You got your taxes filed in time. Now what?
The IRS says about 60 percent of taxpayers use tax professionals to prepare their returns. Certainly, all those folks carefully looked over the documents.
Whether you paid a professional or you did it yourself, don’t breathe out just yet. Because now’s the time to start preparing for next year’s tax season.
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No, I’m not bonkers. I know you don’t want to even think about taxes now, especially if you owed the IRS a lot. But the information you collected can be the impetus for improvement.
Let’s walk through some of the sections of the Federal 1040 form and how you can use the information to improve your financial situation.
▪ Income: Nothing brings home your satisfaction or frustration with your income like seeing it in black-and-white on your tax return.
If you’re just getting by and can’t find enough cuts to save more, what are you doing to change things? Don’t just consider avenues to increase your earnings. Actually do something about it. Check with the local community colleges for any certificate programs or classes you can sign up for to expand your skills.
Have you left money on the table?
A survey last year by staffing firm Robert Half found that employees have a lot of anxiety about asking for a pay increase. Workers would rather clean the house, look for a new job, get a root canal or – and this is crazy – be audited by the IRS than negotiate for more money.
A retired editor at The Washington Post who was my mentor (I called him my workplace godfather) gave me the best piece of advice when I was reluctant (OK, scared) to ask for a raise after another media company had approached me. He simply said don’t be afraid to negotiate for what you are worth. The fact is I didn’t want to leave. But I also didn’t want to use the offer to threaten that I might. “What’s the worst that can happen?” he said. “They'll just say no. You'll still have a job but you'll know what you’re worth to them to keep you.”
Before you ask, know your worth. At Payscale.com, you can get a free salary report with comparison data about others in your position or a similar one.
▪ Adjusted gross income: This section of the 1040 is the tell-all about certain money moves.
When filling it out, you’re asked about deductions for health-savings and retirement accounts. There’s also a line about student-loan interest.
Contributing to a heath savings account and saving for retirement are good moves. It’s not so great to keep your student debt around even if you’re getting a deduction. Pay that puppy off as soon as you can.
▪ Refund: When people get their taxes prepared, they tend to skip right to this section. They’re elated to get some money back. Year after year, many people get a big refund even though their tax situation doesn’t change. This means they’re allowing the government to take too much money out of their paycheck.
But there are quite a few folks who don’t get a refund but instead end up owing a lot of money.
I come across way too many entrepreneurs who don’t set aside money from their revenues to take care of their tax burden.
Make an appointment now – while you have time to make changes – to see a tax professional. Evaluate your tax situation so that you neither get a big refund nor owe a lot of money when tax time comes back around.
▪ Amount you owe: Did you have to pay more taxes because you had an early withdrawal from your retirement plan?
I’ve had to counsel a number of people who got into a financial jam and felt they had no choice other than to make an early withdrawal resulting in a higher tax bill and a 10 percent tax penalty. Others dipped into their retirement money to pay down debt. Really reflect on this decision.
Look at the way you’re handling your money and see if there is a way for you to save for emergencies so that you don’t have to tap your retirement plan. You’re going to need that money later in life.
▪ Gifts to charity: Are you generous enough? In addition to helping people, you'll get a nice tax break.
Don’t just shove that massive packet of financial information into a file folder. Your return is the key to changes you might make. Or confirmation that things are on track.