Taxes

Taxes!

Whew, 2017’s taxes are filed. It’s tempting to ignore the whole subject until next April. However, it’s smarter to pay attention now, in order to save money next April by planning ahead for deductions and credits.

How is a tax deduction different from a tax credit?

A deduction is an amount subtracted from the amount of your income that will be subject to tax.

A credit is a subtraction from the amount of tax you owe.

Suppose, just for an example, a single person has an income of $30,000. If there were no deductions, his tax would be $4,000. For 2018, the standard deduction is $12,000, so instead of paying tax on the whole $30,000, he’s taxed only on $18,000. His tax due is $1,800. So that deduction saved him $2,200 in taxes.

Once the tax has been computed, then we can think about credits. A tax credit is subtracted directly from the tax due. It reduces the tax amount directly, instead of reducing the amount of income to be taxed. In the ten percent tax bracket, a deduction of $1,000 from income saves you only ten percent of that $1,000, or $100. If our hypothetical taxpayer who owes $1,800 is eligible for a credit of $1,000 then he only owes $800 in tax.

 

Both deductions and credits will save you money. Now’s a good time to look at your income and expenses for 2018 to see what you can do to be eligible for the various deductions and credits available. A good place to start is the 1040 form. Look at the various credits listed, and see if any are relevant to you. Look at schedule A and see if you’re likely to have any of those deductible expenses. If your schedule A items add up to less than $12,000, then you can just use the standard deduction.

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Can’t Pay Your Taxes?

Even if you don’t have the money to pay the taxes you owe, file anyway. Include a check for as much as you can afford. Then call 1-800-829-1040. They’ll work with you to set up a realistic payment plan. The IRS is like any other creditor: they charge interest on the unpaid amount, and penalties for late payment. There’s no hiding from this, so face it head on and make the call.

Those Occasional Expenses

Bills that come in every month are predictable and easy to cope with. The ones that can throw us off are those that come in less often.

Insurance premiums, property tax, back-to-school, Christmas, and heating oil are predictable. But they fall outside the normal pattern of monthly payments. There are several ways to build up the money for these bills. You can use a Christmas club account for Christmas. You can also use it for anything due near the end of the year, such as property tax.

Another way is to divide the amount of the bill by the number of months between payments, such as six for a twice a year insurance bill. Subtract that amount from the check register each month. Then add it back when the bill comes, and write the check to pay it. If you have a separate savings account, you can actually move the money instead of just subtracting it in the check register.

For a while, I added up ALL of the irregular bills. I added an amount to save for a possible condo repair or car repair. I divided the total by twelve, and put that amount aside every month. With rare and minor exception, this method let me always have the money to pay each irregular bill as it came along. That year I bought a refrigerator, a wall air conditioner, and a (very cheap) used car, all for cash.

Some banks offer a program where each time you use your debit card, they transfer a dollar to your savings account. This can be an easy way to build up some savings. You do have to remember to subtract that extra dollar from the check register.

Staying ahead of this type of expense lets you avoid getting behind.

 

http://www.amazon.com/author/mariebrack

Warning: It’s Tax Scam Season

A recent article in Yahoo Finance says that tax scams are up 400% this year. The bad guys want your refund money, and they won’t mind taking your financial identity along with it.

It’s natural to panic when we receive a communication from the IRS. Take a breath and consider. The IRS will never ask for information by email or text. If you receive an electronic communication that claims to be from the IRS, call them at 800-829-1040, don’t reply electronically.

In 2013, $5.2 billion dollars in refunds were paid directly to scammers. They want more this year. Don’t let them get yours.

 

 

Marie Brack is the author of Frugal Living for the 21st Century: Adventures in Using Your Money Wisely. It’s available on Amazon.com in both Kindle and paperback versions.

https://www.amazon.com/s/ref=nb_sb_noss_2?url=search-alias%3Daps&field-keywords=marie+brack

52 Weeks: Taxes: Tax Refund

From the book:

“Let me take a moment here to emphasize the difference between a “tax return” and a “tax refund.” A tax return is the tax form you file each year, such as the 1040. A tax refund is money you get back because your employer withheld more tax than you ended up owing.

Most articles on personal money management think it’s a bad thing to get a big refund. They say you’re letting the IRS use your money interest free all year. You could have the use of it yourself if you change your W-4 form to have less money withheld from each check.

This is true. But my own experience is that if I get the money in each paycheck, it vanishes. If I get a large refund of overpaid tax, then I have a lump sum to do something useful with. Some years I have used a large refund to fund my IRA account.”

 

 

Marie Brack is the author of Frugal Living for the 21st Century: Adventures in Using Your Money Wisely. It’s available on Amazon.com in both Kindle and paperback versions.

https://www.amazon.com/s/ref=nb_sb_noss_2?url=search-alias%3Daps&field-keywords=marie+brack

Earned Income Credit is Not Just for Parents

From the book:

“A few years ago, I was surprised to learn that the earned income credit is not just for people with children. The worksheet calculation goes on for pages and looks complicated. But if you do exactly what the instructions say and don’t waste energy wondering why, it will work out. The EIC applies to anyone with earned income below a certain level. You can also just check the box for the IRS to compute it for you.”

 

 

Marie Brack is the author of Frugal Living for the 21st Century: Adventures in Using Your Money Wisely. It’s available on Amazon.com in both Kindle and paperback versions.

 

 

 

 

 

 

 

52 Weeks: Tax Week: Free Tax Preparation

From the book: “If your adjusted gross income is below $57,000, free tax software is available from the IRS. Go to http://www.irs.gov and type “free file” in the search box.

AARP offers free tax preparation for people with low to moderate incomes. If they are busy, they give preference to people age sixty and older. Go to http://www.aarp.org and search on tax preparation.”

 

 

Marie Brack is the author of Frugal Living for the 21st Century: Adventures in Using Your Money Wisely. It’s available on Amazon.com in both Kindle and paperback versions.