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Today I’m answering your biggest tax questions. We’re doing a quick and easy take covering what you need to know this year when you file, how to maximize your tax refund, and set yourselves up with your finances for next year!
How to Maximize Your Tax Refunds with Credit and Deductions
There are some people in this world who are giddy right now because it’s tax season.
Yeah, this is like the SuperBowl for some money nerds.
And while I admit to being a number cruncher at times, I have to say taxes aren’t really that exciting for me.
Yep, guilty as charged.
However, I’ve seen how important getting our tax done has been for our finances. Both with planning throughout the year as well as using our refunds to reach our financial goals faster.
And I want you to see taxes in a better, maybe less stressful light so today I’ll tackle the big questions.
Heads up, even though I enjoy covering personal finances, I’m not a tax expert. There will be plenty of resources in today’s show notes for sure.
But this episode I will do my best to break things down and talk like a normal, non-money nerd.
In this episode, we’ll discuss:
- The difference between tax deductions and credits
- Major difference we noticed with the new tax law
- Making the most of your tax refund
Hope you enjoy!
Resources to Tackle Your Taxes
Looking to make taxes less stressful? Here are some of my favorite resources!
- Best Budget and Money Apps: Personal Capital, Tiller, Mint
- TurboTax <— We use them for our taxes
- Automatic Saving:
- Free 401(k) Analysis:
- Jumpstart Your Marriage and Your Money
- Your 2019 Taxes: What You Need to Know About the Tax Reform Bill
- The Almost Everything Taxes Chapter
- How Do I Calculate My Income Tax Refund?
Key Takeaways with Tackling Taxes
Before we close up I want to focus on some key takeaways so you two are winning with taxes.
- Do some tax planning ahead of time. If you haven’t already look at your retirement contributions.
- Review your withholding. Decide if you’d rather have more with your paychecks now or a bigger refund.
- Divvy up your refund to hit your goals.
If you’d like to chat more about how you can maximize this year’s refund or start taking steps to make next year even better, please join us in our private and free Facebook group – Thriving Families.
We’re families looking to support and help one another out. Hope to see you there!
Is a big tax refund a good thing or a bad thing?
Many personal finance journalists and writers have very strong and opposing opinions on them.
For me personally, I see it as two-parter – the refund itself and then the size of it.
Let’s look at both sides and see if we can answer it.
I want to start off with why getting a big tax refund is a win.
A large amount at once can be psychologically empowering rather than smaller ones spread throughout the year.
If you have credit card debt, for example, having a couple of grand to use may push you to just go ahead and get rid of that debt (or at least lower it considerably).
You may also choose to be conservative so you get a refund rather than getting hit with a penalty.
Being self-employed my income varies year to year and can fluctuate during seasons. I prefer playing it safe with my estimated taxes.
It may not be a solution for you, but it works for us.
Getting a big refund, though, not really excited about that and here’s why.
The other side of the argument is big tax refunds are basically an interest-free loan to the government.
A refund is simply you overpaying what you owe and waiting about a year to get it back.
No one is going to care about your finances as you do, so having that money to spend as it is available is practical.
If you automate your finances, having more money in your paycheck can allow you to pay down your debts or save up faster.
So while I don’t think you should feel guilty about getting a big refund, I do think it’s smart to review and update your withholdings so your paychecks are bigger.
You think that small amounts don’t really do much, but if you set up automatic transfers, you can easily reach your financial goals faster.
How do tax credits and deductions work?
Depending on your own circumstances, you can qualify for various tax credits and deductions.
Some people think that tax credits and deductions are the same.
That’s not true; there are some subtle differences and knowing them can help you tremendously.
Tax deductions reduce your taxable income, not the tax burden that you owe.
Tax credits lower your tax bill.
Another opportunity to lower your taxable income and build up wealth before you go and file your taxes is by making sure you’re taking advantage of all available tax-deferred savings options.
Contributing to retirement accounts like a 401(k), 457, or 403(b) allows you to invest while lowering your taxable income.
If you have a high deductible health plan, you can contribute money in a Health Savings Account (HSA).
So if you took care of these things before, you’ll be happy when filing taxes. (Well relatively so) If not, these are things to consider and perhaps sign up for or get more aggressive with this year.
We tend to think tax season as January- April, but you can have some big wins approach it bit by bit throughout the year.
What changes happened with this new tax law?
There’s no way I can cover all the tax changes in every scenario, it would be too long, complicated, and I’m pretty sure, you’d switch podcasts in a heartbeat.
However, I will share what I noticed while getting our taxes done.
The big news with this taxes this year is the standard deduction has increased.
For those married filing jointly, the standard deduction is $24,000. This is a big jump from 2017’s standard deduction of $12,700.
For 2018, the amount of the Child Tax Credit per qualifying child doubles from $1,000 to $2,000. The child tax credit is also extended to more families. (For married couples filing jointly, the Maximum AGI to get the full credit is $400,000) Another bonus – $1,200 of the $2,000 tax credit is refundable.
The new tax law did remove personal exemption. That’s the amount a taxpayer used to be able to deduct from their taxable income for themselves and any dependents claimed on their tax return.
The big plus with the standard deduction is that it’s much easier when it comes to filing. You can use this deduction no questions asked.
Itemizing your deductions means making sure you have the documentation on hand to prove you qualify for your deductions.
Since you can’t take the standard deduction and itemize your deductions, run the numbers so you make sure you choose the best financial option for your situation.
If you’re using tax software (like TurboTax ), it’s fairly easy to see the numbers in both scenarios.
How can we make the most of our tax refund?
The fun part – spending your tax refund! Here’s where you two can make a significant impact on your finances in one shot.
Create or Build Up Your Emergency Fund
If you’re looking for an amount to shoot for, consider one month’s worth of essential expenses. So you’re looking at rent/mortgage, groceries, utilities like light, and if you have a car, those related expenses.
The reason why you want to least have that is it’ll give you some peace of mind should you hit a bump.
And please do not keep it in checking. You’re more than likely going to use. Instead, tuck it away in a high-interest savings account where it grows a bit, but it’s still easy to access when you need it.
Another fantastic option is your local credit union. Being here in the Raleigh area, we use Coastal Federal Credit Union and have been happy with both the service and interest rates.
The reason credit unions can be a great partner is how they are structured. A normal bank serves its shareholders, those profits get shifted their way.
With credit unions, though, as a member of it, you are an owner. So one way profits can get sent to you is in the form of higher interest rates on savings.
So if you guys aren’t happy with your current bank, you might want to consider a switch and opening a savings account can be a great first step.
Knock Out a High-Interest Debt
Carrying high-interest debt is like walking around in quicksand – you will be pulled down.
Paying off those debts can not only give you some breathing room in your budget, it’ll also help give you some peace of mind.
Do what works for you, but I’m a big believer in the debt snowball method, which means you eliminate your debts based on the balance from smallest to largest.
If you have a big enough refund, you can get rid of a couple of your small debts in one shot.
The mental upside is that you’ve removed a couple of your monthly bills which you can now roll over to speed up your debt freedom date.
Invest More for Retirement
Did you max out your IRA contributions last year? Don’t feel bad if you didn’t – you can use some of your tax refund to make this happen this year.
Opening and/or funding your IRA is a wonderful way to invest for retirement. If you don’t have an account, there are several options like M1 finance, Vanguard, and Betterment.
Between the two of you, you can contribute $11,000 ($13,000 if you’re 50 or over), depending on your taxable income. That’s a huge win for your retirement!
The earlier you start contributing the more compounding interest works in your favor.
And last, make sure you take a percentage of your refund and use it for something fun.
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