Death and taxes. These are the only two guarantees in life, so they say. But when all is said and done, virtually every American will have to deal with taxes at one point or another. Whether you have a full-time job, part-time job, are self-employed, or somewhere in between, you are responsible for filing taxes every year. Whether you are getting ready for taxes right now or just want to do a little extra planning, follow this guide for a primer on the tax tips you need to know.
Payroll Allowances and Payroll Tax Deductions
Each time you start a new job, you are required to submit a W-4 and I-9 form. Those forms tell your employer how much tax to deduct from each paycheck and verify that you are a legal US resident who can take a job. Most of us only spend a few minutes on those forms but don’t understand the long-term ramifications. Take your time to understand how your allowances impact your paycheck. Also, be aware that you can update your W-4 selections at any time, so even if you made a mistake you are not stuck with it forever.
Taxes Owed vs. Tax Deductions
Each year, your taxes are going to be the same no matter how much is deducted from each paycheck. If you have a low number of allowances, your employer will deduct more from each paycheck to be sent to the IRS. If you choose a higher number, your employer will deduct less from each paycheck. That does not impact your taxes owed to the government at the end of the year.
The taxes you owe to the federal government are determined based on your total gross income. That is income before any deductions, other than tax-deductible items that lower your tax bill. Taxes are calculated using a graduated scale. That means you pay a higher tax rate per dollar on higher income. It is important to understand, though, that earning more will not increase your taxes on the money you already earned. Someone who makes $20,000 per year and someone who makes $2,000,000 per year pays the same rate on their first $10,000 of income.
Payroll Tax Deductions – How Many Allowances Should You Choose?
So that form you fill out when you start working, form W-4, actually does a lot. (You can update your W-4 any time you like. I updated mine last year to lower my allowances.) It directly impacts your take-home pay each time you get a paycheck.
Some people have different philosophies, but I believe you should try to match your payroll deduction as closely as possible to your actual taxes owed, erring on the side of getting a refund. If you take too many allowances, you will owe taxes at the end of the year. If you take too few allowances, you will get a refund back from the IRS.
Think about it. If you get a refund of $2,000, you get $2,000 at the end of the year. Sure, you gave the IRS an “interest-free loan,” but with current interest rates, that probably cost you less than $5. Planning to owe the IRS, though, means you have to really plan out what you owe and save up to pay Uncle Sam on tax day. I would happily give up $5 to get a refund at the end of the year rather than owe money that will likely have to come from an emergency fund.
For most single adults, it makes the most sense to take 1 allowance. When I was single, because I made money from a handful of side hustles, I would rather have the extra taxes taken out of my regular paycheck to cover my taxes, so I took 0 allowances.
What You Should Do
It is up to you to decide which option is best. You can also talk to a tax professional to decide. If you want a little extra help deciding, BankRate.com has a great payroll deductions calculator to help you through the math. Just be careful not to be too conservative and get too big of a refund, or you will put a big crunch on your monthly budget.
Getting ready for tax time
To get ready for tax season, I always make a full list of what I expect to get and check things off as I go along. Taking the time to prepare in advance saves even more time when your taxes are due.
1. Make a list of all of your bank accounts (even ones that you do not use). As your forms start to come in the mail (or are available online), check them off of the list. Most bank tax forms start to come around the end of January. These come in the form of IRS tax form 1099.
2. Make a list of all investment accounts. Like banks, you will get forms starting at the end of January. Unlike banks, most investments do not require that you pay taxes until the investment is sold (realized gain or loss). Your investment firm will take care of tracking that for you and send you the detail. These come in different versions of the 1099 and several other forms.
3. Make a list of jobs or income sources that will provide income reports to the IRS. I had two jobs this year, but expect three W-2 forms from an extra income source.
4. If you have a mortgage, add that to the list. Form 1098 shows interest paid for a mortgage, which is tax-deductible.
5. Collect any other deduction forms. These can relate to education (direct school expenses and student loan interest) or donations. I keep my school book receipts and get a tax form from my school for tuition. I also make donations (not too big, as I am paying for school) to charities that qualify for a tax deduction. You can also find energy tax credits for home improvements.
