8 Things You Can Do With Your Tax Refund

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Many people will be receiving (or have already received) a tax refund in the near future. Most people that I know plan to blow it on something that will not provide a benefit for their lives. Instead of wasting your refund and regretting your decision, try one of these 8 tips!

Tax Refund

What To Do With Your Tax Refund

Start An Emergency Fund

Probably the most common characteristic of a financially stable household (besides the idea of living within their means) is an emergency fund. The point of this emergency fund so you can have money stashed away when something unexpected comes up.

If you are not financially prepared for emergencies, then you may be forced to rely on high-interest credit cards, or tap into your retirement savings in order to get by.

Pay Down Debt

Another great use of your tax refund is to pay off debt. This may seem like a boring option (especially when compared to how most people use their tax refund), but it will automatically earn a rate of return that is equal to the interest rate on your debt.

For instance, if you pay off a credit card that had an interest rate of 20%, then that is equivalent to earning 20% on an investment!

If you use it to pay off/down an installment loan (such as a mortgage or car loan), then you may have to specify that your extra payment should be applied to the principal.

Consider Paying Infrequent Expenses

Many times it can be difficult to remember those expenses which only come once or twice each year. Instead of being taken by surprise and sent scrambling for extra cash at the last minute, either pay or put aside money for these expenses using your tax refund.

Some of these can include your car insurance premium, a maintenance fee on a timeshare (don’t get me started on this one) or other property, roadside assistance fee, and any other types of subscriptions.

Save For Retirement

You can easily fund a retirement account, such as an IRA with your tax refund. If you have more than the current IRA contribution limits, then you can fully fund your account while taking advantage of one of these other options.

If for some reason you are not reaching the 401k contribution limits at work, you can use this extra money as a way to increase what you currently contribute. Of course, you can’t add outside money into a 401k; however, if you fall short of the contribution limit due to other expenses, you can use your tax refund to pay those other expenses and increase the amount that goes into your 401k!

Save For A Large Purchase

If you are looking to purchase a car (learn how to save money on car costs), new laptop, vacation, or any other large purchase, this may be your chance. Instead of going into debt to buy the item, you can use your tax refund.

Even if the amount of your refund isn’t enough for you to purchase the item outright, it can greatly reduce the time it will take to save up for it. You can also pad the account with bonuses, raises, and future tax refunds.

Give

Giving is a very important part of any financial plan – especially for a Christian (we are commanded to give). I know many people who have a strong desire to give, but are not able because things are too tight for them financially.

If you are in a situation like this, a large tax refund can provide you with the perfect opportunity to give. There are plenty of organizations that are looking for donations in order to fulfill their mission such as, your local church, a missionary, food banks and homeless shelters, and any other charity that is fighting for a worthy (to you) cause, and has proven to be reliable!

 

Start A “Blessing Fund”

One of the things that my wife and I want to do (once we are out of debt) is to establish a savings account that will only be for the purpose of providing financial blessings to others. By having a separate account for this, we never have to worry about depleting our emergency fund or any other “dedicated” savings when we come across someone in need.

If you have a desire to help people out at various times, but don’t always have the means when these times come up, use your tax refund to start a “blessing fund”.

Spend Your Tax Refund

I’ve talked before about celebrating small victories during your financial journey.  Use some or all of your tax refund and do something that you have wanted to do, but couldn’t. Maybe go out to a fancy restaurant, or buy a New iPad or some clothes!

No matter what you choose to buy, use all or a part of your tax refund to treat yourself. Then take the rest and put it toward your highest financial priority. This way, you can celebrate achieving a financial milestone, without diverting funds away from your current plan.

Reader Questions

  1. Did you receive a tax refund this year? If so, how did you spend/save it?
  2. Do you purposely have excess taxes withheld during the year so you can have a large refund?
  3. Do you regret how you’ve spent a previous tax refund, bonus, or other “windfall”?

