Taking control of your taxes

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Tax season is definitely here and if you haven’t already started you have got approximately 2 days and some change…and it’s that remaining time that will be the topic of this post. Some call it procrastination, i even saw a map detailing the “worst” procrastinating cities in the US for turning in tax returns right up ’till the apr. 15 deadline. (via mashable) What they see as waiting until the last minute, I see as smart…at least in one particular way. Don’t get me wrong, I’m not advocating the practice of putting things off (though I am a world class procrastinator), but I do have a very good reason to suggest you wait until the last minute to send all those forms.

There are those out there that use an annual tax refund as a sort of gov’t created savings system, whereby you pay extra throughout the year and have that payout come tax day (or 4-6 weeks after that cause you know, it’s the gov’t…they do nothing efficiently). Now I can see the particular appeal to this technique as sort of a self-imposed-yet-still-forced saving program, but there are factors at work here that make this one of the worst things you can do with your money.

First let’s debunk this notion of getting a big refund being a good way to save…actually let’s just let Dave Ramsey, personal finance guru, and his common sense, debt-free approach to money handling take care of that for us with this quotation from a recent blog post.

Myth: Getting a big refund on my income taxes is a good way to save money.

Truth: If you get a large tax refund, you’re allowing the IRS to take too much money out of your paycheck. You’re loaning the government your money—interest free. That’s money you could use to pay off debt and/or build wealth each month.
Getting a chunk of your money back at tax time is not the same as taking it home in your paycheck each month. According to the IRS, the average tax refund will be $2,800 in 2010. That’s about $230 per month you can’t use because you’re sending it to the government!

There’s more to that article, so click here to read the entirety.

Let’s recap that…if you get a $2800 refund this year, you gave the gov’t $230+ each month you didn’t have to…hmmm…and I’ll be you could find an investment person that’ll help you figure out how much that would be worth by the time you retire if you invested that money.

Now that we’re all on the same page with keeping our money ourselves and possibly investing it to result in even more cash in your bank, let’s take a look at the flipside of that.

Ever since getting married, I have successfully managed my tax deductions to the point that I have to pay a little at the end of each year (exception was this year as we had our little baby and I just forgot to adjust the deduction form). What this means is that instead of the gov’t hanging on to my money the whole year and me getting it back in one lump sum…I’m doing that to them…That’s right, that payment I make each year is money (according to the tax code) the gov’t is due, but I get to hang on to it until the end. That said, with all the investments and savings we try to do all the time, I may have even made money off of that which otherwise would have been in the hands of the IRS or whomever at the various federal, state and local levels handles such revenue.

While I’m at it let me make a case for doing your own taxes as a way to further keep yourself on top of of your tax responsibilities. Whether you use a software like TurboTax or just get the forms and fill them out old school (ie. using a pen with actual ink) it’s really nice to know specifically how much of your money is going to each government entity and how the whole thing comes together. A benefit to using software is many of them allow you to enter last year’s information so you don’t have to keep entering all your employer specific data each time.

So I know it may be a new concept, or even hard to hear, but it is true. You simply need to make sure your tax deductions are properly adjusted to allow for an even to slightly skewed withholding in your favor throughout the year you too care take maximum advantage of the somber yet legally required tax system.

Post thumbnail courtesy of alancleaver_2000

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