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Tax time isn’t always a lot of fun.  It’s hard work gathering all the necessary documents, can lead to frustration if there is confusion when filling out the forms, and there’s always the age-old question…”What if I OWE this year?!”  Well, it doesn’t have to be fun, but it DOES have to be done!  Every year, on time, without fail* (*exceptions may apply–see below).

Always see if you can find a way to file for FREE!  The IRS has numerous options for people who earn less than $58,000/year to file for free.  I love free.  I may not love doing my taxes, but I love free…and there are so many step-by-step options that YOU TOO can file for FREE (if you qualify)!  Without any hesitation I assert that anyone who files a Form 1040EZ or a Form 1040 is smart enough to file by yourself online.  Sure, you may have some questions, but most of the answers to questions for a Form 1040 (EZ or not) are readily available!  Also, if you are active duty military, you have the option of utilizing www.militaryonesource.com for filing–and you can get help if you have any questions on your return–also for FREE!!  (This is the first year in the last five years that I haven’t had to call in for assistance (by the Grace of God!!)…it’s a great program!)

In a “perfect” world, you want to “break even.”  Breaking even generally means that you fall somewhere in the range of owing $500 through getting $500 back.  Breaking even is important because it means that your withholdings are correct and you are putting the correct amount of money into your pocket every month.  Why give Uncle Sam a free loan if you don’t have to? 

Yes, there are some exceptions…if you qualify for the Earned Income Tax Credit (EITC) or the additional child tax credit, you will likely get a larger return than the “break even” guidelines.  If you just moved for a new job or had a new baby late in the year, you may also have a larger than usual return.  Just make sure that you adjust for that new addition in the new year with updated W4s and be sure to discuss withholding the proper amount with your HR or tax specialist. 

On the flip side, if you got divorced and are filing single, but withheld at married throughout the year, you will likely have a pretty big ouch!  Make sure to change your withholdings as soon as possible when dealing with divorce so that the tax consequences don’t hit you long after the divorce is final!!  Also, talk to your attorney about any potential return/owing being included in the divorce settlement so that each party is treated appropriately.

There are ways to set up your withholdings (completely LEGAL ways) so that you get the money you are supposed to get in your pocket every single month without having to wait for a lump sum at the end of the year.  Believe it or not, you don’t want that lump sum.  By getting the lump sum, you are, as mentioned above, giving Uncle Sam an interest free loan every month.  Take the money and use it MONTHLY to save, pay down debt, or provide as needed for your family.  Here is some general guidance on withholding:  You can claim yourself, your non-working spouse, your dependents.  If you have a working spouse, then make sure that only one of you claims the children–or you may find that you owe.  You would claim yourself and your spouse would only claim themselves (and the children would be divided or claimed as decided between you).  If you are single, you can claim yourself.  I STRONGLY suggest talking to a tax professional to determine how you should set up your withholdings.

Now, let’s talk about your two options–REFUND vs. OWE

Bad news first:  If you owe–PAY.  Pay on time, in full, if possible.  If you can’t pay in full and on time, contact the IRS, or your state revenue department, to figure out what payment arrangements may be available to you.  The longest repayment period is 3 years.  There is a 1% /month interest rate on your unpaid principal balance and a 5% /month penalty.   Though the penalty ceases after 5 months, no more than a total accrued 25%, it is added to your principal and the 1% MPR will accrue based on that total number–yes, in the first five months your balance could potentially grow. This is true for federal and state taxes.

If you owe past due taxes–SET UP PAYMENT ARRANGEMENTS as soon as possible so that you don’t have a lien filed against you.  A tax lien (state or federal) will show up on your credit report.  A tax lien does NOT follow the same rules as other negative items on your credit report (they fall off after 7 years from first date of uncured delinquency)–nope, tax liens will stay with you UNTIL PAID IN FULL and then (eventually) fall off.  A tax lien can stand between you and a (new) car, a job, a house.  Be careful!

