illustration by Cait Jones
financial plannig march 2016
What are you going to do with your tax refund this year? A vacation? A new phone? Those lipstick red stilettos you’ve been wanting? Or will yours only cover a fast food lunch?
With a little planning throughout the year, it’s not too hard to set yourself up to have exactly the refund you want.
Mark Altieri, J.D., LL.M. (in Taxation), CPA/PFS, and Malinda Malbasa, M. Tax, are professors of accounting at Kent State University who weighed in on what taxpayers can do each quarter of the year to make tax time a little less, well, taxing.
First Quarter: Ready, Set, Organize
January is typically the time that employers send out the forms employees will need to submit with their taxes. Other documentation is up to you, though, so now is the time to gather all of that paperwork. “For example,” says Altieri, “mortgage payments are in itemized deduction on Schedule A, and the taxpayer will want to make sure that he/she has all the Form 1098 documentation showing the interest expense paid to the bank.”
Malbasa also suggests developing an understanding of what is taxable and what is not, as well as tax rates on certain types of income. “How taxpayers invest idle cash impacts the taxation of earnings related to the investment,” she says. For example, municipal bond interest is not taxed at the federal level. Dividends—interest payments on stock holdings—and capital gains—profit from the sale of a stock—are taxed differently and in very complex ways that change frequently. But don’t think the stock market isn’t for you because, as Malbasa says, “taxpayers in the lowest tax brackets currently enjoy dividends and capital gains tax-free.” Consult an expert to make sure you’re getting all the investment benefits you can throughout the year.
The start of a new year is also the perfect time to find and familiarize yourself with a good tax software package, so you won’t have to pay someone else to do your taxes.
Second Quarter: Preparation vs. Perspiration
“Usually the taxpayer is so exhausted after going through the tax preparation process, he isn’t in the mood to do much of anything regarding tax compliance in the following year,” Altieri says. But it’s the perfect time to set the stage for next year by noting log-in and password information for the federal, state and local returns you just filed, and making notes about the order in which you did things. As Altieri notes, “I usually file my municipal income tax return on time but take extensions on my federal and state returns. This gives me time to become familiar with that year’s version of the tax software program I am using, be it either TurboTax or the H&R Block tax preparation program.”
Do the prep work, then give yourself a well-earned break.
Third Quarter: Home Is Where the Tax Breaks Are
“Home ownership is the last meaningful tax shelter for average Americans in that it generates itemized deductions for the mortgage interest expense and property taxes paid on the home,” Altieri says. If you’re considering buying a house, know that it will not only improve your quality of life, but will change the way you do taxes, as well.
Additionally, workers who don’t have regular income tax withheld by an employer—mostly self-employed or seasonal workers and those accruing substantial income from investments—need to make quarterly estimated payments in June, September and January, as well as that all-important April date. Professor Malbasa recommends basing your quarterly estimates on either 90 percent of the current year’s total tax liability, or 100 percent of the prior year’s, whichever is lower. “While this doesn’t ultimately impact total taxes,” Malbasa explains, “it can greatly impact cash flow on a quarterly basis.”
Also, make sure you are taking advantage of any tax-deferred retirement programs through your employer, such as 401(k) plans. Most employers match at least a portion of employee contributions, and as Altieri says, “This is free money, and the employee must figure out a way to take advantage of it.”
Fourth Quarter: To Itemize or Not To Itemize
This is the time of year when a lot of people make charitable donations in order to lower their taxable income for the year. However, this strategy may not be the best for everyone. It comes down to whether you itemize on your return or go for the simpler standard deductions, and what your particular bracket is. Altieri says, “If I am in the 15 percent marginal tax bracket for this year but anticipate being in the 25 percent marginal tax bracket next year, and I am planning on making a substantial charitable contribution toward the end of the current year, I may defer that contribution to the beginning of next year so as to deduct it against higher marginally taxed income.”
Malbasa adds that “for taxpayers with children, there are a host of deductions and credits for expenses related to daycare and tuition.” Though the rules are complex, Malbasa recommends a 529 plan as a great way to save for college. “Earnings grow tax-free and distributions are not taxed if used for education,” she says. “So if you have children, it’s never too early to start saving—and you get a tax break.”
Do the math, look into that crystal ball, then donate and save wisely for a win-win.
These simple tips, plus advice from experts like Professors Altieri and Malbasa, can help you get ahead of and stay on top of your taxes. Then by April 16, all you’ll have to worry about is how the Indians will do this season.
/ Editorial Associate Sharon Cebula lives in West Akron with her very patient husband, two obnoxious cats, and an enormous collection of owl paraphernalia.