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    Getting a Loan with Poor Credit

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    There are some purchases that require loans. Some people may be able to save up in order to make those larger purchases, but often the goals are just too large, or the need is immediate. However, poor credit choices in the past can come back to haunt you in the form of a low credit score. There are ways to get the loan you need, even if your credit score is less than desirable. Here are a few of the things to keep in mind.

    Put More Down

    Credit scores are a measure of risk. A lower credit score means that you are more likely to default on the loan, and the lender will suffer a financial loss. A higher score means that you are more likely to make on-time payments, and the lender will get their money back. If you pay more for your down payment, then you are able to reduce the risk to the creditor. This means that they will be more likely to give you the loan.

    For instance, suppose you want to buy a car for $15,000. You decide to put $5,000 down, but the lender won’t give you the loan. So you increase the amount down to $8,000. If you still default on your loan, the lender can have the vehicle repossessed, and likely be able to sell it quickly to recoup the remaining $7,000 loss.

    Pay More in Interest Charges

    Higher credit means the lender is more likely to get their money back. So they want to encourage those with better credit to take out more loans. In order to draw them in, lenders offer lower interest rates for those with a high credit score. This is not good news for those suffering from poor credit.

    Instead of waiting, you can get that loan now, and pay the higher interest rates. After a year or two, take a look at refinancing. You may be able to get the interest rate down to something that is more appealing after your score has gone up over the past two years of making on-time payments.

    Build Your Poor Credit to Good Credit

    If you have a low credit score (which is defined as having a score of less than 640) then you may be better off waiting on the big purchase while you increase your credit score. There are a few ways to get your score up that will not require a lot of work on your part.

    Increase your credit card limit: Believe it or not, increasing the limit on your card can actually boost your score. Your credit card reports each month how much you owe on it (even if it’s paid off every month), and what your limit is. So if your limit is $5,000 and you charge $4,999 every month, you are using basically 100% of your limit (and posing a risk of going over or missing a payment). However, if you raise that limit to $10,000, and you still charge $4,999 every month, you are only using about 50% of your limit and you are seen as though you are in better standing.

    Take out a credit card: If you don’t have a credit card yet, then you should get one. If the bank gives you trouble about it, ask for a secured card. This means you put $500 (or whatever the bank requires) into a CD or savings account. This is your collateral on the card which will have an equivalent credit limit. If you miss a payment, the bank has the right to dip into your savings to pay your bill. Just don’t let that happen; instead spend $10 or $20 each month and pay it off right away.

    The bottom line is make timely payments on your credit, and over time your score will go up.

    Getting a Loan with Poor Credit

    If you need to make a big purchase this year, and you suffer from poor credit, then 2015 is the time to get that back on track. After you have an accountant in Billings, Montana prepare your taxes, and you have received your refund, then use that money as the down payment on the loan. That may be all it takes to secure it. If not, follow the above tips to help get your credit to a better status.

    Practical Taxes is a full service accounting firm in Billings, Montana. If you need a simple tax preparation, then make an appointment to come on in. If you need payroll services, business consulting services, or other finance related services, give us a call and set up an appointment.

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    Use 2015 to Revamp Your Financial Health

    Finances-300x225The New Year is upon us, and now is the perfect time to get your finances in order. There are some things that just about every single person needs to be financially fit. Without those pieces, your overall finances will never be complete. Here is a list of the most important parts of your financial plan, if you are lacking in an area, use this year to get it fixed up.

     

     

     

     

    Emergency Fund and Other Savings

    Ask any financial expert, and they will tell you that an emergency fund is one of the most fundamental components of a healthy financial plan. This fund can look different depending on the person, but it has a few key features that make them all similar. First, the money has to be easily accessible. This means you should not be using home equity as your emergency fund. Second, it should be safe; that means no risky stock ventures or buying bitcoins. Instead, most people opt for a high-yield savings account to stash their money in case something happens and they need a boost. After have your tax return prepared by an accountant in Billings, Montana (you can do so by utilizing the services of Practical Taxes, you should have a refund that you can use to get a jump-start on your savings.

