Podcast Summary
Personal preference on tax refunds: Consider your financial habits and goals when deciding whether to aim for a tax refund or owe a small amount. Adjusting tax withholdings or contributing to retirement accounts can help you mostly break even.
The decision between aiming for a tax refund or owing a small amount comes down to personal financial habits and mindset. Some people believe it's better to owe a little to avoid giving the government an interest-free loan, while others see a refund as found money that can be easily spent. However, it's essential to recognize that a refund is not extra income but rather your own paycheck money that has been withheld. To mostly break even, consider adjusting tax withholdings or contributing more to retirement accounts. Ultimately, the choice depends on your financial goals and discipline.
Two Schools of Thought on Tax Refunds: Some prefer a tax refund as savings, others want control. Ideally, aim for a net 0 tax situation.
There are two schools of thought when it comes to tax refunds: some people prefer to get a refund as it acts as a forced savings device, while others would rather have the money throughout the year to invest and put to work for themselves. The speaker personally leans towards the latter, aiming to get as close to breaking even on taxes as possible. However, the speaker acknowledges that in practice, many families only save money through tax refunds, making it an important source of cash for them. The speaker shared a personal experience of owing $5,000 in taxes due to incorrectly reporting income on a W-4 form, but was able to lower the bill by contributing to a Health Savings Account (HSA) and a SEP IRA. Overall, the ideal situation is to strive for a net 0 tax situation, where you neither owe nor receive a significant refund, allowing for more control over your finances.
Managing unexpected taxes with savings: Savings are crucial for covering unexpected tax bills and avoiding penalties. Intentionally setting aside cash for upcoming tax payments can be more beneficial than investing it.
Having savings is crucial when dealing with unexpected tax bills. The speaker in this conversation was able to use their savings to pay taxes on income they had not been paying throughout the year, avoiding penalties. However, in 2022 and 2023, they owed taxes due to not paying quarterly taxes on income from a side hustle. In these cases, they intentionally set aside cash instead of investing it to pay the upcoming tax bills. The speaker also considered setting up an S-Corp to reduce their tax burden but ultimately decided against it due to the added scrutiny from the IRS. Another option they discussed was a SEP IRA, but they did not pursue it for a specific reason. Overall, having savings is essential to manage unexpected tax bills and avoid penalties.
Managing Taxes for Small Businesses: Use tax software to input all income and expenses, stay informed of tax changes, and make informed decisions to lower tax liabilities.
Accurate record-keeping is crucial for small business owners when dealing with their taxes, especially when they have side hustles or multiple sources of income. The speaker in this discussion emphasizes the importance of using tax software like TaxAct to input all income and expenses, including W-2s, 1099s, and business income. By doing this, business owners can make informed decisions about tax liabilities and potential tax savings, such as contributing to a solo 401k or taking business expenses to lower the tax bill. The speaker also mentions that it's important to keep accurate records throughout the year to make the most of tax deductions and lower the tax liability. Additionally, moving or changes in tax rates can impact tax liabilities, so it's essential to stay informed of these changes. Overall, the discussion highlights the importance of being proactive and informed when it comes to managing taxes for small businesses.
Reporting household income accurately: Accurately reporting all income, including side hustles and untaxed income, and adjusting withholdings can help avoid unexpected tax bills, penalties, and quarterly filings.
It's important to accurately report your household income on your tax forms to ensure an accurate tax liability. The IRS considers married filers as one taxable entity, so underreporting income or filing as if you're single when you're married can lead to unexpected tax bills or penalties. Instead, it's recommended to report all income, including side hustles and untaxed income like severance, and adjust withholdings accordingly. Using the W-4 form to elect additional withholdings based on additional income sources can help avoid quarterly tax filings and potential penalties. Honest reporting leads to more accurate tax outcomes and fewer surprises.
Impact of various factors on tax liabilities: Consider all sources of income and their corresponding tax implications when planning for taxes, especially when moving to a new state with different tax rates.
Tax liabilities can be significantly impacted by various factors such as self-employment income, filing status, and state residency. While calculators can help determine the employee portion of taxes, they often do not account for the self-employment tax, leading to an underestimation of the total tax liability. Therefore, it's crucial to consider all sources of income and their corresponding tax implications when planning for taxes, especially when moving to a new state with different tax rates. To help with this, tools like tax calculators and researching state tax rates can be useful for understanding the potential impact on your income and effective tax rate.
Reviewing last year's tax return for optimization: Examining past tax returns aids in identifying potential deductions and assessing tax liability, using tools like SmartAsset tax calculator for accurate insights, and understanding married filing status implications.
Reviewing your previous year's tax return can serve as a valuable roadmap for tax optimization. This can help identify potential deductions and assess your tax liability for the current year. Utilizing tools like the SmartAsset tax calculator can provide more accurate and detailed insights than the IRS calculator. Additionally, understanding the implications of married filing jointly versus separately is essential, especially in cases of suspected tax fraud. The Tax Smart Investing Bundle, a master class offered by Choose FI, can be a helpful resource for those just starting to explore tax-smart investing and its impact on different filing statuses and investment accounts.
Exploring the importance of non-tax advantaged investing: Diversify investment portfolio beyond retirement accounts to reduce tax liability and have more fund access flexibility
During our discussion on The Money with Katie Show, we explored the importance of investing outside of retirement accounts, also known as non-tax advantaged investing. This complements our previous conversations about retirement investing and provides a more holistic approach to personal finance. By diversifying your investment portfolio beyond retirement accounts, you can potentially reduce your overall tax liability and have more flexibility in accessing your funds. Join us on Wednesday as we dive deeper into this topic and give you the tools you need to make informed decisions about your financial future.
