Married Filing Jointly | Our 2016 Taxes
There are few things more romantic than a spouse who is excited to cuddle up on the couch and prepare our tax return together. For some strange reason, we enjoy doing our taxes together. I'm not entirely sure why, but when it's all said and done and our tax return is filed, it feels like we've really bonded.
Deep down, I think Kelsey just can't wait to find out if we will have to pay in, or get a refund. Obviously, the latter is preferred and part of our tax planning strategy. We don't want to pay in, but we don't want to get too large of a refund either. Depending on your life situation this can be easy to plan around each year, or it can be extremely difficult.
Mail starts showing up at some point in January with words like "Tax Statement", "Important Tax Document Enclosed". W2s, 1099s, and other tax documents, oh my!
Whether you package all these documents up and drop them off with a tax professional, or DIY taxes, at the end of the day, I think it's important to be intentional about what you do after your return is filed. Do you need to make changes in preparation for the next tax year?
This part of the process is why we like doing our taxes together. We get to see how each of our major decisions throughout the year impact our tax return. It provides a nice review of the things we've done, and reveals opportunities for improvement in the coming year.
The major areas of focus for us are: W2s (From our Employers/Wage and tax summary), 1098s, 1099s, and other various forms. We receive 10-15 various statements per year.
Because we have a small amount of side income from running Words of Williams and Snappy Casual, it creates a nice high level review of expenses and income. As long as our extra work is covering our expenses we don't worry too much about the money throughout the year.
There are various theories about whether paying in taxes or getting a refund is better. The tax return is an opportunity to get your tax amount to zero after the previous year. If you've paid to much in throughout the year, you get a refund. If you haven't paid enough taxes along the way, it's time to pay up. Let's take a look at each scenario.
Not Paying Enough Taxes Along the Way
We've usually netted out by getting a refund. Meaning, we might pay in to our state, but get a refund from our federal return. Either way, I don't like paying in taxes. That doesn't make it wrong if you usually pay in taxes, it's just our personal preference. I know some people's tax strategy is to save their tax money along the way, knowing they will have to pay the tax bill in April next year.
You'll see the opposite strategy play out in the next section, but if you are in this boat, you are in no hurry to get your taxes done. Likely you want to hold onto those savings for as long as you can. This isn't a bad philosophy, but it take discipline and an understanding of what's coming each tax season.
If you find yourself in a position where you are constantly surprised at the taxes you owe each year, there are few things you can do to help get closer to zero owed next year.
- Change your W-4: If you are an employee, lower your exemptions which will hold back more taxes with each paycheck. This also means each paycheck will be lower, but you shouldn't get hit with such a high tax bill. You can use the IRS Withholding Calculator to help guide you.
- Save (If not self-employed): The W-4 will be a forced way to save the money you will owe at tax time. The other option is to save back the money yourself. This requires discipline in order to avoid tax problems later.
- Estimate self-employment tax: Most very small business owners trying to side hustle, or just starting their own business don't pay quarterly estimates, nor do they save back money to pay their taxes. This causes a lot of problems in the first few years of running a business. The IRS website has Pub505 (2016 version) that can walk you through. I'd suggest setting a few hours aside to figure this out. Otherwise seek a tax professional to help you figure out your estimated taxes.
What to do With a Tax Refund?
We like getting a refund. It makes it enjoyable for us to do our own taxes. It's probably what gets us excited to do our taxes in early February. It is, however, a balancing act. Having gone through various job changes, and adding a few kids along the way, it's us guessing at what our tax return will look like each year.
Our goal is to get about $1,200 refund. If we could pin-point our entire tax situation for the year to the penny and plan out a zero owed/zero return scenario, we could have an extra $100 in our budget each month. If we owed $1,200, we would need to be saving $100 every month so we could pay the tax bill when it comes. So, we try to tip the scale toward a slight refund. Again, it makes it fun for us to figure out how much we will get back in a refund.
And, then we try to put those refund dollars to productive work in our budget. It usually helps us catch up on some savings shortfalls, or fund some things we'd like to do in the coming year. The key is being intentional with the refund.
How We Are Being Intentional With our 2016 Tax Refund
This year, we had some changes to our situation that caused us to receive a larger than expected refund. This year, we are using the refund to catch us up on our emergency fund. We've only been inching our way toward progress as I've shared recently. Last year we used our refund to help catch us up on saving into our HSA. This year, we have that pretty well under control on a monthly basis, so we've decided to save our refund.
We're still working on building our emergency fund up even further, but we will also be increasing our savings for newer vehicles. We've neglected savings for these, because the budget has been too tight and something had to go. We figured savings into our emergency fund was more important and if push came to shove, we could use that emergency fund to help get us a different vehicle anyway.
Because we are getting some money back in our budget this year, we'll use those dollars to fund our vehicle replacement category on a monthly basis.
We could use our tax refund to take a spring break trip to South Padre Island to be on MTV, but that wouldn't align with our priorities... maybe next year... (I don't think that scene ever fit my personality, but an MTV reference just felt right.)
Whatever you do with a refund, make it intentional. If your priorities are taken care of and you desperately need a getaway, or a break from the day to day, then make it happen. As long as you have a plan for your other priorities, then you can likely afford having a little bit of fun with your tax refund. In moderation, of course.
When Will I Get My Refund?
Once you've filed, go to https://www.irs.gov/refunds and you can see when your refund is estimated to arrive. You'll need to enter your SSN, filing status, and amount of your return.
What's your strategy when it comes to taxes?