Checks and Balances
C1 Check two:
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As the economy slowly shows signs of recovery, more Americans are finding it EASIER to spend their tax refunds on frivolous, nonessential items, and treating themselves to major purchases, such as wide screen TVs, iPads, and many other items. According to the National Retail Federation, nearly 55% of tax refund recipients will spend SOME of their refund check this year, UP from 51% last year. The percentage of Americans spending their refunds on big-ticket items is UP from last year as well, from 12.5% to 13.2%, and conversely, the number of Americans paying DOWN debt with their tax refund, is DOWN for the third consecutive year to just 42%, which is the LOWEST percentage since 2006.
When survey participants were asked if they plan on SAVING any of their refund money, 42% said “yes,” they plan to put SOME of that money away. When the recession began in 2008, only 38% said they planned on saving ANY of their refund. And according to the same survey, more people are SAVING when it comes to tax preparation as well. Just OVER 1/5 of all tax payers will use a tax professional, and just UNDER 1/5 will use a tax preparation service. The other, 3/5 of taxpayers, will go at it alone, or use the help of a friend, family member or software program. With the more than 70,000 pages in the current tax code – there could very WELL be some unintentional overpayment of taxes this year as a result.
Ok, so you may be asking yourself, “Matt, what does all of this mean to me?” Now that we’ve “checked” the facts, let’s “balance” this news using our Checks and Balances process to determine what action YOU should take TODAY.
C1 4) and Balances:
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Balance one:
Whether it’s on purpose or an oversight, overpaying your federal income taxes does very LITTLE for your personal bottom line. By intentionally overpaying taxes now in an effort to receive a lump sum in the spring, you’re missing OUT on the potential growth or earnings from saving and investing on your own THROUGHOUT the year. Today, there are a LOT of options available to you to automate your savings plan. In many cases, you can work with your employer to divide your paycheck into TWO parts – one would be your spending money, and the other, your savings or investment money. With direct deposit, this money can be easily and efficiently “saved” without you having to do a thing.
And while your inten
tions may have been good, overpaying taxes doesn’t always work out the way you intended. The IRS does NOT require people to file a return if they make BELOW a certain threshold. So, if you overpaid your taxes, and DIDN’T file a return, you may end up LOSING the money that the government was SAVING for you. As an example, in 2007 more than 1.1 million people did NOT file a tax return. According to a recent report by the IRS, more than HALF of those people have a tax refund WAITING for them, to the tune of $640 or more! Unfortunately, Uncle Sam WON’T be holding their money much longer. If 2007′s non-filers DON’T file by April 18th of this year, that money becomes the property of the U.S. Treasury Department. Why? Because they ONLY give taxpayers a 3-year window to claim their refunds.
Balance two:
It appears that many people in this country OVERPAY their taxes in an effort to AVOID the uncertainty of owing MORE at the end of the year, or because they like that BIG refund check. Either way, that “extra money” could be doing MUCH more for them if they paid LESS in taxes, and saved MORE throughout the year. An automated, self-directed savings plan gives you the ability to save regularly, and make money on your savings or investments EARLIER than waiting for Uncle Sam’s refund check. You could also immediately apply that money towards reaching any number of financial goals you may have.
For example, if your intention is to use that tax refund check to pay down or pay off a HIGH-interest debt, the automated savings plan will allow you to consistently apply money into an account, so you can pay down or pay off that debt sooner. If your intention is to SAVE the refund and DEPOSIT it into your retirement savings account, the automated deposits would immediately go to work for you. And if you were looking to splurge a little with your refund check, by building up a savings account throughout the year, you could create a “stash of cash,” for those trips to the mall that call out to everyone from time to time, and you could then keep your credit cards SAFELY in your wallet!
Ok, so what’s the bottom line here?
C2 5) The bottom line:
While it’s always important to spend LESS so you can save MORE, be SURE you know where you can DEDUCT more. The fee charged by a tax professional MAY be a tax deductable expense, and unless you’re a tax professional yourself, it’s an expense that will prove its worth, by saving you from overpaying your taxes. To get ahead financially, it’s important to keep MORE of what’s rightfully yours. “Tax preparation” can HELP you to take an accurate assessment of what you made, saved and spent in the LAST 12 months, and it can help you identify and take advantage of all the tax credits and deductions available to you last year (provided you’re made AWARE of all those credits and deductions!) “Tax planning,” on the other hand, is essential, as it helps you to identify ALL of the tax credits and deductions that could be available to you in the NEXT 12 months and beyond.
You really shouldn’t use the government as a “forced” savings account custodian, and THEY shouldn’t be able to count on YOU for an interest free loan. Remember the wise words of Benjamin Franklin, “if you fail to plan, you are planning to fail.” By planning ahead you will live better now, pay LESS taxes later, and put MORE money away for your future!
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