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4 Last Minute Money Saving Tax Moves

March 15, 2017 Wise Dollar Money Management 2 comments

As the the tax deadline draws closer, there are a few?money saving taxes moves you can still make.

Naturally, most people would prefer to pay as little tax as possible, while still complying with all of the rules and regulations of the tax system. Each individuals tax situation is a little bit different. But these four last minute money saving tax moves may be able to help you save on your tax bill.

Up Your 401(k) Contribution

Typically, any donations that you make to a 401(k) that is offered by your company will be taken out before taxes. When that is the case, you will be effectively lowering your taxable income for the year ? while still being able to save that money for later.

Obviously, this is a tip that has plenty of other benefits aside from taxes, as using a 401(k) is a great way to save some of your money for later in life. It is never too soon to start saving up for retirement, so look at 401(k) contributions as an option that can help you in both the short and long term. You can make a lump sum contribution up until April 15th to help save on your taxes.

An Early Mortgage Payment

This next tip is a minor one, but every little bit helps when it comes to saving on your taxes. If you own your home, consider making your January mortgage payment a few days early in order to slide it in before the calendar year is up. Of course, it’s too late for this year, but you can do this next winter.

The mortgage interest that you pay on that payment may be deductible, so it can serve to slightly lower your overall taxable income. Of course, that means that your payment won?t be a part of next year?s tax picture, so this is really a case of just moving the savings up by a year.

Give to a Charity

It is always a good idea to find room within your budget for charitable contributions. Picking out a charity that is close to your heart for regular donations is a great way to give back to the community around you. In addition to the good that you will be doing, there are tax benefits to donating to charities as well. Your donations are going to be deductible in most cases (make sure to keep documentation), so you can subtract those donations from your taxable income. Finding a way to save on your taxes while helping others at the same time is a great way to approach this topic.

Avoid the Health Insurance Penalty

Sometimes, the best way to lower your tax bill is simply by avoiding having to pay penalties. One of the newest penalties that you can face on your taxes is the charge for failing to have a qualifying health insurance plan.

If you did not have health insurance for this past year, there may not be anything you can do to avoid the penalty ? but you certainly can look for coverage now to avoid having to pay the fine again next year. In addition to steering clear of a penalty, adding health insurance is a good idea in order to protect your financial future.

Are you planning to use any of these money saving tax moves? How else do you plan to save on taxes?

Photo courtesy of: Alexas_Fotos

Why You Shouldn’t Request a Tax Refund Advance

February 20, 2017 Wise Dollar Money Management 3 comments

Tax season is officially upon us. As we scramble to collect all of our W-2s, 1099s, receipts, etc., we start to think about our tax refund.

Remember that getting a tax refund from the government means you paid too much money in taxes throughout the year. They are giving you back the money that they borrowed.

If you are getting a large tax refund, you should discuss your withholdings with your tax preparer or accountant so you can lower them. Lowering your withholdings will decrease your tax refund next year, but it will give you more money in your take home pay every month.

Getting a large tax refund is bad enough, but I’ve gotten several advertisements in my mailbox over the past few days encouraging me to borrow against my expected tax refund by requesting a tax refund advance. If you are expecting a refund and need money immediately, you could apply for a tax refund advance. But, here’s why getting a tax refund advance is NOT a good idea.

It?s a Short Term Fix

If you are strapped for cash and need money now you can get it with a tax refund advance. This advance is similar to the payday advance loans. You?ll get the money now, but when you need it later you won?t have it.

Getting advances of money is a?the struggle because you’ll have to come up with more money to pay off the advances when they come due. Chances are high that you won’t have any money then either. It’s a vicious cycle that’s best avoided. Start budgeting and saving an emergency fund so you can avoid these options and have the relief knowing you are covered should something come up.

