Most of us sit down sometime around the new year, organize our finances, and create a budget for the upcoming year. We plan out our expenses and how much we want to save. Then, many of us either put the budget aside and never look at it again, or we follow along, exactly as planned. No matter which camp you fall into, I am here to tell you that it is important for you to take a mid-year review of your finances. You don’t need to take a magnifying glass to each and every category, but rather take an hour or so to look things over. Here are some of the things you should be focusing on.

financial review

Mid-Year Financial Review Checklist

  1. Expenses
    It’s always important to keep an eye on your expenses. Now is a great time to look back over at what you had planned for the year and what has actually occurred. Are there some areas where you are overspending that you can cut back? Maybe there are some areas where you budgeted more than you actually needed.

    In both cases, it is important to know these things. If you aren’t spending as much as you thought, then you can adjust the amount you are saving or investing each month. After all, there is no point in leaving the money in a checking account. That is just tempting you to spend it.

    If you are spending more than you planned, it’s time to look at why and make the necessary adjustments. This could mean allocating more to the category in your budget or maybe simply cutting back.

    One additional step to cut back on expenses is to look at your bills – cable, internet, insurance, cell phone, etc. and see if there is a way to lower them. You don’t have to spend an entire weekend on this, just make a call to your service provider and see if there is any way they can lower your monthly bill. You’d be surprised to find it’s that easy to save $5 or $10 a month.

  2. Income
    We all love to have income. This too is an important area to look over. Are you earning more than you thought? Maybe you are earning less due to a layoff or career change. On the surface it might not seem like a huge deal if you are earning slightly less or slightly more than you planned, but it can have big consequences.

    If you are earning less, maybe you now qualify to save for retirement in a Roth IRA. If you are earning more, maybe you can bump up how much you are putting away in your 401k plan or are saving in general. Or maybe you can put more towards any debt you are still paying off. You might see some additional money if you have crossed the Social Security wage base.

    In the case where you are making significantly less than you planned, maybe it is time to look into getting another job or even turning some hobbies into income streams. If you do, be sure to review how to calculate self employment taxes.

  3. Investments
    Mid-year is a great time to review your portfolio as well. Look back at your investment plan to see what your intended allocation should be and where you stand. If you haven’t rebalanced lately, chances are your holdings are out of alignment. I typically rebalance when my holding vary from my plan by 5% or more. Take the 15 minutes to see if you are in line with your plan.

    Again, it might not seem like a big deal, but if you are too heavy in stocks, you are taking on more risk than you are comfortable with. If you have too much money in bonds, you risk not earning the high return you need so that you have enough money for retirement.

  4. Taxes
    Dreaded taxes. No one likes to pay them. But again, it is important you look over things in this area as well. Depending on your income, you might be withholding too much or not enough. While it isn’t the end of the world if you are withholding too much, withholding too little could mean a large tax bill in the new year. I don’t know about you, but having to pay into the system by writing a check in April always hurts. Make it a point to review your taxes so you don’t have any unwanted surprises.

    One other thing with taxes to consider is any life changing event. Have you gotten married or will be getting married later this year? Have you had a child or will be having a child? These events will impact your taxes so it is important to take the steps now while you still have time.

    My wife and I got married last November. In the summer we met with our accountant and found out that we were going to owe a lot in taxes last year because we would be filing a joint return. We made it a point to start taking every tax deduction we could – maxing out 401k plans, maxing out health savings accounts, and adjusting our withholdings. While we still ended up having to pay in April, it was a lot less than we would have if we weren’t proactive about it.

    With that said, taxes don’t stop there. You can work on getting some of your tax documents in order so that in the new year, it is one less thing you need to do. Create a folder and place your property and school tax stubs in the folder so you have them. If you have donated anything so far this year, be sure to place the receipts in the folder or at least write down what you’ve donated on a piece of paper so that you don’t forget about it and pay more taxes than you should. Also, keep any documentation needed for the new health insurance premium tax credit.

Final Thoughts

Creating a budget at the start of the year is a smart move to make if you plan on taking control of your finances. But it is equally important to review and adjust your budget as the months go by. We all know that life happens. As a result, we spend more in certain areas and less in others. By constantly reviewing your budget, you are able to see where you are overspending or under spending and make the needed adjustments. This could mean allocating more to certain areas or boosting your savings. Either way, an up to date budget ensures that you are doing everything you can to be financially successful.

More Mid Year Tasks from Years Past

With the volatility of the stock market and low interest rates, many investors are looking for ways to earn a decent return on their money and also keep their principal safe. While it is common knowledge that you cannot earn a high return unless you take on a higher risk, you can still earn a decent return while playing it safe. To do so, look no further than municipal bonds.

municipal bonds

3 Benefits of Municipal Bonds

Municipal bonds offer investors 3 great things: safety, income and tax benefits. But as with any investment, municipal bonds aren’t for everyone. Read on for each one of the benefits that municipal bonds offer and then you can begin to decide if there is a fit for them in your portfolio.