I know taxes are not fun, but it is one of the two certainties in life. Since you are reading this, the other one does not apply. You have to pay taxes. Get a jump start on planning and it will make your life a lot easier come April 18th rolls around.
Hire an Accountant or Do It Yourself?
When tax season comes around in April, it’s time to file your taxes for the prior year. You can actually file almost any time starting around the end of January. The earlier, the better! However, you do have to wait for all of your tax forms to come in before you can file. Here are some considerations for hiring an accountant versus doing your taxes yourself.
Hire an Accountant
The biggest benefit of working with an accountant is the low level of effort and knowledge needed to do your taxes. When you hire a licensed tax professional, you know your taxes are going to be done well and you have a built-in support system in case of an audit or hiccup with your taxes. You don’t have to worry about knowing which box to check or adding up any numbers. You can pay to have someone do that for you.
If your taxes are simple and you only had one job as a single income source, you are certainly going to save money by using the software. However, if your taxes are very complicated, it is smart to hire a professional. With my financial knowledge and background, I have done my taxes myself since 2013. Prior to 2013, I had an accountant do my taxes. However, saving money was not the only reason I switched.
I found my accountant made a few errors here and there over the years. This isn’t a big deal, mistakes happen, but when I found some silly mistakes that would have cost me thousands of dollars, I decided it was time to take over my taxes on my own. No one knows my finances better than me, after all, so doing my own taxes is the best path to an error-free return.
Online Tax Programs
Popular tax software like H&R Block, TurboTax, TaxSlayer, and TaxACT are great options for millions of people each year. If you have taxes on the simpler side of things, these programs can do absolutely everything you need. Many offer 100% FREE tax filing if your taxes are simple. Even with my self-employed income, I can still file with an online program.
In my experience, tax programs can handle any common tax situation with ease. If you have a load of complicated 1099s from freelance work, contracting, or an active investment account, you have to pay for the higher versions of the programs. I found that all major tax software, both online and desktop based, cost about $400 less than my accountant charged.
If you have the most simple taxes, you might even be able to file with a mobile app! You only need basic computer skills to file using an online system. I have used both H&R Block and TurboTax over the last four years. I found H&R Block does everything just fine, but I like the interface better at TurboTax and also found completing my taxes there to be a little faster.
Keep Organized All Year
Nothing makes taxes tougher than scrambling to get all of your paperwork together last minute. Keep your expenses and forms organized to make the process as simple and smooth as possible. I use Empower to track my investments and other spending. If you don’t like the online-only options, you can also use a program like Quicken to keep your financial info in one place on your home computer. Financial aggregators are particularly helpful if you plan to itemize your tax deductions.
After you file, be sure to keep your bank statements and tax records for future reference. If you do any freelance or contracting work, I suggest a program like Quickbooks to track your income and expenses. I use Quickbooks Online for my business, and use those reports to file my taxes myself. You might not be filling in your 1040 every day, but spending a little time each day can save you a ton of time and work when it comes time to gather your deductions and receipts for tax time. This is my favorite and most useful tax filing tip.
I keep three files in my file cabinet for the types of receipts and transactions I need to track for my personal tax return, and each time I get a receipt that I need to track, I drop it into the right folder. Some people have different deductions, so your folders may vary a bit from mine, or you might just combine them into one folder.
- Medical Expenses – Medical expenses can be reimbursed through a health savings account, so knowing how much to reimburse and being able to prove you incurred those expenses to qualify for the HSA tax deduction is important. If you don’t have an HSA, you may also qualify for a medical expenses tax deduction, so you’ll want to track your medical expenses either way. Qualified expenses include doctor visits, prescription medications, and any tests ordered by your doctor.
