Money Moves to Make Before April 15
Are you ready for tax day? Each year, April 15th is the day that individual income tax returns are due in the United States. To avoid being charged, it’s important to submit (otherwise known as filing) your taxes on or before that date. In some cases, you may be able to request an extension on the April 15th deadline.
So…..are you ready for it? Here’s what you need to know about managing your money leading up to tax day.
What to do with your money before tax day
When you file your taxes, you’ll learn that you either owe money to the federal government or that you’ll be receiving money back from the federal government.
If you owe money
If you anticipate that you’ll owe money, it’s important to consider that leading up to tax day. You’ll want to make sure that you have enough money saved up to pay what you owe to the IRS. There are several reasons why you might owe money this year, even if you’re received refunds after filing your tax return in the past.
Change in withholding allowance
When you start a new job, one of the pieces of paperwork that you’re asked to fill out is a Form W-4. This form is what employers use to determine how much to withhold from your paychecks for federal and state income tax.
By filling out this form, you are claiming tax withholding allowances. The more allowances you claim, the less income tax will be withheld from your paychecks. While this means that you receive more money from your paycheck, it also could mean that you’ll owe money when April 15th rolls around.
Changes in your filing status
The way you file your taxes can affect key factors such as your tax bracket, as well as the credits and deductions that you can take. Major life events, such as marriage or divorce, can lead to changes in your filing status. Having a child or another dependent can also change your filing status.
Certain types of jobs
Generally speaking, if you’re a freelance or contract worker, you probably aren’t having income tax withheld from your paychecks. This means that when tax season rolls around, you’ll likely owe money since you haven’t been contributing to income tax throughout the year.
It’s also important to keep this in mind if you work a freelance or contract job on the side of your full-time job or another job where your employer withholds money for taxes. Even though you may be having taxes withheld from your regular paychecks, the fact that you have other untaxed income means that your refund could be reduced or you could still owe even though you were having some income withheld.
If you receive a refund
Do you plan to receive a refund this year? That’s great! Tax refunds are a great opportunity to start making some money moves, and you can begin planning for them right now. You may want to consider one or more of these options to make the most of your tax refund money.
Set a financial goal
Is there something you’ve been wanting to buy for a while? Then this is a great opportunity to get your nest egg started. Whether you’re saving up for a wedding, a down payment on a house, a new computer, or something else, tax refunds are a great way to turn those dreams into a reality.
When it comes to saving for big purchases such as a house or wedding, it can be helpful to have a specific account or other location for only that money. Setting the money aside in a dedicated account or a safe place in your home can help you keep track of how much you have saved toward that goal.
Pay off debts
You can also use some or all of your tax refund to pay up debts. This could be your credit card debt or student loan debt. You could even make additional payments toward your car or home loan if you wanted to get those paid off quicker.
There are several methods you can use to pay off debt. Some like to use the snowball method, where you pay off your smallest debts first and work your way up to the larger debts. You could also pay off debts based on which ones have the highest interest rates or which ones are more important to you to pay off quicker.
Invest
Do you have a retirement account set up? If not, it’s something that you may want to consider starting now, even if retirement is still decades away. If you have an employer, you may want to ask them if they offer a 401(k) and if they will match your contributions into the account. You could also set up an individual retirement account, such as a Roth IRA.
If getting involved in the stock market has been on your to-do list for a while, consider the months leading up to April 15th as your time to do some studying of the market. Then when you receive your refund, you can use it to fund your brokerage account and start trading.
Tax filing services
Filing your taxes can seem overwhelming for some, but it’s really fairly simple. Depending on your tax situation, it could even be free for you to file!
DIY tax preparation software
There are several companies that have the ability to handle your taxes online on your own. When considering this option, it’s important to think carefully about your tax situation. Each company handles tax filing in its own way. Some companies offer free filing for both federal and state tax returns. Others may offer free filing for federal only, with an additional charge for filing your state taxes. Then you might find companies that offer different prices depending on your tax situation.
Another factor to consider when picking a DIY tax software is whether it supports the tax forms and deductions that you plan to use. Most companies have a list of the supported tax information listed on their websites.
Some companies to consider are:
- IRS Free File
- Turbo Tax
- H&R Block
- Jackson Hewitt
- TaxSlayer
- Credit Karma Tax
Tax Professionals
You can also hire a professional to handle filing your tax return for you. Tax professionals can include certified public accountants (CPA), enrolled agents, or tax lawyers.
When you hire a tax professional, you will hand over your personal information and tax forms to the tax preparer, so it’s important that you trust the person that you hire. The tax preparer will most likely ask you some standard questions, and they may have additional questions as they work on filing your taxes. The tax preparer should let you review your tax return before it is filed to ensure that there are no errors regarding your personal information.
What’s the best way to file my taxes?
While it can be tempting to save money by filing your tax return yourself, there are some situations where hiring a professional to do it for you can be the better option. If your taxes are relatively simple, you can probably file your tax return online quickly and easily. A tax professional may be the better option if you have a complicated tax situation, such as if you own a business, or have significant assets or investments. It can also be helpful if you’re planning to itemize your deductions.
Costs of financial planning
Before you file your tax return, it’s crucial to have a plan. If you’re able to come up with a plan yourself, that’s great! But there are still some costs to consider when it comes to handling your money before tax season yourself:
- Planning to use your tax return money to save up for a major purchase? Then it’s important to consider the minimum balance and maintenance fees for your bank account.
- If you’re planning to invest your money in the stock market, consider the brokerage fees, minimum balances, and how much money you’re willing to risk.
- If you owe money, make sure you have a plan for making that payment.
- Whether you plan to use a DIY tax prep software or hire a tax preparer, make sure you understand the costs that come with filing your taxes before you make your decision. If you use an online DIY tax preparation software and need assistance, there may also be an additional fee to get that help.
Pros and cons of planning for tax season
You’ll know what to expect
By keeping track of your finances and how your income impacts your tax return, you’ll know what to expect. This can allow you to plan for how to use your tax return to help satisfy some of your financial goals. If you know that you’re going to owe money, planning for it can help you fit that payment into your budget rather than scrambling to pay it when it’s due.
It may be too late
Your tax return for this year is based on your income from the past year. After January 1st, there’s not much that you can do to change the outcome of your tax return. Even so, knowing this information now can help you plan for the next year. You might consider changing your withholding status or setting money aside throughout the year to make next year’s tax season more manageable for you.
The bottom line
While tax season can be a headache for some, it’s much easier if you know how to plan for it. The financial decisions that you make throughout the year can have a huge impact on your tax return for the following year. By having a plan for your money, you’ll have a better idea of what to expect.
Filing your taxes can be a great opportunity for getting on the right path for the next year. If you owe money, you can figure out why and either change your withholding status or make sure you understand how to save up to pay your taxes throughout the year. If you get a refund from your tax return, you may want to consider changing your withholding status so that you don’t have as much taken from your paychecks. Or, you can use the refund as an opportunity to make larger payments that you wouldn’t be able to otherwise!
As with most financial decisions, what you decide to do before tax season is entirely dependent on your financial situation and goals. The best thing that you can do, no matter what your situation is, is to be prepared.