Municipal Bond Safety

Overall, municipal bonds offer investors safety. This isn’t to say that you cannot lose money when you invest in municipal bonds, but the odds of losing money are not high. This is due to the fact that they historically have had a very low default rate.

Of course, you can’t base all of you investment decisions on history. There are many communities in California that are bankrupt. In Michigan, Detroit recently declared bankruptcy. This means that bankruptcy and default on municipal bonds can and does happen. Before you invest in any municipal bond, make it a point to research the municipality of the bond you will be buying.

Some investors have made the mistake of thinking that municipal bonds are risk-free, meaning there is no default risk. This is not true. The only investments that are truly risk-free are US Government and Treasury bonds.

Municipal Bond Income

The next great feature of municipal bonds is the income they generate. While the income isn’t life changing, it usually ranges around 5% and is predictable.

Most all municipal bonds pay interest semi-annually. But you should be aware that many municipal bonds get called. This means that a municipality will retire a bond before it matures. For example, a municipal bond might mature in 20 years but have a call feature after 7 years. When the seventh year passes, the bond can be called by the municipality. You will receive your principal back, but you lose out on the future income payments. But, with your principal returned to you, you are free to buy other municipal bonds.

What happens when the community who issued a municipal bond defaults?
One more note about municipal bond income, in the case of a municipal bond defaulting, you will not earn the interest payments going forward as well. The municipality will simply suspend future income payments. It is rare for you to lose your principal when a municipal bond defaults.

Municipal Bond Tax Benefits

The third benefit of municipal bonds is the tax-free treatment of the income. Municipal bonds are tax-free on the federal level, meaning you won’t pay federal income tax or investment tax on the income. But, many states also offer tax-free treatment to their own municipal bonds as well. This means that if you live in Pennsylvania and buy a Pennsylvania municipal bond, you will not pay state income tax on the income either. In fact, you won’t pay local tax on it. This makes the income “triple tax-free”.

Note that not all states offer tax-free treatment on municipal bonds and that if you invest in municipal bonds from another state (for example, if you live in New York and invest in a municipal bond from Kansas), you will most likely have to pay state income tax on the income.

For many investors, the tax treatment of municipal bonds (along with the predictable income they provide) make them a wise choice for those who are retired. But, as with any investment, look into the tax treatment of the income for your state before you go out and buy any municipal bonds.

Final Thoughts

Of course, as great as municipal bonds sound, this doesn’t mean that you should rush out and buy a bunch of them. You have to determine if they fit within your investment plan. There is no point in buying something that doesn’t help you reach your goals. For example, a younger investor might not invest in municipal bonds simply because he or she needs a higher rate of return.

However, on the flip side, this same investor may want to invest in municipal bonds because they are in a very high tax bracket and want to limit income taxes. Before you do anything, you need to weigh the advantages and disadvantages of such an investment. Only after careful consideration can you make an informed decision that is right for you and your situation.

More on Municipal Bonds and Treasuries

In order to be a successful investor, one has to learn how to buy low and sell high. This can be hard since many of us allow for our emotions to get involved. As a result, we tend to buy high and sell low. But even when the buy low, sell high strategy is followed, there are times when it makes sense to sell low. When you strategically sell low in order to offset gains realized with other investment holdings, you apply the technique known as tax loss harvesting. Let’s walk through the various benefits of tax loss harvesting.

tax loss harvesting

What is Tax Loss Harvesting?

As I mentioned above, tax loss harvesting is when you sell a security for a loss. While on the surface this doesn’t make much sense, the benefit will be clear in an example. Let’s say I have two holdings, A and B. Holding A has produced a short term capital gain distribution for me. On the surface a capital gain payout is a good thing, but the downside to short term capital gain distributions is that the payout is taxed at ordinary income levels. Therefore, if you are in the 28% tax bracket, you will be taxed at 28% on that short term capital gain.

You can offset your investment gains with your losses. However, the IRS allows you to offset up to an additional $3,000 in income each year with investment losses. If I sell a portion of Holding B for the same amount as the short term capital gain distribution of Holding A, I offset that gain with my loss and don’t incur any taxes. In essence, I just saved myself 28% since I am in the 28% tax bracket.