- Charitable Donations – If you itemize your tax deduction, you will want a record of every donation you make throughout the year. I put the receipts for each non-profit donation in a folder so I can quickly add them up at tax time. You can include cash donations or receipts from donations to organizations like Goodwill.
- Business Expenses – Even if your business is not registered as an LLC, if you earn money from a hobby or side business, you can deduct your expenses per IRS guidelines. I enter all of my expenses as they come in with my accounting program, but I also keep hard copies of every business expense by year in case I ever get audited.
Keep a Tax Forms File
Starting around mid-January, you will start receiving tax forms in the mail from your employer, bank, stockbroker, and any place that paid you more than $600 in non-employee compensation. Some people just get one W-2 form, but others get a stack of 1098 forms, 1099 forms, and others depending on your family’s finances.
On January 1st, I put a new folder on my desk for the year’s tax forms. I always print hard copies and create an online backup just to be safe, as these are very important for tax preparation. Each time a new form shows up in the mail (or email), I put it in that file.
Keep Business Files Up-to-Date Monthly
Earlier in the article, I briefly mentioned how I track my business expenses. To make your tax preparation easy, you should keep your business accounting up-to-date all year. I enter expenses as they occur, and enter income monthly based on bank transactions.
Keeping my P&L updated took some time to set up the first month, but now I update everything the first week of each month and it only takes about 20 minutes per month. If I were to try to do this annually, I would spend much more than the four hours per year I currently spend on my books. Plus, I can better track invoices, revenues, and expenses with fancy one-click reports.
All of the information I enter into my accounting program goes into my Schedule C, which is an addendum to the 1040 for business income.
Tax Credits and Deductions
Here are the basics on deductions and credits. This is not a list of types, but an explanation of the impact credits and deductions have on your taxes.
The baseline on your taxes is your income. That is why taxes are often called “income taxes.” For simplicity (this is by no means accurate for tax brackets) let’s say I made $40,000 in 2008 and pay 25% in taxes. I would have a $10,000 tax bill for 2008. (Those are not my income or tax numbers, this is just an example).
It is not that simple if you are a student or support a student (credit) or make donations to a qualified non-profit (deduction). Student loan interest (deduction), kids (credit), mortgage loans (deduction), and many more normal activities can lower your $10,000 tax bill.
In 2008 I had a tuition bill of $24,000. Tuition and related expenses (not room and board) can qualify for the “Hope Credit” or “Lifetime Learning Credit” depending on the situation. I qualify for the lifetime learning credit, which is a 20% tax credit up to $2,000. 20% of my tuition is $4,800, so I qualify for the maximum credit of $2,000. Because it is a credit, I can take that $2,000 off my tax bill and would owe $8,000 for 2008 in the example above. A credit subtracts from the total tax bill and has a bigger impact than a deduction.
Let’s say I donate $2,000 to my synagogue in 2008. (I did not donate that much, but did donate something). Because a non-profit donation is a deduction, I would subtract $2,000 from my income of $40,000, leaving me with a taxable income, also called an adjusted gross income, of $38,000. At 25%, my taxes would be $9,500.
So a $2,000 impact on my taxes could have an adjusted impact of only $500. That is $1,500 less than a credit. That does not mean you should not donate to your favorite 501(c)3, but you should be aware of the difference between a deduction and a credit.
Should I itemize my deductions?
Every year, millions of Americans gather up their W2, 1099s, and other various forms to file their federal income tax forms. About 33% of all Americans itemize their deductions. It is important to understand how itemized deductions work to ensure you get the best tax rate possible.
If you are single, you automatically get a standard deduction of $5,800. Couples filing jointly get a standard deduction of $11,600 (2011 rates). The standard deduction acts as a minimum deduction amount if you do not qualify for higher deductions. 66% of taxpayers use the standard deduction.
Here is how it works in practice. If you earn $40,000 and file a standard deduction, your taxable income is $34,200. You deduct that amount from your income and calculate your taxes based on that lower rate, called your taxable income.