    Insurances Protect Your Financial Health

    We live in a world where we can protect ourselves from the unknown. While the premiums may not be something you really want to pay, they are always much lower than the out-of-pocket costs if tragedy hits. There are ways to protect your income and finances through insurances such as:

    Life Insurance: Leave your legacy, provide for your family, and cover final expenses all after you are gone. Utilizing permanent life insurance can help you meet savings goals as well as protection goals.

    Disability Insurance: Most disabilities are caused by illness rather than major accidents. And you don’t have to be in a wheel chair to be disabled. If you are young, you have a lot of years left before you will be done working. Protect that income with disability insurance.

    Financial advisors will tell you that insurances make up the foundation of your financial plan. Without protection against the “what ifs” there is no real way to plan for the future. Review your insurances over the next couple of months and make sure they are adequate.

    Investments Build Your Financial Health

    There is essentially no way that you can retire comfortably without investing some of your money. Social Security was never designed to cover all of your retirement goals, so you need to put money away on the side as well. Those investments can be in a tax qualified plan, like a Roth or Traditional IRA. Or they can be invested in non-qualified accounts. If you do choose the non-qualified option, your accountant in Billings, Montana can help you to determine the best way to report the gains on them. There are ways to minimize the taxes that come as a result.

    Get Rid of Your Stuff to Increase Financial Health

    Our culture shows us that people are prone to collecting stuff. We buy a house, and we have to fill it. We buy things we think that we need, and after using them a few times, they sit idle in the closet. You can use 2015 to help get your home organized, and build your net worth at the same time. More expensive items can be sold on Ebay or Craigslist, and smaller items can be filler for a garage sale. If you choose to just donate things that you don’t need any more, that is great too. You will be able to deduct the value off of your taxable income.

    Revamp Your Financial Health, and End the Year in the Green

    Let’s make 2015 the year where we get the most out of our finances. Starting with getting your taxes prepared by a professional accountant in Billings, Montana, and ending the year with money coming in on the side, make this the year that your financial picture looks great.

    Practical Taxes is a full service accounting firm. If you need online payroll services, this is your place to be. If you need business consulting services, then look no further. Of course if you just need a professional to do your tax preparation for a cost that is affordable, we can do that as well.

     

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    Tax Implications of Selling Your House

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    A great way to build wealth is to own a house. Now keep in mind that buying a house just because you think it’s the perfect investment is actually not the way to go. A house is a good investment, but there are better ways to invest that will earn a bigger return.

    But what happens when you want to sell your house? Suppose you want something bigger, or maybe smaller. Perhaps you’re sick of maintaining your home and you want to move into a rental. Or you have been transferred out of state for your job. No matter what the reason for selling, there are tax implications of selling your house that you need to be aware of (don’t worry, your accountant in Billings, Montana will know the specifics; you just need to be aware).

    Avoiding Taxes when Selling Your House

    In 1997 the Taxpayer Relief Act was passed. This law provided a big relief to those who were selling their home and making a bit of a profit on it. Before the law was passed you had to reinvest those profits into another home (a bigger home) within a certain time period. Now you get a big break.

    2 of the last 5 – The law states that if you have lived in the house, as your primary residence, for at least two of the last five years, then you can claim the capital gains exclusion when selling your house.

    $250,000 to $500,000 – If you file your taxes as single, then you can profit $250,000 on the sale of your house and not have to pay taxes on the gains. If you are married, then you can profit up to $500,000 on the sale of your house.

    Age is Just a Number – You can claim the capital gains exclusion no matter how old you are. You don’t have to be over 55 to get this.

    Before 1997 it was pretty hard to sell a house, make a profit, and get away without paying the taxes. Now it is pretty easy to sell a house, make a profit, and not have to worry about paying taxes on the gains. But there are times when you still might owe.

    When do You Pay Taxes when Selling Your House?

    Not everyone can get away without paying taxes on the sale of their house. But you almost have to try hard to pay those taxes.

    If you profit more than the exclusion allows, then you will owe taxes when selling your house. But the good news is that you don’t owe taxes on the full amount. For instance, if you are married, and you sold your house and made a profit of $500,100, you would only have to pay taxes on the $100 over the exclusion amount. There is more though. If you make over $200,000 per year, there is a Medicare tax imposed on the gains over and above the exclusion.

