It’s only been a few weeks since many people rushed to file their taxes before the tax deadline in April. Were you surprised this year at how much you got back from the government? Or did you end up paying a lot of extra tax instead of getting a refund?

Being on either end of the spectrum — massive refund or massive tax liability — isn’t a good place to be. No one wants to owe the government a ton of money, but letting Uncle Sam sit on thousands of dollars over a given year isn’t wise either. If you found yourself in either of these camps you need to look at adjusting your tax withholding in order to eliminate the gap between what you paid in tax and what you were supposed to pay.

How to Adjust Tax Withholding

Making adjustments to how much tax is taken out of your paychecks is an inexact science that involves tweaking the withholdings on your Form W-4. You can make these adjustments at any time during the year. You can also adjust your withholdings as many times as you want (or as often as your human resources department will put up with).

Use Form W-4 to adjust how much tax you want withheld from your paycheck

To change the amount of tax withheld, you can use the Personal Allowances Worksheet in the middle of the first page on Form W-4. (There is also a more detailed worksheet on the back that helps you figure in your deductions if you itemize your taxes, see form.) Calculate your allowances based on your current situation and be sure to carry that number down to Line 5 on the first page. Fill in the rest of your information and pass it on to your payroll or HR department, whichever handles the processing of W-4 forms.

Caution: Don’t Make Huge Adjustments

Calculating your personal allowances should help you get relatively close to even with the government. You might owe a little or get back a little on a refund. The goal is to avoid the huge refunds and huge tax liabilities.

However, don’t overreact if you ended up with a huge tax liability or refund this year. Tweaking your allowances and withholdings should be done incrementally. If you had 8 allowances last year, don’t drop it to 0 this year because you don’t know exactly what that would do to your paycheck. Take small steps and see how much extra tax is taken from your check (or isn’t, if you’re trying to reduce a massive refund). You’ll be more capable of adjusting to your new paycheck and monthly income with small steps than jumping in with both feet.

The IRS also has a very useful (albeit somewhat complicated) calculator that helps you adjust your withholdings for the rest of the year to avoid tax problems.

When to Adjust Your Tax Withholding

Including receiving a surprise — good or bad — when you file your taxes, are there other reasons to change your tax withholdings?

Huge Tax Liability

The most critical issue that requires a tax withholding change is a big tax liability. There is nothing worse than having the government inform you that you owe them a few thousand dollars. For many cash strapped families, this can be devastating.

Big Tax Refund

Some people prefer to get huge refunds because they use that money to pay down debt or take a trip. From a financial standpoint, you are better off having an extra $300 in your pocket every month than getting $3,600 back at tax time. You can save, invest, or pay down debt faster when you get the money each month. However, this does require financial discipline. (You’d be better off leaving things as they are if you would just blow that extra $300 every month.)

Significant Life Change

Getting married? Just have a new baby? Paying mortgage interest for the first time? All of these big life changes can significantly alter your tax liability. Recalculate your personal allowances each time a new life change happens.

Don’t Forget State Withholding, Too

It is easy to think of the Federal government as the only place you need to make tax changes with, but all of the above holds true for your state tax withholding as well. You could give yourself a big monthly income boost by cutting your tax refunds in half from both the Federal and state governments and getting the extra cash each month instead.

Related Articles:

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2. Newlyweds and Taxes…
3. Refund Anticipation Loans Suck

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Tax season is open! If you still haven’t filed your taxes yet, you may be able to do so for free by using the tips in this article. I highly recommend using e-file when you file your taxes because your tax return is processed at least twice as quickly as a paper tax return. You may receive your refund in as little as 8 days via e-file, but in some circumstances it can take a month or more to receive a refund via check. Keep in mind, the sooner you complete your return, the sooner you will receive a refund!

File Your Tax Return for Free Online

Free File with the IRS. There are several places you can e-file your taxes for free. The IRS recently began offering Free File Fillable Forms to everyone, regardless of income (previously, free file options were limited to lower income individuals). The Free File Fillable Forms are online versions of the paper forms, however, they are designed for people who are comfortable and skilled at dong their own taxes, as they only offer basic calculations. The other downside is that the IRS only offers the Federal versions of these forms – it is up to you to track down your state tax forms if required by your state.

