It is everyone’s favorite season… tax time! Breaking even on taxes is like seeing a Jack-a-lope. It does not happen (at least to my knowledge). If you are getting a refund, it means that you over paid your taxes throughout the year and lent the government money with no return. Not the best investment to make. If you owe money, you typically fall into two categories: 1) You made more money than you thought you would and have the money to pay your taxes (good place to be), or: 2) You did not pay enough taxes and do not have enough money to pay the tax bill (not a good place to be).
Owing taxes tends to create stress, anxiety and anger about what happened financially over the past year. Fingers get pointed and memories of fun vacations get tainted with guilt from overspending. As the grown-up, you have to take responsibility and most people vow that this will not happen again next year!
Here are three ways to get a grip on your taxes and trim the fat so that you are in shape for this year:
1. Understand why you owed, and make changes to avoid a large tax bill for this year. Tax preparation season is a blur. You get tax forms mid-January through March, rush all forms to your tax preparer (or do it yourself), and are usually surprised at what the forms tell you is due. Unpredictability and owing money are not a good combination. Ask more from your tax preparer. Understand why you owed money and ask him/her what changes you need to make now to avoid owing for this year. Are you under withholding on your W4, did Restricted Stock Units vest? The goal is to get an expert’s opinion on how to get as close to breaking even as possible. Withholding can be more of an art than a science.
2. Once you have a better handle on your current year tax obligations, can you afford your lifestyle or do you need to trim the fat? Overspending can be corrected. It may not always be easy, but you are in full control over discretionary spending. Since you are a responsible adult, you track your spending (right?). Look at last year’s shopping, travel and food spending. How did you do against your target? You didn’t have a target? (Financial planner sighing in disbelief). Time to set them.
3. Set your targets for discretionary spending. This is the potential “fat” in your spending plan. Food costs have gone up. Spending on groceries for a family of four ranges from $900-1,200 per month. If you are spending more than this for groceries, look at where you are shopping. Is it Safeway or Trader Joes, or Whole Foods?
In the Bay Area, eating out is usually 30% of a family’s food spending. Where does your restaurant spending come out?
Shopping is where you can do the most damage but also trim the most fat. Before you make any shopping purchase, decide if it is a need or want. If it is a want, look at your current spending and see if you can afford it. Since you are tracking your spending, this should be easy to see.
Don’t play the victim when it comes to tax time. If you pay taxes, you made money. The goal is to maximizing pre-tax contributions to retirement and other accounts (FSA and HSA) to lower your taxable income. Once you are paying as little tax as possible, be proactive about living within your means and saving for your financial priorities. This is how you come out ahead and build financial well-being for your family.