount? Anywhere from 25–30 percent. And if you haven’t been doing that, take advantage of the holiday season hustle. Expect to see a spike in demand for certain side gigs: pet sitting, ride sharing or delivering packages, to name a few. Be sure to consider alternative ways tosave money automatically to get out ahead next year.
As the year winds down, remember that dedicating a small amount of time to these simple tasks can help you get a serious jump start on 2017. Come April, your future self will thank you.
Give to charity
Not only will donating to a charity score you serious do-gooder points, but you’ll also yield benefits come tax time. Look to donate to organizations that are in step with your values: are you an aspiring painter? Consider donating art supplies to a community arts center. Did you adopt your pet? Look up your local no-kill shelter. If you’re looking for guidance on which nonprofits to donate to, do a search onCharity Navigator and be sure toconsider what makes a good charity.
Aside from monetary donations, some organizations also accept physical items, such as clothing, furniture, canned food, and even your car. Before stopping by with piles of stuff, check beforehand to see what donations a charity accepts and if it’s a non-profit that you can receive a tax deduction for your donation. And don’t forget to ask for a receipt for your donation; you’ll need a record when filing your taxes.
With charitable donations, you can generally deduct anywhere from 20% to 50% of your adjusted gross income (AGI). Just know that if you decide to take the standardized deduction, you won’t be able to deduct any charitable contributions.
Play the tax-deduction game
If you’re self-employed and had a profitable year (congrats!), make tax-deductible purchases related to your business to help lower your taxes. For instance, invest in a new laptop, home office furniture, a professional membership, or an annual subscription to some essential cloud software. Even better, put on your learning cap and enroll in an online course — those can be tax-deductible, too. Plus, with end-of-year sales, you’ll be able to take advantage of some solid deals. Of course, make sure it’s a reasonable purchase that’s within your budget — hold off on buying that catamaran for now.
Get organized to itemize
If you’re going to itemize versus going with thestandard deduction, you’ll need to gather the proper documents. These include receipts from donations you made to non-profits. You’ll also want to keep track of mileage, gather receipts for out-of-pocket expenses such as supplies and parking fees you paid for when volunteering your time. You can also itemize expenses related to job hunting, such as parking and transport to job interviews, printing your resume, and any employment agency fees.
Other documents you’ll want to begin gathering include the 1098-E and 1098-T to receive a deduction on your student loan interest and tuition paid, home mortgage statements, and medical expenses if they cost more than 10% of youradjusted gross income.
Put off receiving your bonus
Unless you could use it during this time of year, ask your employer if you can put off receiving your bonus until after the new year. This simple act of delayed gratification will lower your income for 2016. In turn, this will lower the total amount you’ll need to pony up in taxes. Anticipate owing money to Uncle Sam? If you can afford to, put away part of it for your taxes. While it may not be the most exciting thing to do, your finances will be better off down the line.
Contribute to your retirement
If your employer offers a 401(k) retirement plan, consider increasing your contribution before the new year. If you’re under 50, themaximum contribution limit in 2016 is $18,000 for the entire year. Money toward your 401(k) is tax-deferred, which means you’ll be taxed when you take money out, your contributions will bump down your taxable income. And if your employer provides a match, that’s all the more reason to contribute a little extra now. That’s free money you’d be leaving on the table.
While you have until April 17, 2017, to make contributions to your IRA accounts for 2016 if you can swing it, put in a little extra at the end of the year. Contribution limits on IRAs for 2016 are $5,500, and $6,500 if you’re 50 and older. If you have a traditional IRA, where contributions are made from pre-tax income, you will be able to deduct contributions on your tax return.
Get your flexible spending account down to zero
If you put in money toward a flexible spending account (FSA) to use toward medical expenses or childcare, now is the time to spend whatever’s left. Otherwise, you’ll lose it. Get your eyes checked, get customized earplugs or a pair of prescription sunglasses. Hard-pressed to find ways to spend any remaining funds? Check outfsastore.com, a one-stop-shop stocked exclusively with FSA-eligible products.
Last-Minute Tax Filing Tips
By Shane Steele
April 2, 2016
This information is not intended to be tax advice. Consult a tax preparation professional for tax advice.
No one enjoys doing taxes. That’s why a lot of us procrastinate until the last… possible… second. We’d rather clean the toilet, binge watch Here Comes Honey Boo Boo, or pick food out of our teeth before succumbing to the painstaking chore of filing taxes.
Instead of staring at the clock as the minutes until tax day melts away, let’s dive into some simple and proactive ways you can meet this year’s deadline both efficiently and confidently.
Put paperwork together.
Begin collecting all the necessary documentation needed to complete the process of filing your returns, including a W-2 from your employer, bank statements, investment documents, or other sources ofmiscellaneous income.
Get free help from the IRS.
Itching to get the preparation underway, but don’t have the budget to pay a professional? You may qualify forfree assistance. IRS-certified volunteers will provide basic income tax preparation with electronic filing available to certain individuals. If you don’t qualify, you can still leverage theIRS’s website for all of your tax-related questions.