If you qualify for deductions higher than the standard deduction, you can itemize your tax deductions. The most common itemizations are listed below.
Retirement Account Contribution
If you have a self-directed IRA or small business SEP account, any contributions you make are pre-tax. If you contribute, it will lower your overall tax liability. If you have enough in your savings, you could even direct your employer to put 100% of your final paychecks into a 401(k) (up to a certain annual contribution limit), which makes that income tax-free.
If you own a business and do not have any employees, you can set up an SEP, or simplified employee pension. This works like a 401(k) for small business owners. All you need to do to open an SEP is to submit a form 5305-SEP at your bank.
Principal Residence Mortgage Interest
If you own a home, you can deduct the interest paid on your mortgage. I bought my first home this year, and I have been paying interest on my mortgage payment every month. You will receive a tax form 1098 from your bank giving you the qualified interest amount for the deduction.
When you give money to a 501(c)3 non-profit, save your receipts. If you donate anything to a non-profit, save all of the paperwork they give you. Every non-profit donation counts if you are going to itemize your taxes.
Be warned that disproportionately high donation deductions are considered suspicious by the IRS. Keep your receipts in case you are audited.
If you are going to school, you can deduct tuition and related expenses such as books and fees. You cannot deduct room and board. Your school will give you a tax form listing your tuition and fees, but you are responsible for keeping receipts for your textbooks.
If you have a student loan, you can also deduct the interest expense for the life of the loan. While I am about two years out of school, I am still deducting about four hundred dollars from my student loan interest in 2011.
This is a tricky area, but very important for the entrepreneurs out there. If you own a small business, you can deduct the expenses directly related to operating it. I deduct the expenses from running my websites, for example, web registration fees, hosting expenses, design expenses, and a portion of my internet costs.
Just beware that the IRS may consider your business a hobby if you are not profitable for five consecutive years. Beware podcasters and other hustlers, I lost money on my DJ business in 2011 because of the expenses to start up. Once you’re profitable you’ll have to pay taxes on that income.
There are tons of deductions, and I can’t write about all of them. Lucky for us, the IRS already did. You can get the details for every type of expense at the IRS website. When in doubt, you can call the IRS or ask your accountant for advice.
What to Do If You Forget a Tax Deduction
The day is finally here: You can mail off your tax return to the IRS and cross that dreaded chore off your list. You checked and double-checked your math, made sure that you dotted all of your i’s and crossed your t’s, and have all of the documentation required to prove your income and deductions. As you drop the forms in the mail, you breathe a sigh of relief . . . that is, until a little voice in your head reminds you of a deduction that you forgot.
It seems unlikely that one might forget a tax deduction. After all, every deduction you make lowers your tax bill and puts money back in your pocket. Yet for various reasons, ranging from simple forgetfulness and disorganization to delayed paperwork, every year thousands of taxpayers leave money on the table because they don’t claim those deductions on their taxes. The good news is, though, even if you already filed a return, you can still make those deductions.
Amended Tax Returns 101
According to the IRS, every year, millions of taxpayers file amended tax returns. Usually, these amended returns are required due to unreported income. It’s common for self-employed individuals, for example, to receive a 1099 or K-1 form after they filed their taxes, which necessitates filing a new return. As long as you catch such an error before the IRS does, and your original return was correct to the best of your knowledge when you filed (i.e., you did not deliberately commit tax fraud), there are no penalties for filing an amended return.
However, you can also file an amended return if the required changes reduce your overall tax burden. The IRS allows taxpayers up to three years to make changes to filed returns. This means that if, say, you forgot to include a deduction for a boat you donated to charity, you can submit an amended return within the next three years to receive a refund on the tax you paid.
Keep in mind that in order to make a late deduction, you must file an amended return for the year in which the deduction applies, and you cannot just take the deduction the following year. In other words, if you donated a boat in 2015, you cannot take a deduction on your 2016 taxes if you forgot to include it when you filed for 2015. The IRS will reject the deduction, and you may face penalties for making a false return. To get credit for your donation, you must file an amended 2015 return.