    Keep in mind that you can only claim the exclusion for one house at a time. So if you sell your primary residence, you can claim the exclusion. But then if you sell your vacation home, you cannot claim the exclusion (because you weren’t living there for 2 of the last 5 years).

    Taxes when Selling Your House

    Still have questions about the tax implications when selling your house? Contact Practical Taxes today!

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    Ways to Earn Tax Advantaged or Tax Free Income

    Investing-300x199Have you ever wondered how the super rich can get away with earning millions of dollars, but they hardly pay anything in taxes? They aren’t cheating or breaking the law, those who earn that much are at a high risk of being audited. Instead, they are taking advantage of a system that is put in place for everyone to use, but most choose not to. There are a number of ways to earn reduced tax or tax free income, and if you make use of these methods, hiring an accountant in Billings, Montana to prepare your tax return will be a no brainer.

     

     

    Municipal Bonds Provide Tax Free Income

    In order to raise money to pay for large ticket items, local governments issue what are called municipal bonds (for instance, when Dehler Park was built in Billings, a large portion was funded through bonds). These bonds are exempt from federal income taxes, and often they are exempt from state and local taxes as well (usually the caveat is that you must live in the area).

    The trade-off, however, is that municipal bonds don’t pay nearly as much interest as a corporate bond. Suppose a low-risk corporate bond (one issued by General Electric for example) is paying 6% interest, then a municipal bond may only be paying 3% or 4%. That is the price to pay for something safe and tax free.

    Suppose you buy $10,000 worth of bonds that will mature in 15 years and they have a 4% yield on them. Now there is a lot that goes into bonds about par value, and buying at a discount, and all of that. So let’s just say you paid a flat $10k. Every year (usually distributed quarterly), you will earn $400 from the interest on the bond. You keep 100% of that, it is all tax free income. At the end of 15 years you get your $10,000 back as well.

    Invest Outside of your IRA For Tax Advantaged Income

    Many people have been told to invest in an IRA since that is the best tax advantaged vehicle you can get. But there are times when you will want to invest in a non-qualified account (qualified means tax advantaged, non-qualified means your earnings are taxed). The math works like this if you are in the 25% tax bracket:

    Suppose you invest $100 in your IRA. Suppose it grows to $200 and then you withdraw it. You then pay taxes. Total taxes paid: $50.

    Now let’s suppose you put $100 into some stocks. After it has been in more than one year, it grows to $200, so you take it out. You owe 15% capital gains tax on the growth, and you already paid 25% tax on the initial money. Total taxes paid: $40.

    Now this isn’t tax free income, but it is tax advantaged. Sometimes it makes more sense to invest outside of your IRA than to invest inside of it (however, if you have access to a Roth IRA, then it is best to max that out before trying this method).

    Other Tax Free Income

    There are some other ways to earn tax free income, or at least reduced tax income. Your accountant in Billings, Montana can help you with those ways. When you call Practical Taxes to set up your tax return preparation, keep these methods in mind. When you visit with Mike, then you can discuss their feasibility with him.

    Practical Taxes is a full service accounting firm in Billings, Montana. That means we do everything that an accountant does including payroll, online payroll, tax preparation, business consulting, and much more.

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    5 Sources of Taxable Income You May Not Know About

    Taxable-Income-300x199As we enter the new year, taxes are on many people’s minds. Some may be excited because they know they will be getting a larger refund this year, others may be worried because they haven’t adequately prepared and didn’t start a file for 2014 taxes when the 2013 taxes were finished. If you are like most people, then you probably have a general idea of where your taxes are going, but there are a few sources of income that you might forget about when getting your return in order.

     

     

    Social Security can be Taxable Income

    For most people, the benefit that they receive from Social Security will not be taxable. However, there are instances can cause your benefit to taxed. If your only income was from Social Security, you likely don’t have to worry, but if you have other income (even if it is tax-exempt) you could owe taxes on your benefit. The baseline income that would make your benefit taxable is $25,000 for an individual and $32,000 for a married couple. An accountant in Billings, Montana can help you determine if your benefit is taxable.