Benefits of Tax Loss Harvesting

  1. Tax Savings.
    The first benefit of tax loss harvesting is the tax savings. Whatever amount of short term gains I can offset through selling “losers”, saves me on my taxes. Note that I don’t even need to have capital gains to save on taxes. Assume that I have no gains this year, but I sell a fund that I lost $3,000 on. I can apply that $3,000 towards my ordinary income, reducing the taxes I owe there. If I were in the 25% tax bracket, that $3,000 loss saved me $750 in taxes.
  2. Carry-forward Benefit.
    Another benefit of tax loss harvesting is the carry-forward benefit. Remember how I told you that you can offset $3,000 annually? Well if you have $5,000 in losses this year, you can apply $3,000 worth of the losses this year against your taxes and the remaining $2,000 in the next year. Just because you can only offset $3,000 per year doesn’t mean you lose any additional losses. You carry that amount forward until you are able to use it. I’ve known people that have $15,000 worth of losses that they carried forward for many years.
  3. Potential Higher Returns.
    Taking advantage of tax loss harvesting can allow you to realize a higher return. For example, let’s say you bought a mutual fund for $10,000 and you plan on holding it for a long time. But a few months after buying it the stock market drops and your $10,000 is only worth $7,000. You sell the fund and wait 31 days (more on the reasons for this later) and then buy back into the fund. At the end of the year, assuming you have no capital gains, you have a realized loss of $3,000 that you can write off of your taxes.

    That $3,000 is worth $750 to you if you are in the 25% tax bracket. With your reduced tax liability, you take the $750 and invest it back into your mutual fund. You then hold the fund for 10 years and it earns 7% annually for you before you sell it. After those 10 years, you have $15,375.16 as seen below:

    $7,000 + ($15,245.42-$7,000) * .85 + $750 + ($1,475.36 – $750) * .85 = $15,375.16

    Note that this assumes you are paying 15% in long term capital gains taxes. The $15,245.42 is what the $7,000 grew to in the 10 years and the $1,475.36 is what that $750 grew to. How much would you have if you didn’t sell your fund and held for the entire 10 years? You would end up with $14,458.61:

    $10,000 + ($15,245.42 – $10,000) * .85 = $14,458.61

    By taking advantage of tax loss harvesting, you earned an additional $916.55. This is all from the $750 that you were able to invest because of tax loss harvesting. If you held onto this fund for longer than 10 years, the difference would be even greater.

Notes About Tax Loss Harvesting

Wash Sale Rule. There are a few things you need to know about tax loss harvesting before you jump into it. The first is the wash sale rule. Without going into great detail, a wash sale is when you sell a mutual fund (or other investment) for a loss and buy back the same fund (or investment) within 30 days before or after the sale. If you do this, the IRS does not allow you to recognize any loss you realized on the sale of the mutual fund (or investment).

Taxable Accounts Only. Secondly, tax loss harvesting only makes sense in a taxable account. Since your retirement accounts, such as a 401(k), 403(b), Traditional IRA or Roth IRA accounts, are all tax deferred, you get no benefit of tax loss harvesting since any gains in these accounts aren’t taxed until you withdraw the money.

Final Thoughts

There are many benefits to taking advantage of tax loss harvesting. When I worked in a high net worth investment firm, we placed tremendous emphasis on tax loss harvesting as a way to reduce our client’s tax liability. Many times when we first did tax loss harvesting, our clients would question why we were selling so called “losers” and realizing a loss. Once we explained the benefits of this practice, and they saw the benefit when completing their taxes, they were on board 100%. I encourage you to analyze your investments to see if there is an opportunity for you to take advantage of tax loss harvesting.

More Tax Topics

Before you head out to file your taxes before the tax deadline, you’ll need to grab more than just your wallet to pay your tax professional for their services. There are a large number of items you need to bring with you when filing your taxes. In many cases, these items are essential to filling out your tax return. You’ll need documents, receipts, identification, and various other pieces of information.

Tax Checklist

If you have already filed your taxes, use this list as a checklist to make sure you didn’t leave anything off your tax return. If you did, you can amend your tax return.

photo by: Theen

Photo Credit: Theen

Your personal information

You’ll be sharing personal, sensitive information with your tax professional. That is exactly why it is a good idea to go to a reputable professional. Check reviews on the Better Business Bureau, and check their credentials.

Here are the various pieces of personal information you’ll need:

  • Your social security number and full name.
  • You’ll need your spouse’s social security number and full name. If you are filing jointly, your spouse will need to come along to sign the return as well.
  • To play it safe, you may want to bring along your social security card as some tax professionals may require it.
  • Date of birth for you and your spouse.
  • Bring the copies of your tax return from the last three years. Your tax professional can check for errors and also possibly use past information to help fill out this year’s return.
  • You may need a photo ID such as a driver’s license or passport.

If you were received income…

You’ll be reporting all of the income you received throughout the previous year. In many cases, if you were getting taxes withheld from your paycheck, you may be eligible for a refund.