How to Make the Changes
Amending your tax return requires submitting a form 1040X, Amended U.S. Individual Tax Return. You will need copies of the return and supporting documentation you already submitted, but you do not need to submit that paperwork again; it is only for reference while you fill out the 1040X.
You will also need documentation to support the deduction that you’re claiming. Review the rules for charitable donation deduction to ensure that you have all of the documents you need. Depending on the deduction you’re claiming, you may need a copy of an appraisal report as well as a receipt for the donation from the qualifying nonprofit organization.
Once you have gathered the paperwork, follow the instructions on the form, being sure that you fill in the correct tax year for which you are filing. Essentially, you will need to enter the amounts from specific lines on your original return with the amended amounts. You’ll also need to provide a written explanation as to why you are filing the amended return and submit the appropriate documentation.
Once you submit your amended tax return to the IRS, you can generally expect a refund within 12 weeks of receipt, provided that you don’t already owe taxes. Depending on the value of your donation, the amount of the refund you receive can vary from a few dollars to several hundred dollars. Keep in mind that amending your federal tax return can have an effect on your state return as well, so double-check to ensure that your state return is still accurate, and follow your individual state’s procedure for amending a state return.
If you worked with a tax professional to file your federal return, that same person can help you make amendments. Often, tax preparation services will offer the service at no charge. Whether you use a service or do it yourself, though, don’t end up kicking yourself for missing a deduction. As long as you have the paperwork you need, you can still get your money back.
The Most Common Tax Forms
As we reach the end of the year, it is time for that lovely American tradition: tax season. Starting January 1st, keep your eyes on the mailbox (and e-mail box nowadays) for tax forms from employers, banks, investment companies, and other income sources.
To get ready, I always make a full list of what I expect to get and check things off as I go along. Here is a re-visit of a post from last year about preparing for tax time.
Only three months to tax day. It is probably time to start getting ready. Here are my two cents on early tax preparations. The first steps involve making lists and gathering documents needed for tax preparation.
1. Make a list of all of your bank accounts (even ones that you do not use). As your forms start to come in the mail (or are available online), check them off of the list. Most bank tax forms start to come around the end of January. These come in the form of IRS tax form 1099.
2. Make a list of all investment accounts. Like banks, you will get forms starting at the end of January. Unlike banks, most investments do not require that you pay taxes until the investment is sold. Your investment firm will take care of tracking that for you and send you the detail. These come in different versions of the 1099 and several other forms.
3. Make a list of jobs or income sources that will report income to the IRS. I had two jobs this year, but expect three W-2 forms from an extra income source.
4. If you have a mortgage, add that to the list. Form 1098 shows interest paid for a mortgage, which is tax deductible.
5. Collect any other deduction forms. These can relate to education (direct school expenses and student loan interest) or donations. I keep my school book receipts and get a tax form from my school for tuition. I also make donations (not too big, as I am paying for school) to 501c3 charities that allow for a tax deduction.
This is not an exhaustive list, as everyone has unique circumstances. I fill out a form for my accountant listing everything above and give him the big stack of tax forms. I found that a professional preparer is worth the cost in my case because my combination of income, expenses, scholarships, and deductions fall under so many different tax laws that only a professional could ensure I get every deduction and credit that I deserve.