Free File with a private company. The IRS also contracts with multiple private companies to provide free tax software to taxpayers under a certain Adjusted Gross Income (AGI). Taxpayers with an AGI less than $57,000 are qualified to file their federal taxes free through a participating company. Again, state taxes are not included in the Free File offer. Companies that offer Free File may have different eligibility requirements for their Free File program, and the available forms and services may vary – be sure to read the details.

IRS Free File Program vs. Free E-file

It’s also essential to clear up some confusion regarding the IRS FreeFile program, and free e-filing. The basic difference is that Free File is sponsored by the IRS through the two methods mentioned above. E-file is a method of filing your taxes via the internet and is offered free of charge by all the major tax software and tax preparation companies. Processing tax returns submitted via e-file is cheaper, faster, and more accurate than filing paper returns.

When searching for a place to file your taxes for free, be sure that you are signing up for the Free File program if you qualify, and always ensure the tax preparation company or software you use offers free e-file so you can receive your tax refund more quickly

Where to File Your Taxes for Free

There are many online tax preparation companies and various software programs. Here are a few of the major programs that offer software support, guarantee their tax preparations, and offer Free File and free e-file. Remember that there may be different Free File eligibility rules (you generally must have an AGI under $57,000 to qualify) and there may be an additional charge to file your state taxes.

Free File with TurboTax: TurboTax is the company I used for about 5 years or so, and I am most familiar with their product (I now use an accountant due to my business income and more complicated tax situation). The TuroTax software is intuitive and walks you through each stage of the tax return, including income, deductions, tax credits, etc. The TurboTax Free file program supports IRS forms 1040, 1040A, 1040EZ.

• File your federal tax return free with TurboTax.

Free File with H&R Block At Home: H&R Block At Home is the software program owned by H&R Block. Their software is fully guaranteed and easy to use. The H&R Block At Home Free File Online program guides you through a simple, federal tax return to help ensure your taxes are done right. The form is pre-selected and there are no forms to select.

• File your federal tax return free with H&R Block At Home.

Free File with FreeTaxUSA: FreeTaxUSA provides the Federal Free File program for taxpayers with an AGI less than $57,000; free state tax returns are available for those with an AGI less than $20,000.  Taxpayers who are not eligible for a free state return will only pay $9.95 to file their state taxes. FreeTaxUSA’s Free File program covers all simple forms of income, deductions, and credits. Check out the FreeTaxUSA site for more details.

• File your federal tax return free with FreeTaxUSA.

Whichever company you use to file your taxes, I hope your tax return is a good one and you receive it quickly! Good luck!

Note: If you are in the military, you are also eligible for free tax preparation. Check out this article: Free Tax Preparation for Military Members.

Related Articles:

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3. How to File a Tax Extension

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Actually, I don’t need my tax refund, not right away anyhow. But I’ve been hearing this comment frequently since tax season started, and even more frequently since the IRS announced the tax refund schedule. It seems as though this year the IRS implemented new anti-fraud measures in their tax software, which is designed to prevent identity thieves from wrongly claiming tax refunds which aren’t theirs. The result is massive delays in tax refund payments being sent out. Predictably, this has led to anger and frustration on the part of tax payers.

How Long Does it Take to Receive My Tax Refund?

Tax refunds usually don’t take long when they are e-filed. If there are no problems with your return, for example, everything is filed correctly the first time, the IRS doesn’t need additional information, and you don’t raise any audit flags, then you should normally receive your refund within about two weeks if you e-file and select direct deposit. Here is the direct deposit schedule for tax refunds.

If you file your taxes manually, then you should expect your return to be delayed an additional one to two weeks. This is because the IRS needs to manually input your information into their computers. Depending on the backlog of returns, it can take extra time to process your tax return. Additionally, you open yourself to more errors in your tax return, since it has to be manually processed – speed, accuracy, and security are all reasons why you should file electronically.

But I NEED My Tax Refund Now

Unfortunately, once you file your taxes, there really isn’t anything you can do to speed up the process. The IRS has measures in place to ensure they process tax returns as efficiently and expediently as possible. Keep in mind they will be processing hundreds of millions of tax returns in just a few short months. A two week turn around is nothing short of amazing, in my eyes (or slightly longer with the current delays the IRS is experiencing). If you want to check the current status of your tax return, then visit the IRS page: Where’s My Tax Refund?