If you have already fallen into the tax lien category–you have an option available to you.  PLEASE do NOT pay one of those companies that offers to settle your tax debt for pennies on the dollar.  YOU CAN DO THAT YOURSELF!  It’s called an Offer in Compromise.  It works at the State or Federal level and that’s basically all those companies that are on television are going to set up for you.  Check the link for further information about who can qualify and what repayment options may be available to you.

Alright, so let’s say you get GOOD NEWS: REFUND!!! 

First, do NOT…again do NOT get a “Refund Anticipation Loan” (RAL) or a  “Refund Anticipation Check” (RAC.)  My neighbor had me review her tax documents.  She filed with H&R Block for both 2012 and 2013.  This year she said “No” to the RAL/C.  However, according to her documents from H&R Block for 2012 and 2013 tax years: “Based on IRS acceptance of your tax return today, estimated funding for your Federal Refund Anticipation Check (Federal RAC) of $XXX is within 21 days.”  Okay…if you file online your direct deposit will arrive in approximately 21 days with no fees (see below for the fee structure she got hit with).  The document continues on, “It may take an additional 3-4 business days for the money to be available in your account at your bank.”  I can only assume that this is because it’s ANTICIPATED funding.  If you sign up for direct deposit from the IRS the funds are available the day they are deposited–they come directly from the IRS.

Let’s see what she got hit with:  2012: Total Refund $8353 (EITC, 3 children), H&R Block Fees $325, bank fees $34.95.  Her net gain: $7993.05.  That’s a difference of $360–same timeframe as a regular return…but $360 LESS than she should have received!  (If you account for general preparation fees, there would be a difference, but considerably smaller and WITHOUT the bank fee!!)  2013: Total Refund $7320 (EITC, 2 children–custody arrangement), H&R Block Fees $284.98, bank fees $34.95.  Her net gain: $7000.07.  This year, a difference of $320.  OUCH.

PLEASE.  PLEASE.  Do NOT get a refund anticipation loan/check unless you enjoy WASTING money.  READ before you sign and make sure your tax preparer (if you decide not to do it yourself) knows that you do NOT want anything to do with Refund Anticipation products!

Many people pay off debt with tax returns–that’s great!  Make sure that you keep your accounts current throughout the year so that you get the best bang for your buck as well as a good credit score.

SAVE, SAVE, SAVE!  This year is the first year my tax software (or at least that I remember) gave me the option to purchase a US Savings Bond with part of my refund.  HECK, YES!!!  Savings bonds are a good way to save for the future!!  You can also use your tax return to create/build/complete your emergency savings.  Also, birthdays, Christmas, other holidays–we have the majority of the year still ahead of us.  Remember to plan for the “when” not the “if” something happens events!

If you want to have fun with your tax proceeds and go shopping, go for it!!  However, please remember there are companies out there TARGETING you.  You have a bunch of money on the way, or in your account/pocket, and they want to help you part with it.  SHOP AROUND!!!  If in doubt, put the money in a 3 month CD and wait it out–if you still want it, then go right ahead.  Prevent yourself from impulse shopping with your tax return by leaving your cards and cash at home while you go window shopping.

If you want to use your tax return for a down payment on a car–please make sure you can afford the monthly car payments.  If you can’t, your car will be long gone before next tax season shows up!!  Also, do NOT route the funds to the dealer.  Go in with a cashier’s check or cash, but there can be some pretty hefty fees associated with routing those funds–get the best bang for your buck that you can!!

As promised at the very beginning–there is an exception to the filing on-time rule, but it’s couched in another rule.  If you are not going to file on time, you HAVE to file an extension.  (One caveat: If you are single and deployed, you can delay by virtue of your orders.  You still have to file within a reasonable timeframe of your return to the states.) 

Tax time isn’t always going to be something we look forward to–stress, frustration, not getting as much back as we had hoped…even owing.  Take the time, make the effort.  Always file on time and become comfortable at least with the knowledge that tax time comes but once a year.