Personal Taxes
Something about tax time just ramps up the blood pressure and muddles the thinking of even the most responsible minds. Maybe it’s because of the paperwork – so many details and numbers and Form This and Schedule That. Like our tax return is just begging us to make a mistake. Maybe it’s because of the politics – none of us like to pay taxes, but it forces us to start thinking about how it’s all being spent and who’s paying less than we are and what is WRONG with everyone in charge?
“But in this world nothing can be said to be certain, except death and taxes.”
— Benjamin Franklin
Or maybe it’s really just about the money. What if we owe too much money? What if we’re counting on a big refund and we don’t get one? What if we’re supposed to pay more and don’t realize it? What if we’re supposed to get more back and don’t claim it? None of us are likely to live tax free, but we shouldn’t have to feel like we’re in tax bondage all the time, either!
Money isn’t everything, but it does tend to impact and influence every other part of our lives. Our annual federal tax return and state tax return are a big part of that. We can debate (or argue) about the politics of it –tax brackets, the ever-changing factors that shape our adjusted gross income, what the folks running the state or managing the country actually do with our personal income tax and small business tax contributions every year. Those are valid discussions to have. Get involved. Contact your representatives. Use that voice as best you can. But in the meantime, let’s talk about making tax day a little less stressful each year by not waiting until tax filing time to think about preparation.
Effectively Managing Personal Taxe
We pay personal taxes in all sorts of scenarios. Anytime you buy something, you probably pay sales tax. If you own property, you pay annual property taxes. If you sell something at a profit, you may pay capital gains taxes. While you should absolutely pay what you legally owe, there’s no reason not to owe as little as legally possible. There are several common ways this can happen.
Taxry - The Best Tax Tool
It’s not just about being organized, of course. A little effort up front, and the wonders of modern technology, can also help you stay alert for ways to lower your personal taxes throughout the year.
+ Tax Deductions and Your Adjusted Gross Income
At its most basic, the amount of personal income tax you owe each year (whether paid throughout the year via payroll withholding, in quarterly estimates, or on tax day) is based on your adjusted gross income (AGI). Your AGI is your gross income (the total you’re paid before withholding and deductions) minus any deductions for which you qualify. And yes, once again it’s easy to mix terminology. Your paycheck may have “deductions” taken out for retirement, health insurance, union membership, etc. These aren’t those deductions. When you’re doing your federal tax return, deductions are things the reduce your taxable income.
So your gross income, adjusted by subtracting any deductions for which you qualify, is your AGI – your Adjusted Gross Income. This determines what percentage of your income you’ll pay, and the rest is just math.
Here’s where you have a decision to make. The Tax Code allows you to either itemize your deductions – various things that can reduce the total of your taxable gross income – or simply take a “standard deduction” based on your filing status (single, married filing jointly, married filing separately, or head of household). One of the significant changes made to the tax code in 2018 was a dramatic increase in the size of the standard deduction. Many things you used to be able to claim by itemizing were either eliminated or rendered insignificant by this change. (Whether that’s a pro or a con depends on your specific circumstances.)
Deductions which can reduce the amount of personal taxes you owe on your tax return can include items resulting from medical or education expenses, your home mortgage, investment losses, state or local taxes paid in the previous tax year, or even losses from gambling. For many of us, however, the “standard deduction” is still a better way to go.
How Do I Know What’s Better For Me?
Here’s where taking advantage of the tools available, whether for your small business tax obligations or simply doing your personal taxes, is so important.
Imagine not waiting until tax time every year to categorize your expenses. Imagine if each purchase you made, each bill you paid, each debt you eliminated, could be easily recorded and categorized as easily as depositing a check using your bank’s mobile app or checking social media for new baby pictures. Imagine easy questions as you go which help organize and analyze your spending – not by taking hours and hours a few days a year, but simply as part of your normal routine. Then, when tax day comes, you don’t have to worry – it’s all there, ready to submit with just a few more clicks or swipes. It’s like having your own little tax store on your phone or laptop!
