Thursday, January 27, 2011

Let's Talk About What IS Unfashionable - Taxes!

You work, you trudge and you drag yourself to job... or if you're like a lot of my friends who work from home, you roll out of bed and head to your corner home office (still in your PJs)... LOL.

You pay your taxes on time like a good citizen.  Then comes the New Year and it's time to think about filing your income taxes (more taxes... more paperwork... eek).  You relish the idea that you may get a refund.  Why?!!!

Why do you want a refund?  Why do you not just want to break even?

Do you not realize that a tax refund is just an interest free loan you GAVE the government?   Don't you think it's much better and wiser to keep the money you earned?  If you really just want to anticipate a refund - then just send me money every month and I'll hold it for you and I promise to give it back to you after February 1st of the following year - without interest.  I'll even sign a Promissory Note to that effect!  Sounds silly and/or absurd, huh?  Well when you overpay on taxes, it's stupid to allow the government to use YOUR money for FREE!  Plus there's no penalties if they decide to hold your refund check... but you just miss paying them by 1 day and you're hit with all sorts of interest, fees and penalties.

Sure some of you may argue that refunds are a great way to save money...for a vacation, necessary home improvements, a big TV or some new clothes.  How is it a great way to save?  It doesn't earn any interest.

Wake up my little financial fool.  That is why there are all sorts of savings plans with your company.  Payroll savings deductions are designed to do just that - be great ways to HELP YOU save money. Why not increase your retirement-plan contributions, buy savings bonds or better yet, put an extra $50 per paycheck into a money-market fund.

Here is something I read from a financial blog just this morning:
what should I do to just withhold enough?
Aim for the safe harbors. That's the minimum amount you have to pay during the year to avoid any interest and penalties. There's no interest or penalty if any of the following apply when you file your return on April 15:
  • You owe less than $1,000.
  • You've paid in at least 90% of your 2010 liability.
  • You've paid in at least 100% of your prior year's total tax. On your 2009 return, that was Line 60. Go check it as you begin planning your 2010 return.
If your adjusted gross income (Line 37 on your Form 1040 for 2009) was more than $150,000, you need to pay 110% of your total tax, rather than 100%. So if my 2009 adjusted gross income was $160,000 and my total tax was $10,000, I'd need to pay 110% of that, or $11,000, during 2010 to hit that safe harbor. If I do that, there's no interest or penalty to pay, regardless of how much I owe on April 15, 2011.
If you're paying through withholdings, they are deemed to be paid evenly during the year, regardless of when they are remitted. I have some clients who have nothing withheld during the first 10 months and then meet their safe harbors with November and December withholdings.
If you're making estimated payments, they need be equal or, if your income varies substantially during the year, proportional to the income earned during each quarter. So on a simplistic basis, if I have $100,000 in income earned and $40,000 was earned in the first quarter, I'd need 40% of my tax paid in during that quarter. Technically, it's called the annualized income installment method, and it's a bit more complicated than my example.
See Form 2210 (.pdf file) for the required computations.
Jeff Schnepper is the author of the best-selling book "How to Pay Zero Taxes," which is in its 28th edition. He is a former professor of taxation, accounting and finance. Schnepper now has a full-time tax planning and legal practice in Cherry Hill, N.J. Click here to find Schnepper's most recent articles and blog posts.

Okay, the flip side is... what if you expect to owe taxes on April 15?  It would be prudent to put that money into a money market fund (or send them to me) until needed.  At least that way, as opposed to increasing your payments to the IRS, you'll get the interest. Just make sure you hit one of the safe harbors mentioned above.

There are several banking institutions out there who have a nice higher yeilding interest savings account than your local bank.  Also check out credit unions, as they tend to give better rates than your local bank.  You can check out this link as well that will give you some high yeilding interest rate online savings accounts.

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