Your Taxes Must Be Prepared by That Company

Due to a law passed in 2012, these tax refund advance companies can?t charge fees or interest in order to protect you. To get around this companies have made it mandatory you have them file your taxes. The gotcha is that they can charge you more for their services, and they may try to get you to pay for unnecessary services you don’t even need. Once your tax refund comes in, you won?t get the full amount. Instead, you?ll get the amount minus what you were advanced.

What Happens If Your Tax Refund Advance is Denied?

Even if your tax refund advance is denied, you still have to pay the tax preparer for their services. If you think you?ll get a tax refund advance and you have your taxes prepared, you may not have the cash to pay the preparer is you are denied an advance. This can put you farther in the hole as you?ll need more money that you don?t have.

Fees Add Up

A tax refund advance is usually placed on a debit card of some sort. Most ATMs charge a $2.50 to withdraw your money. If you make multiple withdrawals, your fees can easily add up and the amount you?ll have to spend is less.

While there are no lending fees or interest due for a tax refund advance, it is still like a loan. It is still money you will have to pay back when you get your actual tax refund. A tax refund advance should only be used as a last resort.?Even then, it should be used with caution.

It?s easy to get swept up in the cash you have now and not plan ahead for when you’ll have to repay the advance. A better alternative is to budget and save up an emergency fund, so you never have to count on a tax refund to help your finances. This way any refund you get will be a cherry on top of your already good personal finances.

Have you ever gotten a tax refund advance? Do you expect a tax refund this year?

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How to Ease the Burden of a Large Tax Bill

February 13, 2017 Wise Dollar Money Management 5 comments

Now that the holidays are over and everyone is back to school and work, it’s time for the next big event of the year. Tax season!

Some people rush right in to see their accountants and get their taxes prepared right away. In fact, some of these people may actually be done with their income taxes already. Then there are those like me, who wait until the end of March, or even into April, just barely beating the deadline.

When it comes to income taxes, you will either end up owing taxes or receiving a refund. Being as close to zero as possible is best. If they owe, most people might have to pay in up to a couple hundred dollars. That’s not too bad. But, what if you receive a tax bill for a couple thousand or more? What do you do then?

Here are some ways ease the burden of a large tax bill.

Breathe!

If you do get hit with a large tax bill, just breathe. It’s ok to take a couple of minutes to panic. But then you need to start calming down so you can make a plan. You can and will get through this.

Double Check Your Return

If the amount you owe seems incredibly high ?and you haven?t had any major?changes to cause it, such as a huge increase of salary, losing dependents, etc., there might have been an error in filing. If you did your taxes yourself, double check it. When?you still can’t find anything wrong, it might be worth hiring a professional to check it too.

If you think your tax professional made a mistake, go talk to them. Get a second opinion if needed. This could be as easy as a typo and getting your numbers double checked is worth the extra expense if you can lower you tax bill.

File Your Return

When your taxes are prepared you will see how much you either owe or how much your?tax refund for state and federal?will be. Even if you owe a larger sum than expected, go ahead and file it with the IRS by the deadline. Waiting to file until you have the money will land you with penalties, as well as potentially giving you red flags for next year?s return.

Find a Way to Pay

Depending on the amount owed, this may be as simple of a solution as dipping into savings to pay the balance. If you don?t have an emergency fund or that much in savings this can be a problem.

Look at pulling from other accounts and investments if you can. Try not to pull from retirement accounts unless you absolutely must. Withdrawing funds from a retirement account can have negative tax implications for next year. Pay as much as you are able at the time of filing. Paying anything is better than paying nothing.

Work With the IRS for a Payment Plan

The IRS wants your money and will work with you to get it. If you can’t pay your entire tax bill, work with them to create a payment plan.

There is still a penalty for this, and you must make the monthly payments on time and in the full required amount. But it’s still better than not paying at all. Opting for a payment plan means the IRS can put a lien on your house or other property if you default on payments. You can also get an extension but this is only for filing, not for paying. Once filed, you must pay. The IRS will get your money one way or another.

