Tax Return Different from What You Were Hoping?
Hoping to get a refund from your tax return? Many people intend to use their refund as a “forced savings plan” (essentially withholding extra taxes on purpose so that they get a larger refund at the end of the year, instead of being tempted to spend it during the year). However, 42% of taxpayers who file their tax returns early end up using their funds to cover things like rent, food and utilities – catching up on expenses, rather than putting money away for savings.
So, now if you don’t receive the refund you expected, or if you find yourself owing taxes, it can cause a lot of stress. Below are a few tips for putting your tax return to work for your financial health.
1. Focus and Get a Clear Picture of Your Financial Situation
If you didn’t have a specific plan for the funds but typically depend on them for breathing room or extra cash, take a step back to focus and work to get a clear picture of your financial situation. A great place to start is with a simple budget worksheet where you list your monthly expenses and income so you can track how you are spending. A budget worksheet can help highlight the areas you may need to make changes to your spending habits.
2. Address Past-due Bills
If your intention for your tax return was to catch up on past-due bills, consider how you still might be able to accomplish this. Try to trim expenses in another area to free up money so that you can get current on your bills. Getting ahead of a problem you are anticipating is key. You may be surprised at how willing a creditor will be to work with you if you reach out to them prior to becoming past-due.
3. Pay Off Debts to Save Money and Find Breathing Room
If you did get a refund, it can be an extra boost on your journey to financial well-being. Making sure to pay your highest-interest debt is the first step. The faster you pay off debt, the more you save on interest and free up more money to save. The goal is to build an emergency fund that will help with unexpected loss of income or unplanned expenses.
4. What to Do If You Can’t Afford to Pay Your Tax Bill
If you did not anticipate having to pay taxes at the end of the year but now have a bill, you still have options. The IRS has pre-set guidelines on options that are available to filers that may not be able to foot the entire bill at once. Flexible options like deferred payments or long-term payment plans allow a restructuring of an existing repayment plan, depending on the circumstances.
While there are typically some additional fees associated with these options, this may be a more affordable way to address the tax debt, as opposed to borrowing from high-interest sources like credit cards, cash advances, or payday loans.
5. Get Ahead of Next Year: Adjust Your Withholding if Needed
If you owed taxes this year, you may need to increase your withholdings (the amount that your employer deducts from each paycheck for taxes). Paying a little more in each check so that you don’t have to pay a large tax bill at the end of the year, can be a much more appealing alternative.
Consult with your company’s Human Resources department, or the equivalent, for more information on this. Consulting with a tax professional can also be a helpful experience in determining what the best course of action would be.
6. New Horizons Credit Union partners with GreenPath Financial Wellness for Unbiased, Caring Support
GreenPath offers free member financial counseling and education to support people in paying off their debt. Their professional, caring coaches will explain your options, including paying off your debt on your own or using a Debt Management Plan. They’ll support you to develop a personal action plan that works for you.