Technology is not generally great at making decisions, nor do we want it to. What it is good at is processing and organizing huge amounts of information in all sorts of different ways. Half the battle of tax season is simply keeping track of receipts, trying to remember what those charges from six months ago were, or finding those emails verifying those donations you made and wish to deduct. Technology is great at that, with minimal time or headache on our part once we’ve told it exactly how we’d like things to be done. Plus, you can receive notifications and help with all sorts of other things which may or may not be directly related to your personal taxes – heads up when there are unexpected changes to your accounts, reminders when payments are due, etc. You could even ask to be notified each time Taxry – or any part of the Goalry “Unified Finance” Content Mall adds a new article about the topics you’ve flagged.
If we use apps and other tech to help us remember to reach our step goals or remember our next online meeting, why not use it as your own personal tax manager? We use an alarm clock to wake up in the morning and a timer on the oven so we know dinner is ready – why not let it help you keep track of what you spend in various categories? If you’re a small business owner, why not organize gross receipts as you go so you don’t have to spend time away from what you do best sorting through them every month? Many folks tell us that while they appreciate the data analysis and the ability to generate a wide variety of reports in different formats, what they most value are the random tax saving tips they’ve chosen to allow.
Number one of all possible tax tips? Take care of business throughout the year and tax time will be easy. The best way to lose weight is to do the right “little” things each day throughout the year. The best way to build an important relationship is to do relationship-building things each day throughout the year. The best way to maintain your vehicle, take care of your home, or keep your electronics in their best possible condition is to take a little time each day to make sure your goals can be met – not to panic in April (or July) and try to remember, organize, or report everything at once.
Technology is not generally great at making decisions, nor do we want it to. What it is good at is processing and organizing huge amounts of information in all sorts of different ways. Half the battle of tax season is simply keeping track of receipts, trying to remember what those charges from six months ago were, or finding those emails verifying those donations you made and wish to deduct. Technology is great at that, with minimal time or headache on our part once we’ve told it exactly how we’d like things to be done. Plus, you can receive notifications and help with all sorts of other things which may or may not be directly related to your personal taxes – heads up when there are unexpected changes to your accounts, reminders when payments are due, etc. You could even ask to be notified each time Taxry – or any part of the Goalry “Unified Finance” Content Mall adds a new article about the topics you’ve flagged.
If we use apps and other tech to help us remember to reach our step goals or remember our next online meeting, why not use it as your own personal tax manager? We use an alarm clock to wake up in the morning and a timer on the oven so we know dinner is ready – why not let it help you keep track of what you spend in various categories? If you’re a small business owner, why not organize gross receipts as you go so you don’t have to spend time away from what you do best sorting through them every month? Many folks tell us that while they appreciate the data analysis and the ability to generate a wide variety of reports in different formats, what they most value are the random tax saving tips they’ve chosen to allow.
Number one of all possible tax tips? Take care of business throughout the year and tax time will be easy. The best way to lose weight is to do the right “little” things each day throughout the year. The best way to build an important relationship is to do relationship-building things each day throughout the year. The best way to maintain your vehicle, take care of your home, or keep your electronics in their best possible condition is to take a little time each day to make sure your goals can be met – not to panic in April (or July) and try to remember, organize, or report everything at once.
GOALRY AND YOUR PERSONAL TAXES
One of our foundational believes here at Goalry is that most people are perfectly capable of taking more effective control of their personal and small business finances if only provided with the right information, tools, and opportunities. At Taxry, that means offering you tax tips, but it’s more than that – plain, simple English articles explaining different aspects of your personal taxes. Whether it’s needing to file tax extension requests, learning about the best tax manager app, seeking advice on tax relief, or simply hoping for a little encouragement along the way, we’re here.
We can’t make everything about preparing or paying your personal taxes easy, but it doesn’t have to be as difficult as it’s seemed in the past. And you don’t have to do it alone.
Let us know how we can help.
+ How Can I Lower My Personal Taxes?
Every situation is different, but here are some possibilities to keep in mind – not just at tax time, but throughout the year. When you want to “find my refund,” you probably think about the abilities of the various tax preparation services available to you or hints about how you find about how to reduce this or that tax online. I respectfully suggest, however, that the best times to “find my refund” come throughout the year – sometimes when you’re not even thinking about them.
- Contribute More to Your Retirement Accounts
Obviously this means less take-home income each pay period. If you’re currently trying to pay down debt or you’re living paycheck to paycheck, this might not be easy. If doable, however, this is a win-win. Many retirement contributions are tax deductible AND you end up with more resources to live on when you retire.
The rules about each form of retirement vary slightly, but this is well worth looking into.
