Talking about Taxes
"You must pay taxes. But there's no law that says you gotta leave a tip."
- Morgan Stanley
No one is ever really happy about paying taxes. And no matter what, if you are working or have assets, you are going to have to pay. Here are a few things that might help as you prepare your tax strategy for the future.
Take full advantage of any tax-deferred plans you might have access to: 401K, 403B, etc.
Don’t give the government a free loan just to get a big refund check in April. Adjust your deductions at work and put your “extra” into savings.
Think about charitable giving. You might be able to reduce your tax burden while helping causes you care about.
It’s not easy talking about taxes because no one is ever really happy paying their taxes. But there are strategies that might help your tax situation feel a little better -- and should help your financial picture for the future.
While building your tax strategy, focus on two things: First, make sure you have your emergency fund funded (three to six months of salary in the bank and readily available). Second, build your retirement funds like they’re a debt you have to pay and leverage tax-deferred vehicles if you can. The first will relieve stress, the second can be the most important part of your tax strategy.
If you are working for a company that offers a tax-deferred retirement plan like a 401(K), a 403(B) or 457 plan, take advantage! Your contributions will be pre-tax meaning that you are lowering your taxable income by the amount of your contribution (and deferring taxes on the amount you are putting away until you withdraw it -- at retirement). If your employer offers matching funds, try to contribute enough to qualify.
Isn’t it interesting that stores promote tax refund-based sales in April? That’s because a lot of folks love to get a big tax refund check and then spend it on a big ticket item. Everyone loves getting a big check in the mail, but that doesn’t make taking fewer deductions a good tax strategy.
Here’s the math. If last year you got a $5200 refund, you were giving the US Treasury $100 every week -- for free, no interest paid -- instead of having it in your paycheck. That $100 could have gone into your retirement account, or your emergency fund -- or could have just earned interest in your savings account.
There is an adrenaline rush when that check comes in -- what crazy thing can we spend it on -- but resist! Don’t give the government a free loan of your money when you can put it to work for you.
The 2018 tax law raised the standard deduction on federal income taxes while eliminating some of the tax exemptions available in past years (like home equity interest). Depending upon how much you can deduct, you might want to itemize your charitable donations. Charitable donations are deductible and may reduce your taxable income.
According to Newsweek, “The (2018) tax bill doubled the standard deduction, which gives tax-payers less incentive to itemize deductions like charitable donations. Of course, some people continue to give to charity even if they don't itemize their tax returns, but they don't receive any extra breaks for it.”
Review Your Paycheck and Withholding
Take a look at what you are withholding through your employer. Are you taking too few or too many deductions? Are you contributing enough to any tax-deferred plans? Are you benefiting from any matching opportunities? Once you know what you’re paying in taxes, you are taking a strong step toward building an effective tax strategy. And with a reduced or no refund check in April, and more money in your account each week, you will have greater options for your saving, spending or giving strategies.