Plan for Next Year

This year may hurt, but to avoid this happening again, you can prep for next year. Look at what deductions you take and what more you should be saving. Talk to your accountant before the end of the year to see what your taxes may look like. It?s better to be safe than sorry.

Though these steps may not seem like they would ease your stress, knowing what you are up against will help. Making a plan and knowing your options makes owing taxes less intimidating.

Have you ever had a large tax bill? How did you manage your large tax bill?

Photo courtesy of: stevepb

Using Your Flexible Spending Account to Avoid Paying Even More Taxes

February 1, 2017 Wise Dollar Money Management 3 comments

The following is a contribution from my blogging friend, DJ.

When it comes to creative ways to save money, one of my favorite ones is to keep the money for myself instead of paying more in taxes than I have to.

Most people know that retirement accounts such as a 401(k) or IRA are great tax-avoidance savings tools that we can use. But they?re certainly not the only ones!

In particular, one that most people have access to but forget to use is an FSA or?flexible spending account.

What Is a Flexible Spending Account?

A flexible spending account is a special type of account where the U.S. government allows you to put a certain portion of your money to use for dependent care and medical expenses. They do this because these are arguably two things that most middle-class families struggle with financially, and by providing some tax relief on them, this cuts us a break.

How Does An FSA Work?

The way an FSA works is simple.

Every time you get paid, a pre-determined amount of money that you elect is taken out of your paycheck before taxes are deducted (similar to how your contributions to a 401(k) are taken out). That money then finds its way over to the service provider of your flexible spending account for safe keeping. Then, throughout the year as you make any eligible purchases in one of these two categories, you can use the money to effectively ?pay yourself back? until all of the funds are used up.

Why not just forget the FSA and set the money aside yourself?

In one word: Taxes.

The fact that this money comes out free of taxes is a huge benefit!

How big??Let?s take a look at how much money you actually end up saving with your flexible spending account.

Dependent Care

It wasn?t that long ago that my children were little and had to go to daycare while both my wife and I worked. We would always joke that daycare was the ?second mortgage payment? that we?d write every month. Man, we really needed a break!

It was about this time that we first noticed that my wife?s work was offering an FSA option. I did the math on it, and this is the lesson I learned that turned me into a believer.

The maximum allowable contribution for dependent care expenses is $5,000. At a tax bracket of 25 percent, had we tried to pay this $5,000 ourselves out-of-pocket, we would have had to earn $5,000 / (1 ? 0.25) = $6,667 in gross wages. BUT thanks to being allowed to use this money directly tax-free, the FSA saves us $6,667 – $5,000 = $1,667 for the year. That?s not a bad deal at all!

Each month as we?d make the daycare payments, we?d simply upload our receipts through the service provider?s portal and receive reimbursement. (Nowadays, some service providers even have smart-phone apps that you can use to do everything in under a minute.)

Medical Expenses

In addition to using your flexible spending account for dependent care expenses, the other major category that you can elect to use is for medical expenses such as your doctor?s bills, surgeries, prescriptions, dental work, vision, etc.

The process with the medical expenses works exactly the same as it does the daycare. As your bills are paid, the proof of receipt is sent in to the service provider and reimbursements are made.

For medical expenses, the maximum cap is $2,600. Again, if we?re in the 25 percent tax bracket and use this full amount, the tax savings will work out to $867 for the year.

Accounts Are Separate

Please keep in mind that your medical and dependent care contributions are separate.

When first signing up to participate in this program, you have to elect how much you want to go in each one. For example, if you elect to use the dependent care one only, then you cannot submit receipts for medical expenses. And vice versa.

Use It Or Lose It

One of the biggest drawbacks to using a flexible spending account is the fact that your elections are on a ?use it or lose it? basis.

For example: If you allocate the entire $5,000 for dependent care, but for whatever reason only spend $4,000 for the year, then unfortunately you could potentially lose the remaining $1,000. Therefore, it?s generally a good idea to conservatively estimate how much you really intend on spending without going too far over.