But that doesn’t get down to answering your problem, does it? Let’s take a look at why you need your tax refund as soon as possible, and see if there are ways you can ease the financial strain, or avoid this in the future.

You Shouldn’t Rely on Your Tax Refund for Regular Bills

Emergencies happen. Big events happen. They are, by nature, unavoidable, and can catch you off guard even if you have an emergency fund and have been careful with your money. But relying on your tax refund to pay regular bills is a recipe for disaster. I know the economy is difficult and times are tough. But a tax refund is a once a year event, and is usually unpredictable in regard to how much money you will receive, and when you will receive it (as many people are finding out with these tax refund delays).

If you find yourself needing your tax refund to pay your electric bill, mortgage, or any other recurring bill, then you may be finding yourself in hot water very soon. What will you do when there is no tax refund next month, or the month after that?

If this is the position you find yourself in, then it’s a good idea to take a look at every expenditure in your household and find ways to save money, and or make more money.

Decrease Your Expenses, Increase Your Income

Saving money is always a good idea, but you will quickly reach a point where you can no longer cut back and still maintain the quality of life to which you are accustomed. Even so, this is usually the best place to start as you can often see immediate results with little effort. You can start with something as simple as cutting cable, finding better insurance rates, negotiating your property taxes, canceling memberships, or getting rid of an extra vehicle. What works for you will depend on your personal and financial situation.

Raising money is another great way to get out of a financial bind. You can do this by getting a part-time or full-time job, taking on consulting gigs or freelance work, selling items on Craigslist or eBay, or a variety of other side hustles. Here are some unusual ways to raise money fast which may work for you.

What Not to Do When You Need Money Quickly

Even if you find yourself needing money quickly, you may find it is best to wait things out an extra week or two as opposed to taking a bad deal on quick money. Tax Refund Anticipation Loans are almost never a good deal and don’t get you your money much more quickly than you would get it on your own – and the downside is they cost a huge percentage of your return. Payday loans and title loans can also cost you a substantial amount of money in the long run and should only be used as a last resort – and only if you are 100% certain you will be able to repay the loan in full when it comes due. Otherwise you will only be delaying the inevitable, and at an extreme cost.

Plan for Next Year’s Tax Refund

Now is the time to plan for next year’s tax refund. If you find yourself eligible for a Traditional IRA, you can make contributions throughout the year. This has two major benefits: the first is preparing for your retirement. Investing for your future will help you sleep better at night, and help you make it through your golden years with less worry. The second benefit is that it reduces your taxable income, which will help you get a higher tax refund next year than you otherwise would have been eligible for. If you are looking for a good place to open an IRA or compare brokerages and IRA providers, then I recommend visiting the Mint.com IRA Center which offers a variety of options.

Related Articles:

1. Refund Anticipation Loans Suck
2. When Will I Get My Tax Refund?
3. 3 Ways to Build Wealth from Your Tax Refund

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If you file your taxes with the IRS EFile, or with an tax software program that files your taxes online for you, then you are in luck – you will generally receive your tax refund much more quickly than if you file your taxes by mail. The reason is that electronic tax returns are easier for the IRS to process, making it faster for them to clear the books on your tax return and send you a refund check.

IRS E-File – When Will I Get My Tax Refund?

How long does it take to get your tax refund? The IRS created a schedule for when they will send out federal tax refunds via direct deposit or by check. The general rule of thumb is that direct deposits will be sent out approximately one week before paper checks are sent out. Keep in mind it may take a few days for your financial institution to make your deposit available to you, or it may take several days for the check to arrive in the mail, then another few days after you deposit he check before the funds are available.

IRS E-File Schedule for Tax Refunds via Check or Direct Deposits

The IRS releases an annual schedule to help tax payers better plan around tax season so they will know when they can expect to receive their refund check.

The table below shows when your federal tax refund should be direct deposited into your bank account, or the date your check will be mailed if you filed your taxes electronically and your tax refund was accepted within the dates in the table. Keep in mind it may take a few extra days, or even up to a week to receive a paper check. (source).

This table cuts off after the filing deadline, which is April 17th this year. Here is the full IRS EFile Tax Refund Schedule.

