I cannot pass up this opportunity, which only comes at this
time of year. We are approaching “tax
season.” For some it falls between
January 31–about the earliest you can get copies of all the documents needed to
file–and April 1. For others, it starts
on April 1 and can run up to midnight on April 15, the last deadline to file
taxes without penalties for dollars you owe to the IRS.
This year it is even more critical to get advice on
stretching your paycheck, because the tax breaks that were allowed to expire to
avoid the fiscal cliff included some that affect every single taxpayer, not
just the wealthy. People are beginning
to learn that they get less take home pay, and that is only going to get worse
as the new health care law kicks in this year and next.
The
Washington Times states that approximately 59.3 million taxpayers received
an average refund of $3,000 last year.
Those refunds added up to a whopping $174.5 billion in overpayment of
taxes. This year it is anticipated that the $3,000 level will again be
reached. Those 59.3 million people fall
into the early category above, because they want to get that huge lump-sum
payment from Uncle Sam ASAP. (I’ll get back to that lump sum later)
The latter group, those who file at the last minute, do so because
they either owe some additional taxes, or they have a very modest refund
coming. I am in that group, and I am
going to tell you why we should all be in that 15-day filing window.
If you divide $3,000 by 12 it gives you a quotient of
$250. That is the average amount of
money taxpayers “lend” to the federal government each month with no possibility
of growth in interest or dividends. To
my way of thinking, that is very poor investing.
A better way to pay taxes is to estimate how much you will
owe on April 15 and then have the correct amount withheld periodically as it is
earned. The goal is to try to be within
$100 of you total tax liability when you file.
If your income is mainly derived from a paycheck that you
receive from an employer, you can easily change your withholding by filing a
new W-4. Just ask your employer for the
form, or you can download one from the IRS Website: http://www.irs.gov
and then turn it over to your payroll department when you complete it.
There is an easy way to calculate the optimum number of
allowances on the W-4. Go to the
Kiplinger Website: http://www.kiplinger.com/tools/withholding/index.php and follow the easy steps.
You might want to read the entire set of pages there as well, since
Kiplinger gives excellent advice on the subject.
Even if you were to miscalculate (under-estimate) your
optimum withholding amount, you can always file quarterly estimated taxes to
catch up without penalty. The 1040ES
form and instructions are also available at the IRS Website to help you.
The 1040ES is the same form you should use to file quarterly
estimates if your income is from other sources, such as self-employment, pension,
Social Security, interest or stock and bond dividends.
Now, back to that huge lump sum that so many people seem to
desire… If you are one of those, you
can still get that “refund” but with more bang for your buck.
Instead of making an interest-free loan to the government
every payday, take the amount you have saved by decreasing your withholding and
put it in interest-bearing certificate of deposit. Some employers even have
a thrift plan that allows automatic deposits to be made from your periodic
pay.
If it makes you feel patriotic to help fund the government,
buy U. S, Savings Bonds and at least get the advantage of an interest bearing
bond for doing so.
You still want a big refund, you say? Cash in a couple of the matured CDs or bonds
on the same day you send in your tax forms. You won't even have to wait for the
IRS to send the money.
I have an even better idea for you. Use that $250 per month to fund a 401(k) or
Roth IRA. You won’t be able to withdraw
it until you are at least 59½ years old, but it will grow at an astonishing
rate to fund your retirement. The
beauty of it is that you won’t even miss it while you’re funding your possible early
retirement.
You might possibly be my age, and you can no longer fund a
retirement program, but you probably have kids and grandkids. Kiplinger has some good advice on that too,
titled, "10
Smart Uses for your Tax Refund."
You can apply the monthly savings to those same enterprises just as
easily as with a lump sum refund.
I urge you to forward this column on to all your relatives
and friends.
