Tax Extensions: What You Need To Know
STEPHEN SMALENBERGER, EA®
Have you just filed your tax return? Did you have a refund, owe money, or break even? If you want to make changes and impact next year’s result here are some ideas.
If you had a large balance due:
Save – Save more into your retirement plan that offers tax deferral, which will reduce your taxable income.
Give – Give more whether it’s cash, stock, or personal items like furniture or clothes
Earn – Earn less meaning you time the receipt of income or time the sale of an investment
Know – Understand your tax bracket and how your income is taxed. Since you’ll know what is happening in your situation you may be able to make estimated tax payments so you don’t have a large balance due when you file your return.
Adjust – Change the number of allowances on your W-4, so there isn’t so much due.
If you didn’t have a large balance due or a large refund then you’re right at break-even. This is a sweet spot.
If you had a refund:
For some people this becomes a way of forced savings. If you aren’t good at holding yourself accountable to save regularly this can be a good way to do so. Then when you get your refund you set it all aside into your savings account. The problem with this is that it’s a free loan to the government, held captive until you file your return.
In order to change this:
Know – Understand where your income is coming from and how much is taxable.
Adjust – You can change your withholdings based on the taxes that will be owed. Especially if this is an ongoing thing to receive more money for you, then you should have less withheld from your paycheck so you’re keeping more all year long.
What to do with a refund you receive?
Emergency Fund – Maybe with your refund you can fund your emergency fund if that isn’t already done.
Debt – Pay down debt if there are things you can pay off. Look at the ones with the highest interest rate or the ones that can be paid off with the amount you’re receiving.
IRA – Consider making a retirement contribution.
Everyone’s situation is different and it can change from year to year. If you have something specific we can help you change for next year to make an impact we are happy to help you.