Some important notes about this tax refund schedule: This is only good when you E-File your taxes because the IRS will notify you of the date of acceptance – generally within 72 hours of receipt. Tax returns sent on paper forms must be manually entered into the IRS computers and there is no way to track the date of acceptance, so this chart won’t work for estimating which day your tax return will be sent.

The other important thing to note is that IRS refund checks are processed fairly quickly, usually within 1-2 weeks. This is just one more reason to say no to refund anticipation loans.

Where is My IRS Refund Check?

You can check the status of your federal tax refund as soon as 72 hours after the IRS acknowledges receipt of your e-filed return. The quickest and easiest way to get this information is to go to the Where’s My Refund page. Or, call 1-800-829-1954 or 1-800-829-4477.

Want a Bigger Tax Refund?

If the idea of a larger tax refund sounds appealing to you, then you may wish to open a Traditional IRA, which can not only help you save money for retirement, but it can also help you receive a larger tax refund, as up to $5,000 worth of contributions are tax deductible ($6k if you are over 50 years of age). Reducing your taxable income by several thousand dollars is worth a nice chunk of change in your tax return next year. If you want to learn more, then I recommend visiting The Mint.com IRA Finder, which compares various places where you can open an IRA.

Related Articles:

1. Refund Anticipation Loans Suck
2. I Need My Tax Refund!
3. 3 Ways to Build Wealth from Your Tax Refund

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Starting this year, for tax year 2011, there is a new 1099 form in town. Many of us are already familiar with the 1099-MISC, especially if we work from home as contractors. The 1099 is meant for income that comes, in a fairly regular way, from sources that aren’t considered a “regular” job (which will issue you a W-2). There are different types of 1099 forms, including those that report interest income and dividend income. The latest type of 1099, though, is the 1099-K.

What is the 1099-K?

Will you receive a 1099-k?

Due to the rise of of people making money with the help of the Internet, the 1099-K has been introduced. For the most part, the 1099-K is meant to ensure that income made from power sellers on sites like eBay is properly reported. The 1099-K is issued by third party payment processors, including banks and non-bank services like PayPal. So, if you use eBay to earn money selling, your transactions, processed through PayPal, will be reflected on the 1099-K issued by PayPal. If you sell through Amazon, and Amazon processes the transactions, you will be issued a 1099-K from Amazon.

This even applies to bank accounts. Banks that processes your transactions through a merchant account or some other way will issue you a 1099-K, stating your income such transactions. This is meant to cut down on some of the under-reporting that the IRS saw regarding certain transactions where a 1099-MISC might not be issued because the situation might not be a contract situation.

In order to be issued a 1099-K, though, you will have to have participated in at least 200 transactions amounting to at least $20,000 over the course of the year. So, the occasional eBay seller trying to clean out the attic is not likely to be issued a 1099-K. The new form is meant to enforce income reporting among those who are doing decent business, and who may not be reporting it.

Issues with 1099-K Reporting

I’m already seeing some problems in my own situation with the new 1099-K forms. Since most of my clients pay via PayPal, I fully expect that I will soon receive a 1099-K from PayPal. Of course, many of my clients also issue me a 1099-MISC. I’ve already received a few of those. The problem with this is that some of my income is going to be double reported to the IRS, making it look like I earned more than I actually did.

In order to protect myself in the event of an audit, I am going to have to make a note of which clients issuing 1099-MISC forms also pay through PayPal so that information can be cross-referenced later. (My accountant will also need this information, since he’s preparing my taxes.) Additionally, it will be important to go through my PayPal statements and tote up the fees paid each month. These can be deducted against my income, providing me with a little help. While I’ve always kept good records in the past, and reported all of my income, the new 1099-K will require me to be even more vigilant in my efforts.

If you have a business that involves selling products or services, and a third-party is handling the transactions, watch for the 1099-K. And make sure you reconcile your 1099-K forms with your 1099-MISC forms.

Related Articles:

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The end of the year is rushing to a close, which means now is the time to finish your plans for saving money on your taxes. While there are some things you can do after December 31st to lower your tax obligations, most things must be accomplished by the year’s end. These year end tax tips are things you can do between now and December 31st to lower your tax obligation next year.

A little preparation can save you thousands!