Here is what you’re going to need to report all of your income:

  • Your W-2 forms for any place you worked that you have received from your employer. Your employer should have mailed these to you by the end of January. If you have worked somewhere in the past year and did not receive this form, check with the employer. Also, if you worked multiple jobs, you will need to report all of them.
  • If you searched for a new job during the year, you’ll need to know the amount you spent on your job search. These expenses include employment and outplacement agency fees, the cost of preparing a resume, and the cost of traveling to search for this job.
  • Your unemployment records and the amount of income you received from unemployment.
  • Income received from serving jury duty.
  • Any gambling income or large prizes or awards you may have won throughout the year.
  • Any other income you can think of.
  • Any income you received from interest, such as Forms 1099-INT or 1099-DIV.
  • Any foreign income earned.
  • Bring with the total amount of the costs for your employment such as a uniform or tools. This can possibly be deducted if you itemize deductions.

If you have children or other dependents…

If you have children or dependents, you will want to report this as you may be eligible for various tax credits.

Here is what you’ll need to bring if you have children or other dependents:

  • Know their social security number for your children and dependents along with their full name. Be sure the name matches their social security card.
  • Dates of birth for your children or other dependents.
  • Childcare records including the business tax identification number of your child care provider and how much you paid for childcare.
  • Expenses related to the adoption of a child.

If you are self-employed…

Being self-employed can allow great flexibility for a working environment, but it definitely can get a little tricky during tax season. It is important to bring all important documents so you can have your self employed tax deductions in line.

Here is what you will need if you are self-employed:

  • Any 1099 forms you have received in the mail from contract work you have done.
  • If your office is in your home, bring along this information as well. It is possible you can deduct a portion of your home costs or rent if you work from home.
  • Any business expenses you paid throughout the year.
  • Total business miles driven throughout the year.

If you attended college…

If you have attended college during the previous year or paid student loans, here are the items to bring:

  • Form 1098-T from your university, which indicated how much you paid for tuition.
  • The cost of essential books and supplies you were required to purchase through your university.
  • Form 1098-E from your student loan providers if you have paid interest on a student loan.
  • Information on any scholarships you received.

If you are divorced…

  • If you paid alimony during the past year, you’ll need the amount you paid and the social security number of your ex-spouse.
  • If you received alimony, you’ll need the amount and your ex-husband’s or ex-wife’s name.
  • Any documents proving that your ex-husband or ex-wife is allowing you to claim your child on your tax return.

If you paid for health care costs and insurance…

If you tragically experienced a theft or disaster…

  • If you were a victim of a theft, bring all documents proving this.
  • If you live in a region that was a federally declared disaster area, bring proof of that.
  • Bring costs of clean-up expenses, lost property, and rebuilding costs of an earthquake, fire, flood, hurricane, or tornado.

More Documents You Will Need

Here are more items you’ll need when you file your taxes:

  • If you own your home: Documents containing your mortgage payment and interest.
  • If you owned rental property: All of the records of the income you received and records of any expenses.
  • If you have an IRA: The amount you contributed to your IRA and the value of your IRA.
  • If you are retired: Your social security income and any pension income.
  • If you donated to charity: Bring any receipts for any charitable donations you gave throughout the year, such as dropping clothes off at a Salvation Army.
  • If you want to receive a direct deposit from the IRS: Bring a check that will have your bank name, routing number, and account number for your refund.

What are other important items are missing from this list?

More Tax Topics

Do you find yourself stressed out around tax time? What about even thinking about doing your taxes? If so, you are not alone. Taxes are often thought of as a dreaded part of the year causing stress and leaving people feeling overwhelmed and depressed.

Why Are Taxes So Stressful?

Sure, the act of filing taxes can be daunting, but there just might be more to it to explain why people are so stressed out about taxes. Here are some reasons you might be stressed when you think about doing your taxes this year and also how you can deal with that stress as the tax deadline nears.

WhyStress_by CollegeDegrees360

Photo Credit: College Degrees 360

You’re Dealing with Money

Ask people what their greatest stress is and chances are they are going to say money. People stress about not having enough money, not understanding money, spending too much money, not handling it well, not having a savings, not earning enough, and everything beyond that. Tax time can bring up stressful financial issues that occurred throughout the year. It can be especially stressful if you end up owing the IRS.

How to deal: Find ways to cope with the stress of taxes. Before you start your taxes, you may even want to take an in-depth look at your finances so you understand what your current situation is. Whether good or bad, understanding where you are at financially, can reduce some of the stress of not knowing.

You are Afraid of Being Audited

An audit is often a misunderstood, scary process. Too often people are scared to claim deductions or report certain things (like the Home Office Tax Deduction) because they believe it might flag an audit.

How to deal: First, understand what exactly an audit is and what happens when you’re being audited. This may alleviate some of the mystery of an audit and better explain what it is. Second, you can do things to reduce your chances of being audited. Fill out your taxes carefully to reduce mistakes and errors which can lead to an audit. Be sure your numbers add up and match any documents that were already sent to the IRS. Also, understand how tax brackets and tax laws work to know what you can get.

