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Redo You: Money with Lynnette Khalfani-Cox
While taxes are always certain, they don't need to be stressful. Financial expert Lynnette Khalfani-Cox, better-known as "The Money Coach," shares some easy steps for a stress-free tax season.
1. GATHER YOUR DOCUMENTS.
Before you prepare your taxes, gather all the documents you need to prepare a complete tax return. This includes income documents, such as W-2's, 1099 forms, your Social Security statement for older Americans, and dividend and interest statements from your bank or broker. You'll also want to locate other tax related documents, including proof of any property you bought or sold, a summary of moving expenses, childcare expenses and educational expenses. And finally, you'll want to collect tax deduction documents, such as your mortgage interest statement, property tax records, charitable donations, retirement contributions, and healthcare or job-related expenses.
2. MAKE A RETIREMENT CONTRIBUTION.
You can reduce your taxable income by contributing money to a traditional individual retirement account (IRA). Contributions to IRAs can be made up until April 17th (which is Tax Day this year) and can count toward the 2011 tax year. If you were under age 50, as of Dec. 31st 2011, you can sock away $5,000 into an IRA. If you were 50 or older, you can stash $6,000 into an IRA. Older savers get to put in an extra $1,000 to let them play "catch up" on their retirement savings.
3. FILE YOUR TAXES ONLINE.
Whether you're working with a tax professional, or doing your own taxes with the help of online software, save yourself a lot of hassle by e-filing. Not only does this help to prevent mistakes (built-in calculators do "autochecks" for you), but it is also easier and means no waiting at the post-office. You upload and it's done. Plus, when you e-file, you can opt to get your refund via direct deposit, which means that money goes directly into your checking account.
4. FILE AN EXTENSION.
Good news! Tax Day is April 17th this year. (We all get two extra days because April 15 is a Sunday, and April 16 is the Emancipation Day holiday in Washington, D.C.) But if you're worried about not being able to file your taxes on time, it's actually not that big a deal. By law, if you're unable to meet the April tax-filing deadline, simply request a tax filing extension. It's easy enough to do by filling out the appropriate form (Form 4868) on the IRS's website. Once it's accepted, you automatically get a six-month extension of time to file. But remember, if you're going to OWE taxes, you're still expected to pay by April 17th or you could face a late payment penalty.
5. And if you do owe taxes, but can't afford to pay right now, there are some options including a PAYMENT PLAN. How does that work?
If you're worried that you owe more taxes than you can afford to pay right now, don't let that stop you from filing your taxes as required by law. You have three options when money's tight and you can't pay your taxes immediately. You can: a) contact the IRS and seek extra time to pay; b) contact the IRS and set up an installment agreement, or c) pay your taxes with a credit card.
6. A lot of people look forward to a big tax refund check, but you say that's not necessarily a good thing. In fact, you suggest people ADJUST THEIR WITHHOLDINGS to avoid a big refund. Can you explain that?
If you're receiving a big refund check every year, that means you've kind of goofed financially. The average tax refund is over $3,000. That means the government was taking out an extra $250 each month from your paycheck! You're essentially giving the government an interest-free loan! If you'd rather have that money in your pocket each month, you can walk into your HR office and redo your W-4 - increasing the number of allowances claimed. To do accurately determine how many allowances to claim - because you don't want the IRS taking out too LITTLE money - use the withholding calculator on the IRS's website. In your very next paycheck you'll see an increase in your net pay, and you can start putting that money to work for you by getting into an interest-earning savings account.
7. If you do get a refund, any advice on how to spend it? (SPEND REFUND WISELY)
If you do get a refund, it may be tempting to blow it, but I recommend using only about 10% for a fun purchase or splurge. With the other 90%, I suggest the following: invest in yourself (perhaps by enrolling in a class or professional development program you've been meaning to take) and pay down debt, such as a high interest credit card or your mortgage.
You can find more of Lynnnette's financial tips on her website, AskTheMoneyCoach.com.
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