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Taxes Archives - Faithful with a Few

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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The IRS Has Over $1.1 Billion In Unclaimed Refunds

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The IRS has more than $1.1 Billion in unclaimed refunds for nearly 1.1 million people who did not file an income tax return for 2007. Many taxpayers may have chosen not to file a return because they did not earn enough income to require filing an income tax return, even though they had taxes withheld from their income. There are many reasons for you to file a return even when you are not required to do so.

How To Get Your Unclaimed Refunds

In order to recover your unclaimed tax refunds, you must file a return for tax year 2007. Taxpayers are given 3 years from the due date of a return in order to file – there are no late-filing penalties charged when a refund is due. Since the tax return deadline has been extended, you have until April 18, 2011 to file your 2007 return.

You may not feel like going through the trouble of filing an old return for a couple of dollars (I probably wouldn’t either), but…

The IRS estimates that half of these potential 2007 refunds are $640 or more.

If you fail to file a 2007 return by the deadline listed above, the money becomes property of the U.S. Treasury. Here is another lost benefit that you need to consider:

By failing to file a return, people stand to lose more than a refund of taxes withheld or paid during 2007. In addition, many low-and-moderate income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families whose incomes are below certain thresholds, which in 2007 were $39,783 for those with two or more children, $35,241 for people with one child, and $14,590 for those with no children.

There are a few things that you must know when filing a return for tax year 2007:

  • You will not be able to file an electronic return, although you will be able to request direct deposit
  • If you did not file a tax return for 2008 or 2009, your 2007 return will not be released to you
  • Your 2007 refund will be used to satisfy any outstanding debts owed to the IRS, unpaid child support, and any delinquent federal student loans

    • To be honest, if you any of the outstanding debt mentioned above, collecting an unclaimed refund from 3 years ago would be a great way to pay it off! This way, you don’t have to worry about taking out any unsecured loans! If you don’t have any of the above, then take a look at the IRA contribution limits and prepare yourself for retirement!

    Here is some final guidance that the IRS issued in order to make this process as easy as possible:

    Current and prior year Internal Revenue Service tax forms and instructions are available on the Forms and Publications page of IRS.gov or by calling toll-free 1-800-TAX-FORM (1-800-829-3676). Taxpayers who are missing Forms W-2, 1098, 1099 or 5498 for 2007, 2008 or 2009 should request copies from their employer, bank or other payer. If these efforts are unsuccessful, taxpayers can get a free transcript showing information from these year-end documents by ordering on-line, calling 1-800-908-9946, or by filing Form 4506-T, Request for Transcript of Tax Return, with the IRS.

    It may be helpful to look at your last year tax return as well.

    Hopefully, a few of the 1.1 million people who are due money will read this before the deadline – be sure to share this article with everyone that you know before then 😉 !

    photo by Salvatore Vuono

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    How Do I Know Which Filing Status To Use On My Tax Return?

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    Since tax filing season is upon us (after waiting for the tax filing delay to be over), many people will have questions regarding which filing status to use when completing a tax return. Because of that, the IRS has given use several tips/facts that can help us to choose the proper status:

    Tax Filing Status For Married Taxpayers:

    • Your marital status on the last day of the year determines your marital status for the entire year.
    • A married couple may file a joint return together. The couple’s filing status would be Married Filing Jointly.
    • A married couple may elect to file their returns separately. Each person’s filing status would generally be Married Filing Separately.

    Filing Status Options For Unmarried Taxpayers:

    • “Single” generally applies to anyone who is unmarried, divorced or legally separated according to state law.
    • Head of Household generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.

    Filing Status Options For Widow(er)s:

    • If your spouse died during the year and you did not remarry during 2010, you may still file a joint return with that spouse for the year of death, provided the joint return election is not revoked by a personal representative for the deceased spouse.
    • You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse died during 2008 or 2009, you have a dependent child and you meet certain other conditions.

    As you can see, there are a few options available for each type of taxpayer. If you find that there is more than one option that applies to your situation, you are free to choose the one that gives you the lowest tax obligation!

    If you still require more clarification, you can read more about determining your status in IRS Publication 501 (opens a PDF).

    If you decide to file your own taxes, we recommend using TurboTax to do so. If you have already filed a return, you can check your tax refund status.

    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

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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:

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