I say ?potentially? lose this money because your FSA does cut you some slack. I know from personal experience that there is typically a two and half month window between years where you can try to use up any unused funds from the previous year before they expire.

Another clever way around losing your FSA funds is the fact that what you can claim is quite flexible. There are a ton of off the wall but qualified things that you could spend your funds on that you?re probably not even thinking of. These can be simple purchases such as:

Over the counter medication
Allergy pills
[easyazon_link keywords=”Sunscreen” locale=”US” nw=”y” tag=”wisedollar-20″]Sunscreen[/easyazon_link]
Putting together a first aid kit
[easyazon_link keywords=”Band-aids” locale=”US” nw=”y” tag=”wisedollar-20″]Band-aids[/easyazon_link]
[easyazon_link keywords=”Pepto-Bismol” locale=”US” nw=”y” tag=”wisedollar-20″]Pepto-Bismol[/easyazon_link]
[easyazon_link keywords=”Clearasil” locale=”US” nw=”y” tag=”wisedollar-20″]Clearasil[/easyazon_link]
And a whole lot more!

Conclusions

If you?d like a really simple way to squeeze as much as $1,667 extra on daycare and $867 on medical expenses, then talk to your company HR and see if you have the option to sign-up. If you can?t, please keep in mind that you might also have the option to sign up for an HSA instead.

We?ve been using our FSA for years, and – again ? the taxable savings just keep adding up and allow us to spend the money on the things we really want to!

DJ is the author of the book ?[easyazon_link identifier=”B00VXP4E8A” locale=”US” nw=”y” tag=”wisedollar-20″ cart=”y” popups=”y”]Save BETTER![/easyazon_link]? and creator of 1,000 Ways to Save, a website that is dedicated to finding as many great ideas as possible that will help you spend less and save more!? Please feel free to connect with him on Pinterest.

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4 Ways to Plan Now for The New Year

December 21, 2016 Wise Dollar Money Management 2 comments

As another year draws to a close, it is easy to catch yourself looking ahead to the new year.

After all, the start of a new year always feels like a chance to ?start over? ? to do things that you didn?t get around to this year. Of course, in reality, the calendar has nothing to do with what you can or can?t do on a given day.

Rather than putting your financial goals off until the new year, why not get started right away? Anything you do today won?t have to be done tomorrow, and that is certainly a good feeling.

So, with this line of thinking in mind, let?s take a look at 4?things you can do now to start planning for financial success in the new year.

Build Up Your Savings

Of course, this should always be one of your top financial goals. Do everything you can to start saving up money for next year and you will head into 2017 feeling great about the status of your finances.

There is no such thing as having ?too much? savings, so keep moving as much money as you can into your savings account while continuing to meet your monthly budget obligations. As long as you see that savings pile steadily growing over time, you will know you are on a positive track.

Trim the Budget

The end of the year is always a good time to take a fresh look at your budget to see what you may be able to cut out. Are there any subscriptions that you are paying for which are unnecessary? Could you save money on an ongoing expense such as food just by shopping smarter?

Take a close look at how your budget is working (or isn?t working) and make the necessary corrections to be more efficient with your spending in the year to come.

Think Taxes

While your taxes might not technically be due until April, you can start now thinking about how you are going to pay your bill ? or what you will do with a refund, depending on the situation.

Look back to previous years for a good indication of what your tax situation may look like this time around, and start saving up if necessary if you think you are going to owe. You certainly don?t want to get caught off guard with an unexpected tax bill, so get ahead of the game by thinking about this topic as soon as possible.

Plan on an Income Increase

It is certainly great to live within a controlled, restricted budget, but nothing will help you pay the bills and save money quite like finding a way to make more each month. With the time remaining in 2016, think about how you are going to track down some additional income in the new year.

This may be through getting a raise at your job, working on a side hustle, or some other method. Whatever the case, remember that additional income isn?t going to happen by accident -? you have to go get it!

How are you preparing for the new year? Do you have a plan?

Photo courtesy of: Shandi-lee Cox

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