- Use a Health Savings Account
These allow you to designate a specific amount to be set aside from your paycheck each pay period pre-tax – thus reducing your federal withholding and providing a degree of tax relief overall. (It may help with your state tax return as well, but that varies from state to state.) If the money is spent on approved medical expenses, there’s no federal tax liability or penalty.
These are especially helpful if you have fairly predictable medical expenses throughout the year, plus an estimate of what you might spend on miscellaneous issues as they arise. Most HSAs will let you roll over unused funds as well.
- Use Flexible Spending Accounts
These are similar to HSAs, but many allow a wider range of expenses to be covered without tax liabilities. The funds are taken out pre-tax, just as with an HAS, reducing your federal withholding and providing similar tax relief overall. The most common uses of FSAs are for out-of-pocket medical expenses and various sorts of “dependent care.”
Flex spending accounts don’t typically roll over if unused, so make sure you know the requirements and limitations before investing.
- Start Saving For College
The 529 is an oldie but a goodie. If you have kids, open one of these for each one. Your contributions aren’t tax deductible, but the interest earned over time is tax free – which can be a big deal when the markets are doing well. Some states let you deduct contributions on your state tax return, however, even if you can’t take them off on your federal tax return.
- Make Your Home More Energy Efficient
This can be a great investment if you’re planning home repairs or improvements anyway. You may even be able to secure better financing options if doing major work towards energy efficiency. However you pay for it, your federal tax return and many state tax returns will give you a decent deduction for these improvements.
+ Why A Big Tax Refund Isn’t Ideal
It’s exciting getting money back at tax time. It feels “extra” or “free,” and it’s in that nice lump sum. If nothing else, it means you’re not paying this year.
Realistically, however, getting a big tax refund each year means you’re not having the right amount withheld from your paychecks. (If you consistently owe money every year, it’s quite possible you’re having the same problem in the other direction. If you find yourself regularly having to file tax extension paperwork, something is not working the way it should!) When you’re first employed, you complete a W-4 for your new employer. The primary function of that W-4 is to help them determine how much to take out of your check each pay period – before you ever see it – and pass it along to the government on your behalf.
Most of this is your “federal withholding,” although most states take their little slice as well. When we talk about “income tax,” this is the literal meaning of that – the state and federal government take a slice of your earned income each year to finance the things they do in the name of public good. And in case you’re wondering, yes – you have to pay it. Yes – it’s constitutional. No – it wasn’t originally allowed by the Constitution, but that was changed by the 16th Amendment. (Amendments are edits to the Constitution approved through methods described in Article V of the Constitution. Once approved, they ARE part of the Constitution. That’s why we no longer have legal slavery, women have the right to vote, and states can’t raise legal minimum voting age higher than 18.)
There are other taxes withheld as well – Social Security, Medicare, etc. Don’t confuse these with “deductions.” Deductions are specific amounts or percentages pulled out of your paycheck – usually at your request or with your approval – which contribute to things like retirement accounts, health insurance, etc. In theory, they’re things which provide more direct benefits to you than your taxes, which are intended to fund the public good, or the good of “the whole.”
When you have substantially less than you actually owe taken out each pay period, you end up owing a lump sum come tax time. If it’s too high, there are additional penalties for not paying enough as you went. This is particularly an issue for taxpayers with additional outside income – freelancing, consultation work, online sales, etc. You can offset some of this by paying quarterly estimates, but that’s not intended to offset an accurate W-4. Work to change the system if you wish, but until then, fix your W-4 if you’re not having enough deducted.
When you get a big refund every time you do your personal taxes, it means you’re having too much taken out. Why is that bad? Because you’re essentially loaning that money to the government interest-free. Here’s to good citizenship and all, but you know what else is good citizenship? Paying down your credit card debt. Keeping up with essential home repairs and improvements. Taking your kids shopping for school clothes. Surprising someone you care about with dinner or flowers or movie night. Contributing to local causes you believe in. Paying your electric bill. Investing in an emergency fund or retirement savings.
These are all things which are much easier to do if you have more disposable income each month. Unless you honestly believe your state and federal government are doing such a streamlined, efficient, and amazing job of spending every possible tax dollar – to the point that you almost don’t WANT your share back on tax day – there’s no reason to be paying them far more than required. And let’s be honest – chances are you’ll do a much better job of using that extra money properly each month than they will.