You are Intimidated by the Government

Many people are intimidated by the IRS, and it might seem like a scary thing.

How to deal: If you fill out your taxes correctly, you don’t have to worry. Keep your receipts and paperwork so if the IRS requests additional information from you or needs to do an audit, you can cooperate and make things easier for both parties.

It Causes Tension in Your Relationship

Once you are married and file with a spouse or domestic partner, it is now a joint responsibility. If you and your partner aren’t on the same page, this can cause fights and stress. Diving back into old financial arguments that happened throughout the year can occur and any previous resentment about spending issues or any other money issues can resurface. This can also bring light to any sensitive issues about one partner not feeling like they earn enough or being sensitive about the loss of a job or other negative financial situation that may have occurred throughout the year.

How to deal: Before jumping in to filing, make a game plan with your spouse. Go into it with a calm, patient, but thorough attitude. Don’t let issues escalate into an argument, and stay on point. Each of you can gather your specific documents like W2s, 1099s, or whatever else you have. Make a plan on how you should file. If you’re doing it on your own, have one spouse do it, as the other double checks his or her work. Have your spouse nearby so you can ask a question or get input if needed. If you’re getting it done by a tax professional, you should both be present in case a question or issue comes up that that specific person is needed for.

You are Disorganized

If you’re disorganized, you’re stressed. Whether it is specifically with taxes or with any other aspect of your life, being disorganized and not having a grasp on the situation is going to cause stress. Going through past business expenses for self employed deductions, searching for receipts and paperwork, and locating all of your important tax documents could get quite stressful if you haven’t been organized all year.

How to deal: Before you begin, make a list of what you need to file your taxes. Write down all of the paperwork and documents you’ll need. If you need to calculate what you spent on something, do that before beginning to file your taxes. Start a folder with all of your important documents you need to file and organize them by type. If you’ve already filed, learn from your mistakes and get organized for next year.

You Don’t Understand Tax Laws

Sometimes the stress associated with doing taxes is the result of not understanding the process of filing taxes, what taxes actually are, and the tax laws. People often wonder what applies to them, what doesn’t, and they may be unsure what type of credits or deductions they qualify for.

How to deal: Take time to learn which tax laws apply to you, how income is taxed and what you qualify for. Read credible sources from your local library or online which can make these issues clearer for you. If you file online using TurboTax, use their tax tips and video library. If you are still confused, consider visiting a trusted, friendly tax professional that not only can help you with your taxes, but also is willing to take the time to explain things to you so you know for next year.

Do taxes stress you out? Why or why not? How do you avoid the stress of taxes? How do you deal with it?

More Tax Topics

The Sales Tax Deduction is a deduction of your local sales taxes, when itemizing.

What is the Sales Tax Deduction?

You are deducting the sales tax that you have paid this tax year on purchases. You can either deduct your state income taxes or your state sales taxes, and you cannot deduct both of these. Use the Sales Tax Deduction if you are itemizing your deductions on Schedule A.

When do I use the Sales Tax Deduction?

Use this Sales Tax Deduction if you are not deducting your state income taxes. There are two main reasons you would use this deduction:

  • If you’re living in state that doesn’t collect income taxes (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not collect income taxes. Tennessee and New Hampshire have a limited income tax and only tax dividend and interest income.), you may benefit most from this type of deduction.
  • Also, even if you live in a state that collects income taxes, if you made large purchases throughout the year with high sales taxes, this may be a good option as well.

More on the Sales Tax Deduction

If you are itemizing your deductions on Schedule A, you will add up your sales taxes. You must have a receipt for each purchase.

Use the Sales Tax Deduction Calculator provided by the IRS.

Sales Tax Deduction Expiring. Unless something changes in the current tax law, 2013 will be the last year that this deduction is available. For 2014 and moving forward, this will not be available.

More Tax Topics

What is the Home Office Tax Deduction?

You may be eligible for a Home Office Tax Deduction if you use part of your home for a business use. This Home Office Tax Deduction can be used for all types of homes, and it is available for both homeowners and those who rent.

Who can use the Home Office Tax Deduction?

You can use this Home Office Tax Deduction if you use a portion of your home, either owned or rented, for your business. You must have a set room for regular and exclusive use for conducting your business.

You must also use this set, exclusive room for your principal place of business. If you own an office outside of the home but occasionally work from home, this wouldn’t be eligible for the home office deduction. However, if you own a location outside of the home but also use your home substantially and regularly for business, you can qualify for this deduction.

You may also qualify for this deduction if you are an employee and use part of your home for business use.

Options to Calculate Home Office Tax Deduction

There are two methods for filing for this deduction. First, the Simplified Option, allows you to multiply a prescribed rate by the allowable square footage (300 square foot maximum) of the office.

The current rate is $5 per square foot of home used for business.

