Editor’s Note: In this article, Sam shares her opinion about taxes. The purpose of this blog is to educate. Personal financial advice can differ, even if it’s good. Please be a student of money when you visit the PerkStreet Blog and share your opinions in the comments. With luck, we’ll all come out of each article having learned something.~Kyle
It’s that season again. Yep. Tax season.
Unlike many Americans, my husband Juan and I get excited when our W2s and annual bank statements come because it means we get to do taxes. Why would this make us happy? Because we work to make sure we’ll get to cash a check this time of year, not cut one. I leave the bulk of the actual legwork regarding our taxes to the accountant, Juan — he’s not a CPA, but he’s pretty darn smart about this stuff.
Here are some of the tricks we use to make this time of year a little more enjoyable and a little less frustrating. Juan and I hope you’ll find the following more helpful than certifiable:
1. Go “Single-Zero,” Even if You Are Neither
This year, Juan claimed zero withholding allowances and “Single.” I worked through what at first felt like a personal diss and realized that although we’d be getting less income with every check, we would adjust and simply spend less. It’s a win-win (so long as the ladies at the Federal Government don’t think my husband is actually single). Looking at our W2s side-by-side, I’m thinking I’ll go to my HR department and switch my paperwork to Single-Zero as well. We’ll end up spending even less over the course of the year, and that’s never a bad thing.
2. To Withhold or Not to Withhold?
There are two answers to this age-old question:
A reason to claim zero allowances: Don’t buy into the hype.
There are those who believe that you should adjust your withholdings so you break even at tax time because the government would be making the interest off your money instead of you. Although it might be accurate, this is a severe overstatement. You wouldn’t be earning that much in interest anyway. Given a $3,000 return with today’s interest rate of 1.1%, it would be less than $40 in interest over the year.
Instead, pocket that $3,000 at one time and do something smart with it. You could even consider it a forced savings account if you aren’t great at saving. We say, let the pennies on the dollar go towards educating children and building interstate highways. It’s the American Way.
A reason to claim allowances: Here are some exceptions to our rule.
Take the financial difference between the possible withholding levels and if you claim some allowances, either invest the difference immediately into something like a Roth IRA or pay down credit card or other debt. You have to stay disciplined with this suggestion, though.
Go to IRS.gov for the withholding calculator to see what the difference would be and make an informed decision.
3. Donate Something
I’m fickle about material items, which is why I can’t bring myself to spend a lot on them in the first place. So there are always clothes to donate. In the Boston area, you can also donate gently used home items (toilets, light fixtures, faucets, etc.) to a center that resells them. And just to feel good, we donate old towels and sheets to the local ASPCA while visiting the animals in the shelter. The donations get deducted and we feel great. Not only have we done some good, but also our house gets a sprucing up… and we pay less in taxes.
4. What You Owe in Taxes is What You Will Eventually Pay
I want to revisit the first point. When you pay more throughout the year, your spending habits and budget adjust. Some will argue, “I need every penny,” and this may be true. However, we know that there are things that we buy throughout the year that we didn’t have to. Most of us can live on a lot less, so we should try to do just that. This little exercise in making higher contributions throughout the year will not only tighten the belt slightly (you may not even notice), but you will also have been saving for yourself for an entire year. Take your fat check and spend wisely… or for an even wiser move, save it again.
What do you do year round to make taxes less taxing at this time of year? Please share in the comments!
Sam Hammar is a city-dwelling workaholic, who works on all kinds of projects that help the City of Boston be the kind of place PerkStreet Financial is proud to call home. Although public service is tough, Sam keeps things in balance by focusing on the little things in life. Sam loves saving money and helping people, and she also loves her husband, Juan. Her writing is geared toward recently married couples.
Interested in writing for the PerkStreet Blog regularly like Sam does? Email the editor at Kyle.Psaty[at]PerkStreet[dot]com!
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