Need More Time to File Your Tax Return? Here Is How To File For An Extension

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For many people, meeting the IRS’s April 18th tax return deadline for filing and paying the 2010 taxes will prove impossible. Unfortunately, the IRS did not automatically extend the deadline because of the tax filing delay!

Fortunately, the IRS allows taxpayers to file for an extension of the deadline to October 17th. The process for requesting an extension is fairly easy, however, there are a few things that you must consider regarding this option.

What Happens When You File For An Extension?

Filing for an extension gives you an additional six months to submit your tax return. For tax year 2010, that means that your tax filing deadline would be extended from April 18, 2011 to October 17, 2011.

An extension allows you to submit your tax return after April 18th, but it does not extend the amount of time you have to make a payment. This means that you will owe interest on any amount not paid by the original April 18th deadline, plus a late payment penalty if you have not paid at least 90 percent of your total tax by that date. In order to avoid all interest and penalties, you must pay the full amount due by April 18th.

How To File For An Extension On Your Tax Return

In order to request an extension, you must file Form 4868 (PDF) with the IRS before April 18th. You can electronically submit Form 4868 through IRS Free File. Using this service to prepare and electronically submit Form 4868 is free to everyone, regardless of income.

Actually, since I offer professional tax preparation services, I can also electronically submit Form 4868 for you – just use the contact form on the linked page.

What If You Can’t Pay Your Taxes By The Deadline?

Since extending your filing deadline doesn’t push back the deadline for payment, what can you do if you can’t pay the full balance by April 18th? Here is what the IRS recommends:

If your return is completed but you are unable to pay the full amount of tax due, do not request to extend your filing deadline. Submit your tax return on time and pay as much as you can. The IRS will send you a bill or notice for the balance due. To apply online for a payment agreement, go to IRS.gov and click “Online Payment Agreement Application” at the left side of the home page under Online Services. If you are unable to make payments, call the IRS at 800-829-1040 to discuss your options.

If I Still Have To Pay By April 18th, What Is The Benefit Of Filing For An Extension?

By filing to extend your deadline, you are able to avoid the failure-to-file penalty. This penalty is usually larger than the failure-to-pay penalty, so by filing to extend your deadline, you are able to avoid paying the larger penalty.

Also, if you are able to pay at least 90% of your tax liability (remember that for a large amount of taxpayers, your withholdings may cover this amount already) by April 18th, and request to extend the deadline, you will be able to avoid paying penalties, as the IRS explains:

  • The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.
  • You will have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.
  • If you filed an extension and you paid at least 90 percent of your actual tax liability by the due date, you will not be faced with a failure-to-pay penalty if  you file by the extended due date and pay the remaining balance with your return.
  • You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

So the bottom line is that if you have already completed your return and you know that you can’t pay the entire balance, it is better to just submit your tax return, pay what you can, and set up a payment plan with the IRS.

You should only request to extend your deadline if you are unable to complete your tax return by April 18th!

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What You Need To Know About Tax Exemptions And Dependents

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Some tax laws and guidelines affect every person who may have to file a return – this includes rules governing tax exemptions and dependents. Ever since I became involved in preparing taxes, I have noticed a lot of confusion regarding exemptions and dependents.

Apparently, so has the IRS. Therefore, they have released a bulletin outlining six facts regarding tax exemptions and dependents that will help you when you file a tax return:

Tax Exemptions And Dependents:

  1. Exemptions reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. For each exemption you can deduct $3,650 on your 2010 return.

  2. Your spouse is never considered your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you’re filing a separate return, you may claim the exemption for your spouse only if they had no gross income, are not filing a joint return, and were not the dependent of another taxpayer.

  3. Exemptions for dependents. You generally can take an exemption for each of your dependents. A dependent is your qualifying child or qualifying relative. You must list the social security number of any dependent for whom you claim an exemption.

  4. If someone else claims you as a dependent, you may still be required to file your own return. Whether you must file a return depends on several factors including the amount of your unearned, earned or gross income, your marital status, any special taxes you owe and any advance Earned Income Tax Credit payments you received. [Find out if you need to file an income tax return]

  5. If you are a dependent, you may not claim an exemption. If someone else – such as your parent – claims you as a dependent, you may not claim your personal exemption on your own return.