Second, you can do the regular method which determines the actual expense for the home office including mortgage interest, insurance, utilities, repairs, and depreciation.

Here is more information on the Home Office Deduction provided by the IRS.

More Self Employed Topics

For many people, they are relieved to receive a refund check from the IRS after filing taxes. After a year of hard work and the stress of filing taxes, it feels good to receive this money to put in your savings account or make your budget more manageable for a while. However, it is possible to owe the IRS after you file your taxes.

TaxBank_Tax Credits

Photo Credit: Tax Credits

You Might Owe the IRS Money if…

Essentially, the one huge, general reason why would you would owe is if you paid less tax during the year than your income level determines you should be paying. While the majority of people will get a refund after this tax season, it is estimated that more than 25 percent of the population will actually owe something instead. If you are asking yourself why do I owe taxes? Here are a few common reasons why you could actually owe the IRS money at the end of filing your taxes.

You are Self Employed

If you are self-employed, don’t have a boss, and did not pay taxes throughout the year, you will owe the IRS money that wasn’t withheld from your check, including income tax and self employment tax. Here’s more:

  • If throughout the year, you took on a project or did work that you didn’t get taxed for, this can result in you owing. For example, if you did consulting work or did tutoring on the side, you will owe tax on your extra income. If you are a freelance writer, photographer, graphic designer, or anything along those lines, this will also pertain to you.
  • When you are a normal employee of a company, you are most likely getting taxes withheld from your employer every time you get a paycheck. However, when you are a freelancer or contract employee, you do not get these taxes taken out. If that is the case, you are responsible for paying these taxes.
  • If you are a freelancer or working for someone by a contract opposed to a paid employee, you should have been filing quarterly to make payments throughout the year. Unfortunately, in addition to having a higher tax at the end of the year, you are also subject to fees and penalties for not paying throughout the year.
  • If you made the mistake of not filing quarterly or forgetting about these taxes, use this as a learning experience. This year, moving forward, choose to file quarterly instead. Keep track of all of your self-employment deductions to help offset your income.

Read more: Tips for Filing Your Taxes with Self Employment Income.

Your W-4 Allowances Are Too High

If you are paid employee, you most likely filled out a W-4 when you started your employment at your job. (Remember that stack of paperwork you filled out when you were starting at this job way back when?) While filling this out, you may have modified the taxes withheld (by increasing the number of allowances) to increase the amount you are taking home. While it may seem like a more appealing option to take the higher paycheck, if your income level does not match the amount of taxes you paid throughout the year, you’re unfortunately going to have to owe more. In summary:

  • If you modified this form and got larger paychecks throughout the year, you may now owe additional taxes if you did not withhold enough throughout the year.
  • The good news is that you can modify your W-4 with your employer so next year you don’t have the same problem.

You Have Other Forms of Income

If you received unearned income from sources that did not tax you throughout the year, you are subject to pay these now during your annual tax time.

Some of these can types of income can include unemployment benefits, interest you received from your bank accounts, alimony, if you won the lottery or another sum of money, social security, or royalties received.

Read more: Surprising Things That Count as Taxable Income.

Your Filing Status Changed

If your filing status changes, there is also a chance you might owe instead of collecting a refund this year.

What to Do When You Owe the IRS

You owe the IRS money, and you weren’t expecting it. Take a breath. While it may be quite overwhelming and even a little scary to owe the government money, there are ways to cope with this. Fortunately, the IRS offers some advice for those of us who may owe this year:

  • First of all, do not ignore it if you owe the IRS money. It is never a smart plan to ignore debt, regardless of the type it is. However, owing the government is even worse in some cases. The government can seize your property and financial assets if you don’t pay the debt. If you don’t pay, this will impact your credit as well.
  • If you are paying by check, you may want to make a copy of the check for your records. Keep track of the check number and date you sent it as well for your records to show you paid by the tax deadline.
  • You can also choose to pay the IRS by using a credit card. If you’ve been trying to deal with credit card debt, this might not be the best option for you. Increasing your credit card debt is never a good plan, especially if you are already struggling with it. However, if you have a lower interest rate than what the IRS will charge you, this may be the way to go.
  • You can request an installment agreement from the IRS. If you owe less than $25,000 in combined tax, penalties, and interest, you can request an installment agreement at Be sure you understand what this installment agreement means and how and when to make payments. You may also be charged a fee for this as well as interest to what you owe.

Read more: What are Your Options When You Owe the IRS Money?

Have you ever owed taxes when you thought you would actually be getting a refund? If you are a freelancer, how do you deal with owing the IRS? What are some ways people can get quick cash if they owe the IRS and weren’t expecting it?