The “Other Income” Tax Form: 1099
Not all 1099 forms are created equal. Depending on the source of the income, you may receive a 1099-MISC or a 1099-DIV. Maybe a 1099-INT or a 1099-R. There are many versions of this form for different purposes. Below is a list of the most common 1099 forms and what they are used for. Here is a list of the types of 1099 forms you may stumble upon in your tax preparations:
- 1099-A: Acquisition or Abandonment of Secured Property
- 1099-B: Proceeds from Broker and Barter Exchange Transactions
- 1099-C: Cancellation of Debt
- 1099-CAP: Changes in Corporate Control and Capital Structure
- 1099-DIV: Dividends and Distributions
- 1099-G: Government Payments
- 1099-H: Health Insurance Advance Payments
- 1099-INT: Interest Income
- 1099-K: Merchant Card and Third Party Network Payments
- 1099-LTC: Long Term Care Benefits
- 1099-MISC: Miscellaneous Income
- 1099-OID: Original Issue Discount
- 1099-PATR: Taxable Distributions Received From Cooperatives
- 1099-Q: Payment from Qualified Education Programs
- 1099-R: Distributions from Pensions, Annuities, Retirement Plans, IRAs, or Insurance Contracts
- 1099-S: Proceeds from Real Estate Transactions
- 1099-SA: Distributions From an HSA, Archer MSA, or Medicare Advantage MSA
- 1042-S: Foreign Person’s U.S. Source Income
- SSA-1099: Social Security Benefit Statement
- RRB-1099: Payments by the Railroad Retirement Board
- RRB-1099R: Pension and Annuity Income by the Railroad Retirement Board
- RRB-1042S: Payments by the Railroad Retirement Board to Nonresident Aliens
The first 1099 I ever received in my life was the 1099-INT, for interest received. Most banks send you a 1099-INT if you earn more than $10 in interest during the calendar year from bank interest, though some banks send them regardless of the interest earned.
Interest earned and reported via a 1099-INT is taxed at your regular income tax rate and is treated as regular income.
Stock market investors are generally familiar with the 1099-DIV, as it is used to report dividend earnings from stock investments. If you own any dividend-paying stock, your investment company will prepare a 1099-DIV form for you.
The 1099-DIV has different boxes used for different types of dividends, which do have an impact on your tax filings and tax rates. The most common boxes most investors will deal with are related to capital gains and cash dividends paid.
The 1099-MISC is a catch-all form used for income that doesn’t fit into the other 1099 forms. All income has to be reported to the IRS, even if you don’t receive a 1099 or another form. The 1099-MISC is used for freelance income, landlord rental income, royalties, some insurance proceeds, and “other income.”
As a blogger and freelancer, I have received 1099 forms for royalties, freelance writing, and affiliate revenues. These forms are most commonly issued to self-employed people or anyone with a sole proprietor business earning more than $600 per year from specific vendors.
Your 1099-R form will be sent by the investment company holding your retirement accounts when you take distributions. Depending on the type of retirement account you have, such as an IRA vs. a Roth IRA, your taxable income from a 1099-R will vary.
I know what you’re thinking, 1099-Consolidated isn’t on that list I just read. WTF is a 1099-Consolidated?
A consolidated 1099 form is often provided by investment companies who would have to send you a stack of 1099 forms for your various investments. You may receive a 1099 consolidated form, which includes interest, dividend, and capital gains information, from both your brokerage and Betterment for the most recent tax year.
Using Flexible Spending Accounts to Save on Taxes
Tax season is approaching, and I have looked at ways to save on my taxes. It is too late to sign up for 2011 unless you change jobs, but Flexible Spending accounts can save you big money on medical, commuter, and childcare through tax incentives.
What is Flexible Spending?
Flex spending accounts (FSAs) are a government approved method to pay for certain expenses before tax. For commuters, parking and monthly public transit costs are allowed. For parents, day care is allowed. For all people, certain medical expenses are permitted.
In my last job, I took the Light Rail to work every day. I ordered a monthly pass through a flex spend account and was able to pay for it pre-tax. I am preparing for PRK laser eye surgery, and will be paying for that from a health care flex spend account.
How Do You Fund It?
FSAs are funded through payroll deductions from your employer. When I was buying a $60 monthly pass, I had thirty dollars deducted from my account every paycheck to cover the cost. The deduction was pre-tax, so I had a lower taxable income.
I knew in December that I would be getting eye surgery this year, so I did research to find the average cost. I put in a conservative estimate ($3,500) to be deducted from my paychecks in 2011. That means about $135 will be deducted from each paycheck pre-tax. This will lower my taxes by about $1,000 this year, so the incremental cost for the surgery is only $2,500.
