Tax season is over. Welcome to tax season.
While it may feel like it’s behind you, the process is already begun again. Start preparing to get the most out of your police paycheck.
Some of us dread tax season. Some of us cling to it like it’s a life-line of some sort. Whether you’re expecting a big return or not, there are two common mistakes people make when filing (and two easy ways to fix them). Are you guilty of them?
1. File in a way that’s right for you
Tax procrastination stems from a lack of forethought and planning based in the subtext of fear and anxiety. That fear can be founded in a simple lack of understanding of tax code and the uncertainty of how to file in the first place. People worry about what they are able to write off or are overwhelmed with the understandably confusing tax forms.
I’m not a tax attorney, CPA, or tax code junkie, so I pay an excellent, qualified CPA. I am not satisfied with “good.” I specifically seek “excellent” because a family member or friend who has done your taxes for years — however “good” they may be — is not as likely to get you where you need or want to be.
Someone who can be considered “excellent” in my area of the country will get about $350/year to do your taxes. That may initially sound like quite the investment, but my peace of mind is worth quite a bit more than a mere $350.
All I need to do is scan and email him all the appropriate documents I collect during the first part of every year and we spend 30 minutes on the phone getting them filed.
Six or seven years ago, there were a number of LEOs getting audited. I was one of them. The fee I pay my CPA also covers him representing me during an audit. In my case, the Feds said we owed an additional $360. I paid it. My tax guy went to bat for us and we ended up getting a refund from the Feds for $362…because of interest.
If you have no home, are single, and use the 1040 EZ form to file, there’s no reason you can’t use an online service such as Turbo Tax.
2. Understand what your return means
There are people who actually look forward to tax time because they want that fat return. This may be the more sinister behavior pattern when it comes to dealing with your taxes.
It wasn’t until 2009 that my wife and I really started paying attention to our finances.
One of the most important lessons we learned is that a fat return means you just lent the government all the money in your return — at 0% interest!
Here’s a personal example you may be able to relate to. We used to consistently get back — combining Fed and State — between $12,000 and $14,000 per year, which at the time seemed pretty sweet.
We came to realize that huge return means we should have been getting a minimum of an additional $1,000/month in my paycheck instead of giving the government an interest-free loan.
An argument could be made that this type of “big return” is like forced savings. Sure, you could take that approach, but would you put money into a savings account that gave you 0% interest?! Of course not!
You also have to consider compound Interest.
With that $1,000/month example, I can use an investment calculator to see what potential upside I might be looking at. I’m going to assume a return of 10%. Some financial experts will claim that assumption is too high; however, Morningstar will tell you the average return over the last five years for U.S. Equity Small Growth Funds was 14.83%. The last three years, it was 17.85%. Last year, it was 15.06%.
Starting with a balance of zero, I’m going to add $1,000 every month. The result of your $1,000/month investment into the aforementioned funds will result in you contributing $120,000 over a ten-year period. The yield will be $210,374.00!
That’s more than $90,000 in interest paid.
How does that compare to the 0% interest loan to the government? Just to underscore the point, here are two examples to consider.
First, how much would your $1,000 per month for 10 years be worth in 30 years? How does $1.4 million dollars grab you? Second, what if you continued to contribute $1,000/month for the entire 30 years? Your $360,000 investment will get you $2,171,321! That’s over $1.8 million in interest. By the way, if we change the 10% average to 14%, the $2.1 million becomes $4.8 million. That’s the power of compound interest.
So, how can you go about getting that money throughout the year instead of one lump sum? The “trick” is your W-4.
It’s all about the withholding. Simply go to the IRS website and fill out the worksheet. That will give you a better idea about what should be withheld every month from your paycheck.
At one point, I was claiming married/0/0 (Fed/State, respectively). Now I claim married/14/7. This year, we got a $500 refund from the Feds and $4,500 from State. It’s taken a few years to get the Fed close to zero, so I haven’t adjusted State much, just in case we owed the Feds.
Filling out your W-4 appropriately can make a serious impact on your monthly budget because you don’t have to scrimp and save month in and month out in anticipation of tax day.