  6. Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children. See IRS Publication 501 (opens a PDF),  Exemptions, Standard Deduction, and Filing Information for additional tests to determine who can be claimed as a dependent.

Hopefully, these guidelines have helped you to develop a better understanding of exemptions and dependents. If you need more assistance, visit out tax help page. There you will find guides, articles, and other reference material related to this and other subjects!

Once you are ready to prepare a return, be sure to contact us to set up an appointment for tax preparation. If you decide to file your own taxes, we recommend using TurboTax to do so.

Be sure you are aware of the tax filing delay, as well as the fact that the tax filing deadline has been extended this year. To get the most out of your financial situation in 2011, you should know the IRA Contribution Limits, 401k Contribution Limits, and the Income Tax Rates for 2011!

photo by jscreationzs

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What To Do If You Are Missing Your Forms W2

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Even though employers had until January 31st to get all of their Forms W2 mailed out to their employees, there are still many people who haven’t received one as of yet. If you are missing one of more of your forms W-2, the IRS has procedures in place to assist you.

What Information Is Included On My Forms W2?

You should receive a Form W-2, Wage and Tax Statement, from each of your employers. This form includes all of the income that you received from your employer, all of the various taxes that have been withheld during the tax year (federal, state, local, social security, etc), and any other deductions (pre-tax medical premium, retirement savings, etc).

The IRS requires that every employer issue forms W-2 to all of their employees, so that they can be included when the employee goes to file a tax return. Here is what the IRS recommends in the case of a missing Form W-2:

What Should I Do If I Am Missing Forms W2?

1. Contact your employer If you have not received your W-2, contact your employer to inquire if and when the W-2 was mailed. If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address. After contacting the employer, allow a reasonable amount of time for them to resend or to issue the W-2.

2. Contact the IRS If you do not receive your W-2 by February 14th, contact the IRS for assistance at 800-829-1040. When you call, you must provide your name, address, city and state, including zip code, Social Security number, phone number and have the following information:

  • Employer’s name, address, city and state, including zip code and phone number
  • Dates of employment
  • An estimate of the wages you earned, the federal income tax withheld, and when you worked for that employer during 2010. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible.

3. File your return You still must file your tax return or request an extension to file April 18, 2011, even if you do not receive your Forms W-2. If you have not received your Forms W2 by the due date, and have completed steps 1 and 2, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible.  There may be a delay in any refund due while the information is verified.

4. File a Form 1040X On occasion, you may receive your missing W-2 after you filed your return using Form 4852, and the information may be different from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

Once you are ready to prepare a return, then be sure to contact us to set up an appointment for tax preparation. If you decide to file your own taxes, we recommend using TurboTax to do so.

Be sure you are aware of the tax filing delay, as well as the fact that the tax filing deadline has been extended this year. To get the most out of your tax situation in 2011, you should know the IRA Contribution Limits, 401k Contribution Limits, and the Income Tax Rates for 2011!

photo by Arvind Balaraman

This article was featured in the following carnivals:

Totally Money Blog Carnival: Presidential Quotes Edition

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Free Tax Software Giveaway At KNS Financial

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H&R Block was kind enough to provide us with several free copies of their H&R Block AT Home Tax Preparation software.

Free Tax Software You Can Trust

Many of you already know that H&R Block provides professional tax preparation all across the country. However, like TurboTax, they also provide software with which, you can prepare your own return. H&R Block AT Home is available in a few different flavors depending on your needs.

