Many people look forward to receiving a tax refund each year. They use it for emergency savings, paying off debt or investing for retirement.
However, if you’re not careful, a tax refund can become an obstacle to overcome. This could lead to overspending which may not be in line with your long-term financial goals.
Overspending
Overspending can have serious repercussions for your financial well-being, so it’s essential to limit these behaviors in order to reach long-term objectives. It also helps to enlist the support of friends and family in making wise decisions.
Overspenders often struggle with resisting impulse purchases, so set yourself a budget and stick to it. Additionally, it helps separate wants from needs so you don’t feel compelled to buy items you cannot afford.
If you’re having difficulty controlling your spending, try breaking it up into small, manageable steps that will become habits over time. For instance, start a savings account and set aside 15% of every paycheck as savings; this will allow you to build an emergency fund that can protect against financial instability in the future. It could also serve as motivation as you begin seeing how much money is saved monthly or weekly.
Side hustles
Side hustles have become an increasingly popular way for many people to generate additional income. They can provide the opportunity to work towards financial objectives such as paying off debt, saving for retirement or weddings, or purchasing a home.
When looking for a side hustle that fits into your lifestyle and schedule, be realistic about the time commitment required. Bear in mind that side hustles require significant dedication as well as often come with startup costs.
Furthermore, it’s essential to determine if the idea you have fits with your passions and interests. That could include writing a blog, selling art online or walking dogs for a living.
If you have multiple side hustles, all earnings must be reported on a 1099 form. If any of your gigs generate more than $600 in income from one source, that income must be included on your tax return.
Tax credits
Tax credits are available to taxpayers to help them reduce their taxes. These credits may be nonrefundable or refundable and are usually offered on both state and federal levels in order to encourage certain behaviors such as purchasing solar panels, adoption or child care services.
Credits work similarly to deductions, but instead of reducing taxable income they directly lower your tax bill dollar for dollar. As such, many tax professionals believe credits to be more advantageous for taxpayers than deductions.
Some of the most popular tax credits include the Earned Income Tax Credit and Child Tax Credit. Both are refundable, meaning if your credit amount exceeds your tax liability, you can receive a refund.
Tax preparation
Filing a tax return and having the government refund you any taxes withheld from your paycheck can be an attractive option for many who require extra funds. This option has become more and more popular in recent years as people look for ways to stretch their budgets.
Your refund amount will depend on your income level, deductions and filing status. Furthermore, the complexity of your return also has an effect.
For instance, if you are self-employed and run a business with multiple owners, your tax preparer might need to calculate the number of individuals and how much each should pay in taxes.
When working with a tax professional, it’s essential to stay abreast of any modifications in the tax code. Doing this will guarantee that you get the most out of your preparation fees and final refund amount.