The most common mistakes made on tax returns are the easiest to prevent because they typically occur through inattention or hurry. Tiny errors can significantly delay your refund, so even if you’re short on time, make sure to avoid these common oversights:
Math errors (don’t underestimate the power of a calculator or tax software)
Incorrectly typed or written social security numbers
Failure to date or sign your tax return
Don’t sweat the deadline if you don’t owe.
Don’t panic if you don’t owe or are expecting a refund this year because in these instances there are no penalties for filing after the April 18th deadline. The only drawback for not submitting your return on time is that you will be postponing your refund.
E-file with direct deposit.
One of the best ways to ensure that you receive your refund is by electing to e-file with direct deposit, which according to the IRS is the “best and fastest way to get your refund”. Filing with direct deposit is convenient and easy. Here’s a quick step-by-step guide to getting your tax refund direct deposited to your Chime Spending Account:
Step 1: Get your Spending Account and Routing Numbers
Open the Chime app on your smartphone or log in to your Chime Account on the web.
Visit the ‘Direct Deposit’ screen under ‘Move Money’ to view your Spending Account and routing numbers.
Copy these numbers and paste them directly into the tax software you’re utilizing to process your return.
Step 2: Include your Spending Account information when you file your return
If you’re using a tax software, select direct deposit as your refund method and include your Spending Account and routing numbers as the account to which you want your refund deposited. If you are having your taxes filed by a professional, let your tax preparer know that you want to receive your refund via direct deposit and provide them with your Spending Account and routing numbers. Be sure to triple check the information provided to avoid any errors which could delay your refund.
Step 3: Get notified when your refund arrives
When you e-file your return with direct deposit as the payment method, the IRS expects to issue 9 out of 10 refunds within 21 days, as opposed to 8 weeks for a check in the mail. We’ll let you know the moment your refund is deposited to your Spending Account by email and by push notification if you have downloaded the mobile banking app. If you think it’s taking too long to get your refund, you can always check on your refund status with the IRS’s nifty refund tracker.
You can dawdle, procrastinate, and lollygag as much as you want, but the tax man cometh whether you like it or not. So what are you waiting for? Knock out the nagging stress of doing your taxes so you can get out and enjoy spring, or maybe even consider some spring cleaning for your finances.
8 Unbelievable Tax Deductions
By Shane Steele
March 16, 2016
Every year, the IRS comes a-knockin’, and every year many of us wait until the last possible minute to file our taxes. In the frantic hours before the annual filing deadline, don’t get so frazzled that you forget about some commonly overlooked tax deductions that could mean more money in your pocket. Here are eight deductions you don’t want to ignore.
1. Fostering a Pet.
If you foster little furry babies while they wait for placement in a permanent home, you have the liberty to deduct expenses for litter, pet food, paper towels, and potentially even your mileage to the vet. The only caveat is that the organization you’re working with has to be a 501(c)(3) charity.
2. Baggage Fees.
Airlines don’t seem to mind driving passengers insane with outrageous baggage fees. If you get burned, perhaps Uncle Sam will help alleviate the pain. If you’re self-employed and are required to travel for business, make sure to allocate those costs to your deductible travel expenses.
3. Weight Loss.
Has your doctor told you that your weight is threatening your health? That may not be good news, but here’s what is: The cost of weight-loss programs or aidsyou choose to use to combat a specific disease may be tax deductible–if your doctor writes a recommendation for use.
Wearing a uniform to work may get monotonous, but great news, it can boost your tax return! The cost of the uniform itself, as well as the costs associated with maintaining it, are deductible.
To deduct the cost and upkeep of work clothes, they must be worn as a condition of employment, and cannot be considered for everyday wear. A button-down shirt and a tie probably won’t qualify. However, scrubs, police officer uniforms and hard hats likely will.
5. Smoking Cessation.
Stopping smoking can be difficult, but the government has made the financial burden associated with quitting less painful. The cost of cessation aids, such as patches and gum, can count as tax deductions.
6. Moving Expenses.
The costs associated with relocating for a job are deductible if you pass the distance (over 50 miles from your last residence) and time (39 weeks of full-time employment at your new employer) tests. What is not well known is that recent graduates who move for their first job can claim this deduction as well.
7. Hobby Expenses.
Hobby expenses fall under “other miscellaneous deductions”. You can only deduct as much as you generated in income from your hobby. For instance, if your fashion blog made you $300, but you spent over $1,000 to maintain it, you can only claim $300 in expenses. This will help regain some money if you have a small business that has gone three years without a profit, at which point the IRS recognizes your operation as a hobby.
8. Tax Preparation Fees.
You can write-off the cost of preparing your taxes. If you paid taxes with a credit or debit card, you can also deduct convenience fees. Keep in mind that this deduction only applies to fees paid in the year you’re deducting them. For instance, when you file taxes for 2015, you are only able to deduct fees paid in 2015 for your 2014 tax return.
Don’t leave money on the table this tax season. Take the time to look over these and other potential deductions. They could be the difference between a good refund and a great one!