    Gambling Winnings are Taxable Income

    If you spent a couple dollars on a scratch ticket, and you won $5, you technically need to report the difference on your taxes. Most people will report other sizeable winnings, though, because in order to collect the price they generally have to fill out a tax form. If you won a large prize, you can expect to receive a W-2G form to report your winnings. Keep in mind that you can deduct gambling losses (they cannot, however, exceed the amount that you won).

    Punitive Damages are Taxable Income

    If you were involved in a lawsuit last year, and you were awarded a settlement that goes over and above compensation for damages, then you will likely owe taxes on the amount you received. This includes punitive damages, monetary compensation for injury to your reputation, compensation for emotional damages, and other similar incomes.

    Forgiven Debt can be Taxable Income

    Have you ever owed a large amount of money? Suppose you owed on a credit card, and in the terms of settling the debt some of it was forgiven. The portion that was forgiven may be counted as taxable income by the IRS. Keep in mind that houses are excluded from this; you need to work with an accountant at A+ Accounting and Consulting in Billings, Montana if you have had debt forgiven.

    Scholarships may be Taxable Income

    The cost of college is going up rapidly. Since many people cannot afford to attend, they apply for scholarships to help cover expenses. If those scholarships are used to pay tuition, books, and supplies, then they likely won’t be taxed. But if they are used to pay for room and board, they could be.

    Unless you have a single W-2 with no other earnings and you will only be claiming the standard deduction, you would likely be better off working with an accountant in Billings, Montana like Practical Taxes. With all of the unusual taxable incomes out there, as well as a number of deductions that you might not be aware of, you will save yourself a lot of headaches by letting a professional take care of your tax return.

    From bank reconciliation, to online payroll, to tax preparation, Practical Taxes can do it all. We are a full service accounting firm in Billings, Montana.

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    Avoid Paying Taxes by Using Permanent Life Insurance

    Retirement-300x225Did you know there is a way you can access money without paying taxes on the benefit? It is completely legal; we are not avoiding any laws here. But tapping into the cash value of a permanent life insurance policy will help you to boost your income during retirement, but not boost your tax bill. There are multiple other ways as well to keep your income high, but your tax bill low. Talk with an accountant in Billings, Montana, if you want to learn about some of the other ways to do so.

     

     

    How Permanent Life Insurance Works

    There are two basic types of life insurance: term and permanent. Term insurance will provide a death benefit as long as you are up-to-date on your premiums, and you die within the term specified. Permanent, on the other hand, will provide a death benefit as long as you are up-to-date on your premiums no matter when you die. But that’s not all.

    Permanent insurance is a unique financial tool because it not only gives you the death benefit, but also has cash value. This cash value is like a little side fund where your money can grow, tax free, until you withdraw it or you die (if you die you don’t get both the death benefit and the cash value, but rather just the death benefit). That cash value can be tapped into at any point, but there are ways to get at it without taxes.

    Using the Cash Value of Permanent Life Insurance

    Suppose you own a house, and you want to utilize the equity that you have built up. Would you sell off a portion of the house? Or would you use a home equity loan? If you have a house with a lot of land, you may consider selling off a few acres from the back of the lot, but for the most part people will take out a loan. Using the cash value from your permanent insurance will work the same way.

    Instead of cashing in your insurance, which would leave you with a lower death benefit, most people choose to take a loan against the cash value. They can utilize the cash, and not have to worry about losing their insurance. Even better, though, is that since it is a loan, there are no taxes that are owed on the money.

    Repaying the loan can be done in a few different ways. Many people choose to repay it slowly, a few hundred dollars each month or year, but some choose a different method. Since the death benefit is still intact, and if the loan isn’t too big to risk the policy running out of cash, some people do not even bother paying off the loan. They simply wait until they die, and then the death benefit (a benefit that is almost never taxable) will repay the loan and the remainder will go to the beneficiaries.

    Maximizing Your Retirement Income

    Retirement takes planning. There is no way to get around that. By starting early, and setting up a Roth IRA, getting permanent insurance, relying a little bit on Social Security, and having a 401k, you can set up your retirement so that there are minimal taxes, but considerable income. If you are approaching (or in) retirement, talk with Practical Taxes to determine your best course of action.

    Practical Taxes is a full service accounting firm. We can do payroll, tax preparation, business planning, online payroll, and much more.