Contribute to your retirement accounts. Most contributions to your defined contribution plans such as a 401k, 403b, TSP, etc., need to be made by December 31st. Increasing your contributions will reduce your taxable income. You can also contribute to a Traditional or Roth IRA, SEP IRA, or Solo 401k plan and certain other retirement plans after December 31st and still reduce your taxable income – as long as you contribute before the tax filing deadline.

If you can contribute extra to your retirement funds this year, then try to do it in the accounts that close out by the end of the calendar year before contributing elsewhere. Here is more information about how to maximize your retirement plans at the end of the year.

You may also find the following information about contribution limits helpful: 401k contribution limits, IRA contribution limits.

Donate to charity. Any donations you make to a qualified charity can be deducted when you file your taxes next year. This includes donations such as tithing or giving to an organization such as Goodwill, or the USO. Before you give to organizations, you should know which questions to ask to determine which charities are legitimate and be aware of charity scams.

Pay qualified business expenses. If you have your own business, you can write off certain expenses. As long as you pay your expenses by the end of the year, you can write it off next year. I run a couple websites, so for me, this would include things like prepaying for web-hosting, buying a new computer, paying for advertising, or other qualified business expenses. Your business may have other expenses which you can pay during the tax year to get the deduction this year. This is an area where hiring an accountant can really pay off.

Additional tips for saving money on your taxes:

• Contribute to a Health Savings Account. Contributions to a Health Savings Account are made with pre-tax income.
  
• Harvest your losses. You can sell losing investments and offset up to $3,000 of other income per year. Any additional losses can be carried forward to future years.
• Prepay your mortgage and property taxes. If you itemize your taxes, you can deduct mortgage interest and your property taxes. If you make your January payment in December, you can deduct the interest for the tax year in which the payment is actually made.
• Prepay other deductible expenses. You can also prepay other deductible expenses such as medical costs, student loans, etc.
• Complete any deductible home improvements. Certain home improvements are tax deductible if they improve your home’s energy efficiency.
• Avoid mutual funds with high capital gains distributions. Capital gains distributions equal taxes, even if your fund lost money.
• Contribute to a 529 plan for your kids. Many states allow deductions for 529 contributions.
• Deduct job related expenses, including moving. If you moved over 50 miles for a job or relocated due to military requirements, you can deduct related job expenses. You can also deduct mileage on your personal car if it was used for work (commuting does not count).
• Have a baby. Babies are great tax deductions!

photo credit: MoneyBlogNewz

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I am old enough to remember Steve Forbes’s failed bids for the presidency back in 1996 and 2000, and young enough to have thought that his flat tax plan (which was the cornerstone of his campaign) was a startling new idea.

Seeing new incarnations of the flat tax every four years as the race the White House heats up has cured me of thinking that Forbes had cornered the market in flat tax initiatives. But despite my ongoing interest in money and politics, I found myself still confused by Herman Cain’s 9-9-9 plan and Rick Perry’s flat tax proposal this year. I didn’t know exactly what a flat tax was and why it’s such a favored plan that never seems to be enacted.

What is the Graduated Progressive Tax?

As I looked into the world of flat taxes, I quickly realized that I had no idea how our current system of graduated progressive tax works. I knew there were marginal tax brackets that meant you paid more as you graduated from one to the next, but beyond that, I was at sea. Even after a decade of handling my own tax returns.

A common misconception about our current system (and a misconception that I shared) is the idea that once you move into a higher tax bracket, you pay the higher tax on your entire income. But that is simply not true.

Let’s say you earn $33,000 per year. You are in the 15% tax bracket and pay accordingly. Then you get a great raise one year and now earn $35,000, pushing you into the $34,500-$83,600 tax bracket, which pays 25%. Before you start thinking that you’d rather not have the raise, remember that you will continue to pay 15% on everything up to $34,500, and 25% on anything above that. So your increase in taxes is an increase on the amount you earn over the bracket—that is, on $500—not on everything you earn.

The Basics of Flat Tax Proposals

The progressive tax system is a little confusing, but the goal is to tax people on the money they don’t need to spend. That is, if you’re only making $10,000 per year, a larger percentage of the money you earn needs to go to necessities. Since someone earning $100,000 per year should have no problem paying for necessities, his higher income is taxed at a higher rate.

