Extensions, Refunds And More
For those of you yet to file your tax return, it's time to get going. You've only got a few days left. Stephanie AuWerter, Deputy Editor of SmartMoney.com, has some tips for last minute filers.
Can't get it together? File for an extension. The good news: Approval for an extension is automatic. Fill out an IRS form and you'll get an extra six months. "It's a pretty short form that you need to fill out," says AuWerter. But here's the bad news: the extension is on the paperwork. It's not on the amount you owe. So if you owe money to the IRS, you need to pay up when you file for that extension, otherwise you'll be charge a penalty. Now by the time you figure out what you owe - if anything - chances are you'll be ready to file. But if you're certain you're getting a refund or if you're missing some outstanding paperwork, but have a good idea of what you owe, this will give you some breathing room.
If it turns out that you owe the IRS more money than you have on hand, you do have options. This can happen with freelancers, for example, who don't have taxes taken out of their paychecks. For starters, you can pay with a credit card, but you should be aware that you'll be charged an additional 2.5% "convenience charge" on top of your normal interest rate for doing so. Another option, is to set up an installment plan with the IRS. You'll be charged a $52 set up fee, and pay 11% annual interest on the outstanding balance. "You need to crunch the numbers to see which one is the better deal," says AuWerter.
For those of you out there who don't owe money this year, you're probably watching the mailbox every day for your refund check. If you got a huge refund, you've just given the IRS an interest-free loan for the past year. Getting a refund is always a nice thing, but you should shoot for getting a small one. Chances are you could put that money to good use throughout the year. In this case you might want to increase the number of exemptions you claim on your W-4. On the flip side, if you owed a lot this year, you may want to decrease the number of exemptions on your W-4. According to AuWerter, "You want ...to get [the number] in that sweet spot where you're getting a small refund each year."
Once that refund check shows up, you're probably going to start thinking about how you're going to spend it. Most folks do get a refund; on average, most people will get back about $2400 this year. It's completely natural to want to grab that money and head to the nearest mall. But if you haven't already set up an emergency fund - and most Americans haven't - that is the best use of these dollars. Remember, you should have three to six months worth of living expenses held in a cash account - like a high yield savings account - that you can tap should something go really wrong, like if you lose your job or the car breaks down. AuWerter recommends taking 75% of that refund and save it for a rainy day. The remaining 25% you can go have fun with.
For more information on last-minute tax tips, as well as other personal financial advice, click here.
By Erin Petrun