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Taking Control of Your Tax Budget

Last spring, our copywriter, Jesse, was one of the many Americans disappointed with their tax refund — or lack thereof. He planned to pay off credit card debt with the refund but after receiving less than expected, he had to come up with a new plan.

For many, tax refunds represent their largest annual windfall. Americans grew accustomed to this event and built it into their annual budget.

But when refunds shrunk in 2018, many were left scratching their heads after this budgeting strategy turned sour.1 Let’s look at what happened and learn how to better integrate taxation into our budgets.

What Happened

The federal government cut taxes for many last year. But not all who qualified could reap the rewards of this cut during refund season. Since the Treasury Department lowered the amount they were withholding from paychecks during the year, many received smaller tax refunds, putting a thorn in many families’ saving plans.1

One approach to dodging unexpected tax dilemmas like this one would be to adjust your withholding, thereby increasing your refund. But instead, let’s first reframe how we view taxes:

First, a tax refund is essentially you giving the government an interest-free loan (not a very profitable use for money). Second, it’s not healthy to lean on a tax refund in order to save money. Putting measures in place can increase savings, but it’s better to approach the underlying issue — your saving habits — with a financial professional.

Also, you don’t want to owe the government too much during filing season; if you didn’t withhold enough throughout the year, you may have to pay the IRS a penalty. Therefore, a common strategy is to not owe or receive much during tax season. This could result in optimized positions for your cash, and more confidence in your ability to save on your own. Let’s look at ways to take control of our tax budget.

Mind Your 1099s

If you have a side gig, inform your tax professional early in the year. This income doesn’t automatically have taxes withheld as it does when you are a full-time employee. You may be responsible for filing a quarterly withholding amount to the IRS as well as with the state. Failure to do so could result in a shortfall of withholding and a subsequent penalty.

Investments

Securities held in taxable accounts can affect your tax rate. Work with your financial professional to review your taxable investments at year-end and discuss what trades may make sense to moderate your tax bill for that year. They may discover an opportunity to sell some stock in order to “harvest” a tax loss which can lower the amount you owe the government.

Bonuses

Bonus income has a federal withholding rate of 22%. If your tax rate is lower or higher, there are many strategies you can learn to moderate your income tax. For example: if you fall in a lower bracket, consider using the bonus to contribute to your 401k, which may prevent you from making a huge interest-free loan to the government.

There are several choices you can make over the course of the year that can have a huge impact on tax season outcomes. What’s most important is to stay informed, and one way to do this is by taking the time to meet with a professional to discuss options ahead of time.

Talking through these options can help us align spending and saving methods with our values, so that we are able to approach our finances (and this season of #MindfulTaxes) with purpose. Knowing that tax refunds affect spending plans, it’s important to factor taxation into any financial wellness picture. Organizing and exploring all the aspects of your unique situation is necessary in creating a plan that works — and might even help keep those last-minute tax concerns at bay.

In Good Company is a team of researchers, designers and thought leaders who are taking a different approach to financial education in the workplace. With engaging workshops, trusted professionals and hands-on activities, they create an empowering experience that inspires employees to align their financial decisions with their personal values. It’s all designed to make financial education more accessible. Get in touch today.

1“Once More With Feeling: Fix Your Withholding!” The Wall Street Journal, 13-14 Apr. 2019, p. B5.

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