April is here, and for many of us, that means tax time, so your goal this month will focus on how to handle either a) getting a refund or b) owing the IRS.
Let’s recap what goals we’ve covered so far:
- In January, you made a budget
- In February, you determined some exciting savings goals and some not-so-exciting savings goals
- In March, you separated your savings accounts and decided if you want to try automating your savings
If you’re joining us for the first time, I suggest going back and watching the first 3 videos (linked above). Because these goals are designed to be small and doable, it’s still not too late to catch up.
Today, we have a lot of info to cover all about taxes– what to do with refunds, how to avoid owing if you’re self-employed, and whether or not having a tax refund.
Disclaimer: I’m not a tax professional or a financial adviser. I’m going to go over some general advice, but you should seek assistance from a professional to get advice on your specific situation.
Since this post is coming out on April 12th, we still have a little time before taxes are due on the 15th. If you haven’t done your taxes yet, make sure you hit the deadline. Remember that you can either hire an accountant to do your taxes or you can DIY them using TurboTax– whichever means is more affordable or otherwise available to you is fine.
What to do with your tax refund
My rule of thumb for any windfall of money is what I personally call the 90/10 rule. It means that a good rule of thumb is to use 90% of the money for those bigger goals: debt repayment, savings goals, or investing, while 10% can go towards treating yourself.
While I used to think everyone should adjust their tax withholdings to aim to not get a refund and instead have that monthly money as cash flow each month, I’ve started to realize that so many people actually save more when they get a big chunk of unplanned money.
If this is you, and you have no problem following the 90/10 rule, or an 80/20 rule or something of that nature, don’t worry about adjusting your withholdings. Personally, there’s very little purpose in me doing that when I probably actually save more of the money this way than I would otherwise. Now, if you do tend to spend your entire tax refund without putting it towards your larger financial goals, adjusting your refund might be the best thing for you to do.
Either way, remember that the money returned to you after you file your taxes is not “extra” in any way; it is money that you’ve earned throughout the year and should be handled with an intentional plan, just as your monthly income should also be.
What to do if you ended up owing taxes to the IRS this year
Here are some reasons you might owe taxes:
- There wasn’t enough money taken from your paycheck to cover the taxes that you owe
- This might be because your tax return changed, which could be from a number of reasons relating to dependents or marriage status or mortgage changes, etc.
- Solution – adjust your withholdings
- You’re self-employed and mis-estimated taxes for the year
- Solution – set aside 30-40% of your revenue in a savings account; you can pay quarterly or yearly
But the question remains as to what to do NOW to pay back the taxes owed, instead of just planning for how to avoid this next year.
I suggest prioritizing any debt to the IRS as soon as possible. You can add this to your debt repayment plan if you have one, or make it a priority alongside your EF (if you don’t already have one).
Tax season comes with a lot of different outcomes, but it’s important to remember that getting a huge refund doesn’t make you bad with money because your withholdings weren’t perfect, and owing debt to the IRS, just like any debt, not does not mean that you’re bad with money or a failure. No matter the circumstance, there’s no time or place for shame as long as you have a strong plan for how to move forward.
Don’t forget to pick up my free budget template
And if you need more guidance with goal setting, mindset shifting, and budget brainstorming, you can purchase my Money Map Workbook for just $9 –> Get Your Money Map Workbook