Week #5 is here, nearly 1/10th of the way through the Finance Challenge! First, I apologize for letting those of you down this Saturday that were expecting a new post. I’m releasing this article on a Tuesday, since it appears that my posts seem to get the most views on Wednesdays since the challenge has started. I’m still getting used to blogging and all of the data analytics available, so this change in posting date may be subject to change. Anyway, on to what I’ve done over the last week to improve my financial situation. The last week of January and first two weeks of February are a special time in the USA. Most of us will be getting waves of tax documents during this time period, something that most of us won’t bother with until April 14th. I must confess, this has been the strategy I’ve used for the last decade. I’ve even waited until April 15th two years in a row while in college. So the change I’ve made this week (an year) is to file my taxes early. As I get ready to e-file my returns, it dawned on me that I have produced a few different benefits by filing in February versus filing in April.
Firstly, I am not a Tax Account, nor do I play one. Please consult a CPA with your tax related queries. Also, if you are self-employed, different rules will apply, versus what is described below from the employee perspective. I have; however, always filed my own taxes. My father instilled this virtue in me after my first summer job. I don’t follow the tax code updates that are released each year and thus I rely on a software based solution each year. I’ve never used a free service, since I believe you get what you pay for in the end. I do research what seems to be the best software offering each year though. I’ve consistently purchased TurboTax each past April, due to it constantly being ranked in the top slot for a ton of software reviewers. It’s not to say other products are bad, it’s just that I’ve come to trust TurboTax with each passing year. The pricing for features has definitely tempted me to consider other options though, since TurboTax in recent years has been notorious for removing more advanced features at base offerings, thus requiring users to pay up for pricier versions to use features that their situation dictates. This isn’t review of TurboTax though. This is a public service announcement that TurboTax is never cheap in April. The deals seem to evaporate come March. So for the past 10 years, I have paid ~$10 more than I should have, if only I would have had the foresight to start looking for the software in January. This year was different and I was able to purchase the software from Newegg.com during a promotion TurboTax ran until the end of January. I saved $20 this year! That only leaves me some $80 in the red.
So $20 is already a small victory that I’m proud of, but I realized another benefit of filing earlier. We all know that taxes are taken out at each paycheck. In April of the following year, when we file our taxes, we are essentially tallying our tax liability against what was gradually taken out in taxes from each and every paycheck. When you signed on with your current employer, you had to file a Form W4, which, depending on your specific situation, determines the amount of tax taken out of each paycheck. The Form will walk you through picking the right number of “allowances” which determine the amount taken from each paycheck.Your W4 is supposed to get you close to what your tax liability is at the end of the year. If the cumulative amount of taxes taken out of your paycheck is more than what your actual calculated liability is, you receive a refund. The opposite is also true, if not enough is taken out, you’ll end up having taxes due by April 15th.
Hopefully, you’re eyes haven’t glazed over yet. Taxes and Economics seems to always have that effect. If you remember, one of the goals of the Finance Challenge is to earn more money. Getting a big refund is earning more money, isn’t it? Actually, it probably is not. You’re paycheck happens gradually over the course of a year. This process has been called, “an interest free loan to the government” by many internet prognosticators. They’re definitely not wrong. This is the realization that I had, what if I had deposited that same amount of taxes into an interest bearing account over the course of one year? I’d earn the interest instead of the government. Keep in mind that come April 15th, this means you’ll be paying Uncle Sam your fair share, instead of getting that juicy refund. It’s not that bad of a proposition though, since you keep the interest. Ironically though, you will have to and pay taxes on that interest when your Form 1099-INT comes in the mail. It’s a case of something being (much) better than nothing.
In my opinion, this practice of paying the bare minimum each pay check and saving the rest to be payed by April, builds some good financial habits. You’ll have to fight the urge to spend that money that you deposit and if you don’t deposit a sizable amount all at once, you’ll have to discipline yourself to save each paycheck.
The combined cost savings for the software and what I could have earned in my Synchrony Optimizer Plus account would have netted me $50 last year (before taxes). I’ll be modifying my W4 to help me achieve this result for tax-year 2017!
While this sounds good, again, I can’t emphasize enough that I’m not a professional and your W4 should accurately reflect your situation and making changes to it is done at your own risk. There are plenty of resources online to help you walk through your W4 and how to tailor it to your situation. If you have TurboTax, you might even be able to ask their dedicated support staff.
Until next time!