However, it can feel as though the progressive tax rate might be unfair, particularly to those people earning a lot more, and the strapped middle income earners who feel as though they are carrying both the very poor (who don’t pay much in taxes) and the very rich (who can more easily take advantage of loopholes).

That’s where the flat tax proposals come in. In this scenario, every single taxpayer would pay the exact same percentage of his or her income. The proposals seem to offer a simple and egalitarian method for handling our very complicated system of taxation. Often, proponents of these plans claim that with a flat tax, we could each file our taxes on a form the size of a postcard.

Why We Don’t Have a Flat Tax

There are several reasons why flat tax proposals don’t get farther than campaign promises. For one, instituting a flat tax would not fix the biggest problem with our current system—loopholes. The deductions, credits, exemptions and other aspects of our tax codes that make it possible to reduce the amount of taxable income are more available to those individuals who can pay a tax expert to figure them all out. Creating a flat tax would not get rid of these difficult-to-understand opportunities, and might thereby increase the tax burden on the middle and lower income taxpayers.

Another reason flat taxes have remained a twinkle in a politician’s eye is because the percentage of flat tax necessary to keep the government running would represent a pretty hefty bite out of our incomes. Graduated tax rates try to save those bites for the highest levels of income.

Finally, deciding what income could be taxed is a maddeningly complex decision. How do you tax unearned income, i.e., the money generated from investments? How do you determine the amount that a small business owner should pay when he earned $150,000 in a year but had to spend $100,000 on inventory and payroll?

The Bottom Line

It’s unlikely that I will ever see our system change to a flat tax in my lifetime. Changing our country’s tax code is like trying to steer an aircraft carrier. I do hope, however, that we will always continue the dialogue as it will help us get closer to fairest system possible.

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Now that the year is almost spent, many people are trying to figure out what they can do to reduce their tax liability. Now is a good time to prepare your finances for the end of the year, and try to figure out the best way to reduce what you owe. One way to do that is by lowering your taxable income with the help of deductions. Happily, there are some accounts that you can open that provide you with a tax deduction now, while at the same time setting you up for a better financial future. Here are two different types of accounts to consider as you plan your end of the year financial moves to help reduce your tax liability:

Retirement Account

You can open a 401k or a Traditional IRA and deduct the contributions. (Sorry: If you open a Roth account, you don’t get the tax deduction.) If you work for a school or a church, you can contribute to a 403b and enjoy to the regular (not the Roth) version of this plan. You contribute now, and lower this year’s taxable income.

However, you should remember that, even though you receive a tax benefit now, you will eventually have to pay taxes. Your earnings grow tax deferred until you withdraw the money. At that point, you pay income taxes on the amount you withdraw. If you are in a higher tax bracket at retirement, this can be something of a disappointment later on. But, if you need the tax deduction now for cash flow reasons, it can be a good move to open a non-Roth retirement account.

The benefit, of course, is that the money goes into an account that build on your behalf. So, you have the chance to increase your wealth through an investment portfolio, in addition to the tax break for this year.

Health Savings Account

Open enrollment is upon us, and now might be the time to switch to a high deductible plan, and open a Health Savings Account. You fund your Health Savings Account with pre-tax dollars, so it counts as a deduction. This is a great way to make your health care expenses tax deductible: Contribute to your HSA, get the tax deduction, and then use the funds in it to pay for qualified health care expenses.

The great thing about the HSA is that you never have to pay taxes on the money as long as you use the funds for health care expenses. (If you withdraw the money for something other than qualified expenses, the HSA acts just like a traditional IRA.) Your money grows as well (even though the yield is usually more in line with a high yield savings account), and it remains yours. You are required to have a high deductible plan, though, so you want to make sure that you aren’t going to end up paying too much out of pocket. Carefully consider your health needs before committing to such a plan.

Bottom Line

Opening a tax advantaged account right now can help you lower your tax liability for this year, while at the same time helping you establish accounts that will benefit you down the road. Remember, though, that there are qualifications, contribution limits and other restrictions that might go with these plans. Make sure you understand them before you begin to contribute.

Related Articles:

1. What You Need to Know About Open Enrollment: Health Insurance Options
2. Open Enrollment: Are You Ready for Your New Health Plan Options?
3. What to do About Health Savings Accounts with High Fees

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