How do you think about tax season? Is it nervous time because you don’t know whether you’ll owe money or get a refund? Is it an exciting time because you’re pretty sure a big refund is coming? Or is it something that you don’t give much thought until it’s time to prepare your tax return? It may surprise you to hear that each of these scenarios means you’re not really ready for tax season. Here’s why, and how you can do better.
You care but don’t know what to expect? Despite the challenges of crunching your financial numbers, one nice thing about numbers is that they’re black and white. That means if you have the right information, you can come up with the answers you need. Armed with your anticipated income, expenses, W-4 allowances and deductions at the beginning of the year, it’s possible to estimate your tax obligation at the end of the year and make adjustments, such as claiming more allowances. If you’re not confident in your ability to crunch these numbers, your tax preparer should be. You can also take advantage of tax calculating resources like those offered by Forbes.
You’re excited because you’ll get a big refund. Who doesn’t get excited at the prospect of getting a big check in the mail or direct deposited in your account? But when that apparent windfall is a tax refund, the reality is that it actually cost you money. Why? Because you’ve been having too much deducted from your paychecks and letting the government use that money, your money, interest free for an entire year. A better use of that money would have been to receive it each pay period during the year and deposit it in a savings account. Then, at tax time, you’d have your “refund” plus interest!
You don’t think about taxes until tax time. This could be your approach for all kinds of reasons. Maybe your income is high enough that even if you owe money on April 15, it doesn’t hurt that much to write the check. Or you might think taxes are mysterious and out of your control anyway, so just deal with them when you have to. The fallacy of both approaches is that they ignore an important reality—as part of your personal financial management, taxes are a stewardship issue. Planning for them is as important as setting your budget and deciding how much to save and give.
If you’re not ready for tax season, the good news is that you can start getting ready now for next year. Here’s an idea to jump start your efforts. Are you expecting a refund? If so, don’t rush out and spend it on whatever it is you’ve been living without for the last year anyway. Make it catalyst to start saving by putting it in a new savings account.
You can learn about savings account options with ECCU here.