Since tax season has just passed, you are probably in one of two states of minds. Either a) you love your CPA because you got a big refund, or b) you hate your CPA because you owed money. It generally falls into one of those two camps when returns are filed. Remember, if you get a tax refund that means you essentially gave an interest free loan to the Government. Some people see this as an effective way to force savings during the year, but you really lose out on the opportunity cost of having these resources in your hands during the course of the year.
As of April 27, the Internal Revenue Service had authorized more than 99.1 million refunds for the 2011 tax year—up about 1% a year earlier. It also represents more than three-fourths of all the individual income-tax returns processed by the IRS by that date. The total dollar amount of refunds this year was about $269 billion, down about 3% from last year. The average refund totaled $2,716. (source: www.WSJ.com)
For those not still waiting to file their tax extension, most families have tucked away their tax returns, receipts, and other documents and will patiently wait until the tax return filing begin next spring in 2013 for the 2012 tax season. This is exactly the wrong thing to do. This is the exactly the time of the year you should be sitting down with your accountant to look at what is happening here in 2012 to adjust your withholdings accordingly so you can tax plan as best as possible.
- Give your accountant your most recent pay stubs to see what level you are withholding taxes here in 2012?
- Did you get a bonus in 2012?
- Will you have stock to sell or stock options to exercise in 2012?
- Did you start a business in 2012 or will something change in your business in 2012 in terms of net earnings?
- Did you buy or sell a home in 2012?
- Did you move in 2012?
- Did you have a new baby or did you have a baby in 2012?
- Did you get married (or are you going to get married) here in 2012?
- Did you get divorced in 2012?
Figuring out your withholdings is not an exact science which is why it is so hard to get the actual refund/owe amount to zero by year end. However, by asking these questions and more you can get a much closing sense of what your actual withholdings should be for the tax year. This way you don’t have a huge surprise when you file your taxes in 2013. By having these dollars in your hands during the course of the year, you’ll have a chance to earn interest on your money and possibly save it in different vehicles that are tax advantaged. Better yet, if you have credit card or other consumer debt to be paid down that can be an effective way to use your money.
If you believe you are so undisciplined that the money you put back in your paycheck from adjusting your withholdings will fly out the door to entertainment or travel expenses, then changing your withholdings altogether may be a bad idea. However, Your Smart Money Move here in May is to look at the year ahead and get the planning done now. Each adjustment up or down could mean $1,000 a year or more depending on your tax brackets and overall income. Good luck and good planning for 2012!
This information is not specific tax advice and tax issues involving investing can be complex. Please consult with your tax professional or legal service provider before making any decisions.
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Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc – The Leaders in Gen X & Y Financial Advice
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