Commuter flex spend accounts can be enrolled or dropped at any time. If you have a fixed monthly parking cost or transit pass, just add it through your company’s HR department. It is that simple.
Health and dependent care accounts are set during your annual enrollment period or right after you are hired as a new employee. Some life events, such as marriage or the birth of a child, allow you to make mid-year changes. You are required to make a selection for your account before you need the money, so you have to estimate. Guess conservatively; keep reading to find out why.
How Do You Spend the Money?
IRS publication 969 gives you the details of what is considered an eligible expense. For the most part, any doctor appointments, hospital visits, prescription medication, medical devices, eye care needs, and medical operations are eligible. Over-the-counter medications are not eligible as of 2011.
If You Don’t Use It, You Lose It
That’s right. If you don’t use it, you lose it. If you make an election for $1,000 and only have $500 in medical expenses, you lose the $500 you didn’t use. Bummer, right? So estimate very conservatively. This is not a method for tax dodging, it is a tool to make certain expenses more affordable.
If you are a single twenty-something, you probably don’t need a health care FSA. I had a very specific need for the account, so I was able to accurately estimate the amount. However, I am healthy and rarely go to the doctor, so I will probably skip it in 2012.
Your “Right” To Lower Credit Card and Tax Debt
I occasionally hear a radio commercial saying that if you call a business, they can help you with your “right” to lower your debt. You do not have any right to lower your credit card and tax debt. That is a fallacy. You might have the option to negotiate lower debt, but that might not be the best option.
If you owe $20,000 to a credit card company, it is because you bought $20,000 dollars worth of stuff. You bought it. The company did not force you to buy it. If a credit card company negotiates a lower balance with you, it looks really bad on your credit report. It might feel like you are saving money, but you are probably doing much more harm in the long run.
When a company “forgives” debt, they are writing off the debt as a loss. This is reflected in your credit report. A write-off looks much worse than a late payment. Late means you still paid. Write-off means you did not. It is that simple from the eyes of a lender.
The same goes for taxes. A tax settlement might get you out of some of your debt, but it looks really bad. To get to the point of settling, you probably already went through a rough spot and collections. All of these things look bad on your part. It is no one’s fault but yours.
I know it might sound hard if you are in a tough spot, but you should figure out a budget and figure out how to pay off your debt. Once it is paid off, you have that much more cash to save and use to help you live a better life. It is a short-term struggle with long-term benefits.
5 Ways to Use a Tax Refund
Cover Your Bills
If you are already in a bad situation, make sure to pay your bills. Pay them on time. If you are having trouble making ends meet, though, it is probably a good idea to start a top-down financial overhaul and fix your spending problems. Remember, it is no one else’s fault that you are in debt or can’t make payments. Take responsibility for your personal finance and fix it.
Emergency Fund Savings
We have seen a lot of people come up short over the last couple of years. If you want to avoid the situation above, save up for a bad day. You never know when your income may be disrupted or you will have an unexpected expense. That is why it is called an emergency fund, after all, you can’t plan for when you need it.
Automated Retirement Savings
Why not take that refund and put it straight into a Roth IRA or 401(k)? You are already used to living without that money, so stay used to it. Put it away for your future in a tax advantage account. Automation is key to ensuring you don’t spend what you should be saving.
If you think about it, the social security tax is going to “fund your retirement” anyway, so use that part of your budget as it was intended.
Take a Class
People will save up to $2,000 in 2011 from this tax cut. Why not take a class that will pay off in the long run by helping your career or income prospects. Learn a skill that can pay you, like bookkeeping or photography.
Buy a Stock
A lot of investors don’t know where to start, so they are not an investor yet. Put the money into a brokerage account and learn how to invest. Buy a stock, ETF, or other investment. It could pay off in the future. Use it as inspiration to learn more about investing.
This post was originally published on September 28, 2017 and updated on November 27, 2021.