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While we all have to pay taxes, you actually may not have to pay to get your taxes done. There are five options that might just allow you not to pay a penny this year while you are filing your federal taxes. Many of these programs are based on income, age, or the types of forms you will be filling out.

photo by: ota_photos

Photo Credit: ota_photos

Where Can You Get Your Taxes Done For Free?

Here are five ways you may be eligible to get your taxes done for free and how it works. If you need to know whether or not you need to file a tax return, see How Much Money Do You Have to Make to File Taxes?

IRS Volunteer Income Tax Assistance (VITA)

  • This program is designed to help those who earn $52,000 or less per year.
  • Trained IRS volunteers assist with your basic income tax return preparation.
  • You can file electronically.
  • Many times these places are located in convenient community locations such as a library, school, community college, or town center.
  • With this program, it is a basic filing. Certain types of income may not be eligible, such as income from a rental property. Also, certain deductions may be unable to be claimed for this service as well, such as moving expenses.
  • Before you go, find out if it is necessary to make a scheduled appointment, what documents you will need to bring, if all of the items you need to report are eligible with this program, and what deductions they are able to help you with.
  • You can call (800) 906-9887 for more information.
  • Find a VITA site by using the IRS map to search for a location near you.

Tax Counseling for the Elderly (TCE)

  • If you are 60 years old or older, you may be able to get your federal taxes done for free with Tax Counseling for the Elderly.
  • Many volunteers specialize in retirement, social security, and pension issues so they can help you understand these issues.
  • Before you go, find out if you need to make an appointment, what you need to bring with you, and if there is anything about your specific case that would make you not eligible for this assistance. For example, if you are eligible to claim a certain deduction that they wouldn’t be able to help you with.
  • Many of these locations are in convenient nearby places such as a library, recreation center, and senior centers.
  • You can call (888) 227-7669 for more information.
  • Find a Tax-Aid site by using this map. There are 5,000 locations nationwide.

File for free with IRS Free File

  • If you earned $58,000 or less last year, you may be able to file your taxes for free with software through the IRS website.
  • This program uses a free tax prep software to help for filing basic tax returns.
  • State returns are also available.
  • You start by entering information, and the website will then match you to the best software to fit your specific situation.
  • There is customer support available if needed as well.
  • For more information, visit the File Free page on

Use the IRS free Fillable Forms

  • If you make more than 58,000, there is still an option through the IRS to file your taxes for free.
  • This does not use a tax software, and it is not as easy. Only basic guidance is offered, and it is best for someone who knows how to file their taxes on their own.
  • As with all of the other services, there are additional restrictions. Before you start, read what types of forms are allowed and what types of deductions you can claim while using this program.
  • Visit the Free Fillable Forms page for more information.

Tax Software Programs Online

  • Websites such as TurboTax offer free tax filing in addition to the programs that cost money.
  • In most cases, these programs are only best for simple federal returns, 1040EZ forms, first-time filers, or students.
  • Certain forms aren’t acceptable for these programs, such as a 1099 if you did freelance or contract work.
  • In many cases, you won’t be able to claim certain deductions or credits. Have you made a charitable donation? Paid health expenses? Check to see if any of the deductions you’d like to make or tax credits you’d like to claim are accepted with these programs.

Things to Remember

Understand your specific tax situation before you head out to try to get it done for free by one of these programs or before using online software. One suggestion is to write down every form you received. When you are contacting a professional affiliated with these programs, double check that each of these forms are okay. Also, write down various deductions or other items you want to claim or report. Can they help you if you donated things to charity? What if you have paid alimony, paid interest on a student loan, or have self employed deductions because you own your own business? Also consider:

  • The income restrictions are for the year you are filing for so it is what you earned that year. For example, if you lost your job and are unemployed this year and are now in a lower tax bracket, but you earned over the income listed, you do not qualify for the program.
  • The longer you wait, chances are the busier these programs will be. Make an appointment to avoid waiting in long lines or not being able to get it done by the tax deadline.
  • Double check that you are bringing everything you need to get your taxes done. Depending on the program or the specific location, there may be a checklist of items you should bring, including information about your dependents. If there is any hesitation about a specific document or anything else, you’re better off bringing it to be safe.
  • As with any circumstance where you are dealing with sensitive personal and financial information, be sure you have all your documents before you leave the location. You don’t want to leave something with your social security number or other important information on it.
  • In some of these cases, you may still have to pay to file your state taxes.

Have you ever gotten your taxes done for free? What do you think of the free online programs offered? What tips can you give for someone looking for financial assistance with their taxes this year?

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The income that investments pay investors is a great thing. Dividends are essentially free money to investors as we get “paid” for investing in certain stocks. Capital gains are a nice bonus at the end of the quarter or year that allows us to enjoy the benefits of a rising stock market or smart moves by the fund manager.

investment income

Investment Income Tax

The downside of investment income is that it is taxable. Ahh, taxes. We just can’t avoid them no matter what. Luckily, investment income is taxed at different levels and in many cases, at a lower rate than ordinary income. Below is a basic guide to how investment income is taxed. This guide won’t cover everything related to investment income and taxes 100%, so it makes sense to talk to your accountant about any of this in detail. Plus, Congress likes to change the tax code almost annually so things are always changing. With that said, I hope that this guide will give you an idea of how to invest your money smarter and in doing so, pay less taxes.

