Rethink Receiving a Tax Refund

The National Foundation for Credit Counseling (NFCC) online poll last February revealed that a strong majority of respondents intentionally plan to receive a federal income tax refund.
“The findings suggest that receiving an income tax refund has become standard operating procedure for some people, as 2014 is the second year in a row that the majority of NFCC poll respondents confirmed their preference toward the once-per-year windfall,” says Gail Cunningham, spokesperson for the NFCC.
People may argue that overpaying Uncle Sam each pay period is the only way they can save, as their withholding has become a method of forced savings. However, that reasoning pales when stacked against the many benefits of having an accurate amount withheld from their check each pay period.
Financial professionals at The Village Financial Resource Center encourage taxpayers to consider the following reasons to stop receiving a federal income tax refund:

1. Overpaying any financial obligation rarely makes sense. No one wants to end up owing more taxes than they are prepared to pay, but receiving an excessive refund is not the proper solution.

2. Intentionally choosing to loan money to the government without the benefit of earning interest isn’t a smart use of your money.

3. If saving money is your objective, there are better ways for you to meet that goal. “Even a simple savings account—at today’s negligible interest rates—makes more sense than letting Uncle Sam hold onto your cash for 12 months and then handing it back over to you with no interest earned,” says Joshua Huffman, program manager for The Village Financial Resource Center.

4. Not having ready access to your own money could put you in financial jeopardy if you are faced with an unplanned expense or emergency.

Pop Quiz: Is It Better to Have a Tax Credit or a Tax Deduction?
Tax time is right around the corner. To see how well the average citizen understands tax time basics, Money Talks News finance expert Stacy Johnson posed these questions. How much do you know?

You miss the April 15 filing deadline. The government will fine you big bucks, right?
Maybe not.
The failure-to-file penalty is 5 percent of your unpaid taxes each month, and it begins accruing April 16. The failure-to-pay penalty isn’t quite so hefty, coming in at 0.5 percent of your unpaid taxes.
However, the failure-to-file penalty applies only to tax returns on which you owe money. If you’re due a refund, there’s no penalty for late filing. But the IRS says you don’t want to wait too long, or you could lose your refund entirely. Here’s what the agency says on its website: There is no penalty for failure to file if you are due a refund. But, if you wait to file a return or otherwise claim a refund, you risk losing a refund altogether. An original return claiming a refund must be filed within three years of its due date for a refund to be allowed in most instances.

Which is better: A tax credit or a tax deduction?
A tax credit wins every time.
The reason is simple. A tax deduction lowers your taxable income, while a tax credit lowers your tax bill dollar for dollar.
Here’s an example, with rounded numbers for simplicity. Let’s say you have a $50,000 income and fall into the 25 percent tax bracket. A $1,000 tax deduction reduces your taxable income to $49,000, which would drop your tax bill by $250. However, if you were to have a $1,000 tax credit, your tax bill would be reduced by $1,000. You come out $750 ahead with a tax credit.
Tax credits come in two types: refundable and nonrefundable. Let’s say you owe $500 in taxes and have a $1,000 nonrefundable tax credit. In that case, your $500 tax bill would be wiped out and that would be the end of the story. But if you have a $1,000 refundable tax credit, your tax bill would be wiped out, plus you would get $500 back from the government.

True or false? Someone with a multimillion-dollar income can have a lower tax rate than someone earning $100,000.
Oh, you knew this one was true, right?
The Internet is full of articles about how the super-rich manage to lower their effective tax rate to less than what more average Americans might pay.
While every situation is different, a major reason for the lower tax rate among the wealthy could be how they earn their money. Rather than going to a 9-to-5 job and pulling down a salary, the top income earners may be bringing in their money from the sale of stocks and other assets. Money from those sources, known as capital gains, is taxed at a flat 20 percent for the highest earners. (It can be lower for other folks.)

Do you need an accountant to get your taxes done right?
Nah, you’ll probably be fine on your own.
Today’s tax preparation software makes it easy to complete your own tax return, even if you’re self-employed or have cashed in some investments. Personally, I’m a fan of TurboTax, but you have plenty of options from which to choose. If your income is below $60,000, you can even use some programs to file your taxes for free. Check out the IRS’ Free File site (www.irs.gov/uac/Free-File:-Do-Your-Federal-Taxes-for-Free) for links to participating software providers.
Of course, tax professionals have their place. If you own a business or have a complicated tax situation, using a pro can be money well spent.
If you’re not sure whether you need a tax preparer, remember that many online tax prep sites will let you prepare your return at no cost and charge you only when you file. You can try these sites first, and if you find yourself confused or the numbers don’t seem to add up, you can easily shift to an offline preparer without paying a dime to the website.
Prepared for Money Talks News by Maryalene LaPonsie, www.moneytalksnews.com

5. A lower paycheck could result in charging items you would have paid for with cash, thus potentially creating debt.

6. Less money available for debt repayment could increase your likelihood of making late payments, which in turn will negatively impact your credit report and credit score.

7. A smaller paycheck diminishes your opportunity to save, pay bills, donate, or invest. “Often the very people who celebrate receiving a refund are those who are most in need of extra money in their pocket each month,” continues Cunningham. “Living paycheck to paycheck, people often fall behind on important priorities such as rent or vehicle payments. With the refund in recent years averaging close to $3,000, an extra $250 every month could mean the difference between eviction and repossession, yet many people remain reluctant to forego their habit of receiving refunds.”

8. In spite of good intentions, a once-per-year refund often results in a once-per-year splurge. Avoid the splurge, cautions Huffman: “If you do end up with a refund, consider using it to pay down high-interest credit card debt or to make an extra mortgage payment. People don’t realize you can significantly reduce the length of your mortgage and the amount of interest you pay in the long run by simply making one extra payment a year.”

To calculate the proper number of withholding allowances, go to www.IRS.gov and type the words “withholding calculator” into the search bar. After determining the appropriate number of allowances, complete a new W-4 if necessary. You are allowed to submit an updated W-4 to your employer at any time during the year.
If the adjusted allowances result in a higher paycheck, make a conscious decision regarding how to best allocate the extra money. Cunningham notes that whether the objective is to save money, catch up on past-due bill payments, donate to charity, or invest, the money will likely not serve its intended purpose if you don’t have a solid plan.
For answers and solutions to everyday financial concerns, contact The Village, an NFCC member agency, at 1-800-450-4019 or www.HelpWithMoney.org.


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