Tax awareness knows no season
Stars and Stripes Scene, Sunday, May16, 2010
What a relief: Tax season is over until next year. The forms are filed and the refund is on its way. A conversation with USAA financial adviser June Walbert, however, reminded me that taxes happen in every season.
For less stress next April, Walbert advised starting now to keep good records and seek tax breaks.
"Think about taxes throughout the year so you can take every deduction and every advantage possible," she said.
One advantage is to minimize refunds. Yes, that’s what she said.
"A lot of people get excited about getting a big return," said Walbert. "It’s not really a windfall. It’s money that could have been in your bank account."
Walbert recommends taxpayers should aim for either a refund or a payment of a thousand dollars or less on their federal taxes by claiming the correct withholding amounts on their W4 forms. An incorrect number of exemptions means monthly tax payments are also incorrect.
Greater monthly cash flow, not a bigger refund check, is the goal.
"The goal is for you to be the responsible financial manager and use that money wisely throughout the year," she said. "Otherwise, you’ve just said ‘Here, Uncle Sam, you can use this however you like — interest free — and I’ll look forward to getting it back next April.’
The average tax refund for 2009 was just over $3,000, an overpayment of $250 each month, Walbert said. Families could use that extra $250 a month, she suggested, to save for vacation, retirement, college fund or debt reduction.
The number of exemptions on a W4 is not simply the number of people in a household, Walbert explained.
Taxpayers can find the correct amount by using a tool found on the IRS Web site, Walbert said. I took her advice, went to www.irs.gov and found the "Withholding Calculator" on the lower left side of the page. The tool asks a series of questions, and some background material is required.
The information you’ll need includes last year’s taxes, current pay statements, estimated future charitable giving, property tax records, mortgage interest payments, child care expenses and other potential deductions.
Life changes such as marriage, divorce or a new baby require a re-evaluation of withholding.
Walbert, an Army reservist, offered more advice tailored to military taxpayers:
Reduce taxable income: "If you make $50,000 and contributed $5,000 to the Thrift Savings Plan, then you pay taxes on only $45,000," she said. TSP funds are taxed when they are withdrawn after age 59 ½.
Save promotion pay raises: "I always recommend that you take half of your pay raise and put it toward the TSP." She noted that there are limits to yearly TSP deposits: $16,500 for those under 50 and $22,000 after 50.
Save combat zone pay: Make the most of tax-free earnings and a higher TSP deposit limit, she said. Deployed members can deposit $49,000 tax-free dollars per year of tax-free pay.
Walbert’s best advice for managing taxes all year: Start now to keep good records. Save receipts for possible deductions, such as professional organization dues, uniforms and moving expenses not reimbursed by the government. A little work now may mean a sunnier outlook next April.
Terri Barnes is a military wife living in Germany. Contact her at firstname.lastname@example.org or on the Spouse Calls blog at http://blogs.stripes.com/blogs/spousecalls.