What is Ordinary Income?

Before we get into the various forms of investment income, I need to define for you what ordinary income is as I will be using that term throughout this post. Ordinary income is what the IRS deems to be income that gets taxed at the tax rates you see everywhere. So your paycheck is considered ordinary income. Likewise, some investment income is also considered ordinary income. When the term ordinary income is used, it is taxed at your income tax rate. If you are in the 25% tax bracket, then your ordinary income is taxed at 25%. Read more: How Do Tax Brackets Work?

Bond Interest and Savings Account Interest

I am lumping together these two since the income you earn from each of these investments is taxed at ordinary income levels. This means that the monthly interest you earn on your savings accounts, the interest you earn on your certificate of deposit, and the income you earn on your bonds is taxed at your current income tax rate, whichever bracket you are in.

For example, let’s say you earn $1,000 in bond interest in 2013 and are in the 25% tax bracket. In this case, $250 of your $1,000 will go to taxes.

If you invest in bonds, which you should be if you have a diversified portfolio, try to keep your taxable bond holdings in your retirement accounts. This is because your retirement accounts are “tax deferred” meaning you don’t pay taxes on the income until you take the money out. In other words, the bond income you earn can grow tax free. Note that this isn’t saying your retirement accounts should be 100% in bonds, but rather that the majority of the bonds you own should be in your retirement account to save on taxes.

Your non-taxable bond holdings, such as treasuries can be held in your taxable accounts since the interest earned on these bonds is tax free.


As of this writing, there are two types of dividends: ordinary dividends and qualified dividends. I am not going to go into detail about the two, just know that when you receive your 1099, it will break out the dividends there for you. Another reason I am not going into detail regarding these is because almost every year, Congress debates about getting rid of qualified dividends. There is good chance the idea of qualified dividends will be history in the coming years.

Dividend tax rate: In any case, the term ordinary dividend should set a light bulb off in your head. After all, the term ordinary is in the name. As you might have guessed, ordinary dividends are taxed at your ordinary income tax rate.

Qualified dividends on the other hand, are taxed at a lower rate. As of this writing, if you are in the 10 or 15% tax brackets, you pay no tax on qualified dividends. For all other tax brackets (excluding the 39.6% bracket), qualified dividends are taxed at the 15% tax rate. If you find yourself in the highest tax bracket, 39.6%, qualified dividends are taxed at 20%.

Capital Gains

When it comes to capital gains, there are two types: short-term capital gains and long-term capital gains. Short-term capital gains are gains on investment shares you have held for less than one year while long-term capital gains are gains in investment shares you have held for more than one year.

It’s important to understand that we are talking about shares here and not the entire investment as a whole. If you owned shares in ABC mutual fund for 5 years but bought more shares in 2013, and then sold out of the investment in 2014, you could potentially have both short-term and long-term capital gains.

Capital Gains tax rate: For tax purposes, short-term capital gains are taxed at your ordinary income tax rate. Long-term capital gains have a lower tax rate. Currently, there is no tax on long-term capital gains if you are in the 10 or 15% tax brackets. The long-term capital gains rate for all other income tax brackets (except for the 39.6% bracket) is 15%. For the highest tax bracket, the long-term capital gains rate is 20%.

Capital Losses

When it comes to capital losses, there is no tax owed. Instead, you get to write-off the losses against any gains you have realized over the course of the year, with a maximum limit of $3,000. The nice part about this is that if you have losses greater than $3,000, you don’t lose the loss. You can carry it forward indefinitely.

So, if you have a capital loss of $5,000 in 2013, you can write off $3,000 of that loss for 2013. In 2014, you can write off the remaining $2,000.

3.8% Investment Tax

Investment income tax rate: Lastly, we cannot forget to mention the 3.8% Investment Income Tax that results from the implementation of The Affordable Care Act. For in-depth details about this tax, be sure to read the post I wrote about it here. But in a nutshell, taxpayers that earn more than $250,000 per year (joint filers) or $200,000 (single filers) will pay an additional 3.8% tax on capital gains and dividends.

Final Thoughts

As I mentioned earlier, this was an introductory guide to taxes and investment income. There are many more nuances to taxes and investment income and the tax law is always changing. To be safe, you should talk to your accountant about your specific situation. But this guide can be a good start when thinking about your income, investing and how to limit the amount of tax you pay to Uncle Sam each year. You can also use our tax calculator to see the impact of the various investment taxes.

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