Here are the variations:

Free – File For FREE:

  • FREE to prepare, FREE to print, FREE to e-file
  • FREE expert advice from our community of tax specialists
  • FREE audit support and representation from an enrolled agent – NEW and only from H&R Block
    100% Accuracy Guarantee and Maximum Refund Guarantee

Basic – Simple Tax Situations:

Everything in Free, plus:

  • Import last year’s return
  • Step-by-step guidance to maximize your refund
  • Double check for errors

Deluxe – Homeowners/Investors:

Everything in Basic, plus:

  • Import your W-2, 1099 and last year’s return
  • Searches hundreds of deductions
  • Personalized tax guidance
  • Mortgage interest and charitable tax deduction maximizers
  • Sale of stocks, bonds, and mutual funds

Premium – Self-employed:

Everything in Deluxe, plus:

  • FREE live tax advice2
  • Schedule C guidance
  • Tax laws and planning resources
  • Advanced tax calculators
  • Rental income assistance

The “Premium” version is what we are giving away here! The normal price is $49.95 just to file your federal tax return. To add on a state return, you have to pay $34.95 for each state! I guess it’s a real good thing that they are allowing me to offer this edition (the federal portion) as free tax software.

Free Tax Software For All?

Alright, maybe not for all, but for six! That’s right, H&R Block was nice enough to provide me with six codes for my loyal readers!

How To Enter To Win Free Tax Software:

  1. Link to any of the following articles from your website using the anchor text provided: http://knsfinancial.com/ira-contribution-limits-for-both-roth-and-traditional (IRA Contribution Limits), http://knsfinancial.com/401k-contribution-limits (401k Contribution Limits), http://knsfinancial.com/should-i-cosign-for-a-loan (cosigner). Please note that if you do not use the anchor text provided in the parenthesis EXACTLY AS IT IS WRITTEN, then your entry will not count! This is worth 5 entries for each article (potential of 15 entries)

  2. Sign up for email updates from KNS Financial (you can use the form at the bottom of this post, or the one in the upper right-hand portion of the website) – 3 entries

  3. Subscribe to the KNS Financial RSS Feed – 3 entries

  4. Follow @KNSFINANCIAL on Twitter and Tweet about this contest to your followers using the following (1 entry) – “Win free tax preparation software from @knsfinancial – http://bit.ly/hXCJ0j”

  5. Follow @FGSW (“Fat Guy Skinny Wallet” my new website about Weight Loss, Diet, Fitness, and Debt Management) on Twitter and Tweet about this contest using the following (1 entry) – “Win free tax preparation software from @knsfinancial – http://bit.ly/hXCJ0j via @FGSW”

So, you can have a total of 23 entries for this giveaway!!!

Here are a few more details about this giveaway:

  • You must leave a comment for each method of entry

  • If you win, you will receive a code to use the H&R Block Premium online version for free – keep in mind that the state return is not included

  • If you have already done one of more of the following, you are still eligible for the giveaway – just be sure to leave a comment stating what you have done (and follow the other rules as well)

  • If you have signed up for email updates, please use the same email when you leave a comment (or provide me with the email that you used within the body of the comment). I will match up your comment to my email list to be sure that people aren’t trying to “game the system”

  • If you have tweeted about this giveaway, please provide a link to the tweet as well as your Twitter username so I can match up the entries

  • Although, I plan to reference my email subscriber list and the Twitter records for both accounts, you will only receive credit for an entry if you leave a comment below. For instance, if you are signed up for emails and you fail to leave a comment telling me that you signed up, then you will not be entered.

  • The contest will end on Monday February 21 at 11:59 PM EST

  • I will be using the random number generator found at Random.org to choose the 6 winners.

  • If you are chosen as a winner, you must respond to the confirmation email within 72 hours – if not, another entrant will be randomly selected to take your place. Please leave an email that you plan to check often!

If you are more comfortable having a professional prepare your return, then be sure to contact us to set up an appointment for tax preparation.

Be sure you are aware of the tax filing delay, as well as the fact that the tax filing deadline has been extended this year. To get the most out of your tax situation in 2011, you should know the IRA Contribution Limits, 401k Contribution Limits, and the Income Tax Rates for 2011!

To Keep Up To Date With The Latest Tax News And Regulations, Sign Up For Our Email Updates: