Last year, Denver’s Regional Transportation District launched a funny (if a bit grisly) safety campaign, aimed at keeping people from being hit by a light rail train. “Dumb Ways to Die” (based on a similar campaign that started in Australia), used a catchy tune and some little bean-shaped characters to: warn against the dangers of standing on the edge of a train station platform, driving around barriers at a railroad crossing, or running across the tracks in front of an oncoming train. We know better than to do these things, yet apparently, some folks still do it. (Face palm!) In Australia, the campaign resulted in more than 75 million pledges from people who committed to be safe around trains.
Though I’m not a railroad engineer, I do see my share of financial “train wrecks.” Some of those stem from how people choose to deal with the Internal Revenue Service at tax time. So, with about a month to go until Tax Day (April 18 this year), I’m offering my own public service announcement, and I’m calling it “Dumb Ways to Deal with Your Taxes.” These are mostly common sense things we know to avoid, but in the spirit of the RTD campaign, I believe they’re worth the reminder. Cue the music: Let’s get started!
Dumb Way #1: Choosing not to file your tax return. Worried you’ll owe more in taxes than you can afford to pay? Choosing not to file a return or an extension is the tax-time equivalent of sticking one’s head in the sand, and it can lead to a double whammy from the IRS. Not filing and not paying taxes are two distinct issues – each with its own penalty. A smarter way to deal with this situation is to file a tax return or an extension, and tell the IRS up front that you don’t have the money to pay. The IRS offers several payment options, but no matter which one you choose, try to pay as much as you can when you file your return to avoid penalties and interest on the unpaid balance. Ignoring the IRS’s payment demands could lead to a Notice of Federal Tax Lien or a Tax Levy, neither of which are pleasant options!
Dumb Way #2: Paying your tax bill with a high-interest credit card. The IRS accepts all major credit cards to make it convenient for taxpayers to pay what they owe. But if you owe a lot of money, a smarter way to deal with this situation would be to compare interest rates first. You may be able to take out a personal loan at a lower rate than your credit cards offer – saving you from having to pay much more than you owe the IRS. To prevent yourself from owing the IRS in the future, be sure to adjust your withholding accordingly!
Dumb Way #3: Getting a refund-anticipation loan. Sure, everybody enjoys getting a refund, but be patient. With the advent of electronic filing and direct deposits, getting a refund takes much less time than it used to. In fact, the internet has helped eliminate the market for refund-anticipation loans in many cases. Instead of falling into another high-fee trap, use these tips from Bankrate.com to ensure your refund gets to you quickly.
Dumb Way #4: Spending, not saving, your refund. Depending on the amount, getting a refund at all could be considered dumb, since that means you’re basically loaning the government money at zero interest, when you could be saving that money and earning interest for yourself! Ideally, you should aim for break-even or a small refund each year, and adjust your withholding to maximize that possibility. If you do receive a large refund this year, though, don’t rush to the mall to spend it. A refund can be a great starter for an emergency savings account, an IRA, or for paying down debt.
And that brings me to Dumb Way #5: Filing at the last minute. One reason people wait so late to file is a lack of organization. Retrieving files from multiple places takes time – and locating missing files can cause undue stress. When people get stressed, they tend to make mistakes, and the consequences could be costly!
Tax planning should involve a year-round commitment – not just an annual push at tax time. The smartest thing you can do is integrate individual tax chores into your routine, like changing the oil in your car, or the batteries in your smoke detectors every six months. At M.J. Smith & Associates, we strive to incorporate tax planning strategies into the financial plans we create for clients. It’s part of our holistic way of looking at your overall financial picture. To learn how we can help you, contact us for a complimentary, no-obligation appointment. Don’t wait for the train of “bad choices” to knock you off track!
Any opinions are those of Drew Harper, CFA®, CFP®, and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Raymond James does not offer tax advice. Please consult your tax advisor for questions regarding your tax situation. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.