This month's e-Wealth Coach is Michael Gutter. Dr. Michael S. Gutter is an Assistant Professor and Family Financial Management State Specialist for the University of Florida. His Ph.D. is in Family Resource Management from The Ohio State University. Gutter has published research relating to saving behavior, racial differences in financial behavior, and the relationship of financial socialization on financial behavior. He led the effort to establish Florida Saves.
With 2010 under way, many of us are starting to receive our tax documents in the mail or at work. Tax season is a great time to jumpstart your savings. Here are some tips to keep in mind this tax season.
Avoid Expensive Preparers or Loans
Keep more of your own money by avoiding expensive tax preparation or refund-anticipation loans. Many communities have Volunteer Income Tax Assistance (VITA) sites available which provide electronic filing and tax-preparation assistance at no charge for many taxpayers. You can find your local tax resources by zip code on the IRS website.
If you do decide to use a paid tax preparation service, you can keep your cost down by declining any refund-anticipation-loan (RAL) products. E-Filing and direct depositing your refund can reduce your waiting time and avoid these cost services. Refund-anticipation-loans have high fees, and not using a RAL can save you an additional $100. By waiting, you could use that extra money you did not spend on the RAL to contribute to savings or pay down debt.
Pay Only What You Must
In order to maximize your tax refund, work to reduce your income subject to taxes by taking advantage of tax deductions and credits. Deductions lower your taxable income, and credits lower your taxes. Tax deductions can include interest expenses on student loans, medical expenses, contributions to qualified retirement plans. If you can itemize certain expenses, then you can deduct mortgage interest paid, taxes paid, charitable gifts, and more.
Regardless of whether you utilize a standard or itemized deduction, everyone can take advantage of tax credits. Like deductions, credits can help you receive a larger refund. The Earned Income Tax Credit is a tax credit for lower-income families and can even be refundable. This means you are entitled to the full amount of the credit even if it exceeds the amount you face in taxes. You can use more than one deduction and credit. Having someone else check you tax return can help you to not miss any savings opportunity. For each new deduction or credit you find, utilize a portion of the savings to add to your savings account or pay down debt.
For basic information on taxes check out the University of Florida’s fact sheet on “Federal Income Tax Management” and additional resources.
Pay Yourself First
When it comes to increasing savings, the old wisdom of paying yourself first comes to mind. Now with IRS Form 8888 you can directly deposit funds from your tax return into up to three different accounts, including your savings account. Form 8888 is a good way to save automatically, open new accounts, or add to existing accounts. By setting aside money that hasn't yet reached the individual's hands, there is an opportunity for painless savings. Form 8888 is available at most tax preparer sites or where you can find tax forms.
It’s Not Too Late for Retirement Savings
Even though 2009 has come and gone, you can still help your tax bill by maximizing your contributions to tax-advantaged retirement accounts. Contributions to a traditional individual retirement account (IRA) can reduce your taxable income and can be made up until you file your tax return for the previous years. Traditional IRA contributions grow tax-deferred and can be invested in many types of assets including mutual funds.
Remember to take advantage of every deduction and credit you can! Taxes can impact your saving and investing and are a great way to start saving. For more information on saving and investing, click here.
