I really don’t think this will be your favorite post, but I do think it’s important – and timely – so I’m going for it.
For almost all of you, your taxes are due on April 15th of each year. This year, if you want to be exact, the due date for filing your taxes is Monday, April 18th (or even for some, April 19th). But for all intents and purposes, April 15th is the day to remember.
Lucy’s Tax Tip #1: File your taxes sooner than the due date so you don’t run into any trouble or have any last-minute headaches.
Lucy’s Tax Tip #2: If you don’t already do this, I suggest starting a folder for each year (electronic or paper), where you add any relevant tax documents throughout the year. This makes filing your taxes much easier. Just open the folder and you have everything you need! These folders can then be filed away, and in the off-chance you are audited you should have all the relevant back-up ready to go.
This year, and for the first time, I used Turbo Tax to file my taxes. I found it extremely user-friendly. Turbo Tax uses easy to understand language and gives you the option to drill down to get the level of detail you need/want for the different line items of your taxes.
And now for some Frequently Asked Questions:
Question #1: Do I have to report my Roth IRA contributions?
Answer: No. You have already paid taxes on this money, and therefore, do not have to report it (and aren’t eligible for a tax deduction).
Question #2: Is a big tax return a good thing?
Answer: No. If you get a big tax return, this means you are paying too much throughout the year. Essentially, you are over-paying the government throughout the year and letting them hold your hard-earned dollars hostage until you get your refund. Instead, you could be saving, investing, or spending these dollars.
Question #3: How big is too big, anyway?
Answer: This is relative, but if your federal tax return is less than about $1,500 I think that’s really good! Taxes can be a moving target, and you can’t predict each year’s total tax amount with exactness a year in advance. If you’re in the ballpark, well done!
Question #4: But Lucy, my tax return is huge! How do I fix that?
Answer: Adjust your withholdings – this is how much is taken out of your regular paycheck each pay period to pay your taxes. To make this adjustment, you need to update your W-4, and give it to your employer’s payroll department. (They should be able to help you.) The more allowances you claim on your W-4, the less tax you pay. This is something that may be worth doing, but should not be done haphazardly. You also don’t want to underpay!*
Question #5: This is all fine and good, but I hate numbers. Where should I go for help?
Answer: First, give yourself some credit! It can be empowering to tackle something you aren’t yet comfortable with. I would try TurboTax, finding someone you know who has done their own taxes before and is willing to sit down with you and walk you through the process. (Disclaimer: If you have a lot of complexity, it is likely worth hiring an accountant.)
Question #6: I got married in 2015. What’s my filing status?
Answer: Your filing status is based on your marital status as of the last day of the calendar year for which you are filing your tax return. So, if you were married on or before December 31, 2015, you can select “married filing jointly.”*
Lucy’s Tax Tip #3: A tax return can be a good way to make progress toward achieving some of your financial goals. Consider splitting it among a savings goal or IRA contribution, paying down some debt, and also treating yourself (perhaps by adding some of it to your vacation fund). Remember, IRA contributions can be made until April 15th of the current year for the prior year.
Alright, what did I miss? Have you found your taxes to be a pain, or have you found a routine that makes them easier to do each year? Do you do them yourself or have someone else do them?
You know the routine. I love and appreciate your feedback!
Here’s to Letting Luc!
PS – Is it summer yet?
*Bonus note on getting married and updating your W-4, from a Let Luc reader. Thank you! “Each new spouse will want to update their W-4, marking it as married and claiming 2 exemptions (one for each of you). However, the back of the form has an additional portion relating to dual income households. Specifically, you have to calculate additional withholdings if you update to “married and claim 2 exemptions”! This could save you from the surprise of owing additional dollars when you file your taxes.”