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    Protect Yourself with Disability Insurance

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    If you ask people the question, “What is your greatest asset?” you will get a range of answers. Many will say that it is their house, others will boast that their 401k is the biggest, and still others will jokingly say that their life insurance will pay out a million dollars, but only if they’re dead. Almost everyone will miss the true answer: your earning ability. Over the next few decades, you have the potential to earn millions of dollars. But that ability disappears if you are hurt, injured, or suffer an illness that leaves you unable to work. Disability insurance can help you offset that risk, but you should understand how it works, and what the tax implications are.

     

    What is Disability Insurance?

    There are big misconceptions about what disability insurance is, and what it can do for you. Here are a few of the biggest ones:

    • Major Disabilities – Disability insurance covers all disabilities. If you cannot perform the duties of your job, then you are disabled. You don’t have to be paralyzed or comatose. There are a number of people out there that have lower back injuries and prevent them from sitting for long periods at a time: they are disabled even though they can still go rock climbing. A painter that fractures his wrist could still do a lot, but is disabled. The policy will dictate own occupation or any occupation.
    • On the Job – Disability insurance is not workers compensation insurance. If you are injured on the job, or off the job, a disability policy will provide an income if you cannot work (assuming you meet the requirements, for instance you can’t become disabled because you were committing a felony).
    • Employer Coverage – Most people mistakenly assume they have coverage through work. While some do, many do not. And even if a person has disability insurance through their job, that policy will often only cover 60% of their income; and the benefit received is subject to taxes.

    Taxation of Disability Insurance

    Disability insurance is taxed differently depending on who owns the policy. Figuring it out is not too difficult, but in the event of an oddly worded policy, you may need the help of an accountant in Billings, Montana to do so.

    • Employer Provided Policies – A disability policy that you get as a benefit of your job is almost always taxable. Look at it this way: do you pay for the policy? If not, then it is most likely a taxable benefit. These benefits pay about 60% of your salary, so after taxes that could be less 50%.
    • Personal Disability Insurance – A disability policy that you took out, and you pay the premiums on it, is most likely not taxable. You have paid taxes on the money going into the policy, so the money coming out of the policy is not taxed. There can be some situations where this is not the case, so A+ Accounting & Consulting can help you figure that out.

    Protecting Yourself with Disability Insurance

    If you are working, even if you are not supporting a family, you should have disability insurance. This coverage will protect you in case you cannot work and cannot provide an income any longer. Seek out a financial professional to get a quote on what it will cost to protect your greatest asset; if it is too much then get enough coverage to at least pay for your rent or mortgage. If you need help determining whether or not your policy will be taxable, then you should talk an expert at Practical Taxes. We knows about taxation of disability insurance, tax preparation, business planning, online payroll, and a whole lot more.

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    Maximize Your Taxes with Student Loans

    Student Loans It’s very easy to see how rapidly the costs of higher education are increasing. But that shouldn’t deter you from seeking an education. There are a number of benefits to completing your degree, and even if you have to take out student loans in order to make it happen you can still benefit. Here is some of the quick math when it comes to taking out student loans and how that will help you with your taxes next time you file.

     

     

     

    Costs of Higher Education

    Education can be incredibly expensive if you let it. However, there are ways to get a degree without paying outrageous prices. Even if you attend a private university, where the costs are the highest, you can still get by with very few loans if you get to know the right people. Here is what it looks like for an education per year:

    • Private University/College: $30,000
    • State Schools – Resident: $8,900
    • State Schools – Non-resident: $22,200

    Now keep in mind these are national averages, so wherever you live those could be vastly different. But suffice to say that the costs of tuition and fees (not to mention room and board) range from $35,600 to $120,000 for a four year degree (assuming no cost increases during your tenure). That is a lot of money to owe when you get done; and there is no guarantee of a job. But that’s another topic for another time.

    Paying Back Your Loans

    Currently interest rates on your loans are fairly low. For undergrad degrees, the rate (until July 1st when it readjusts) is 4.66%. Even though this is a pretty low interest rate, it also means that you will be paying back quite a bit over the next 20 years.

    • $35,600 loan: Your monthly payments will be $228.31, and pay a total of $19,194 in interest.
    • $120,000 loan: Your monthly payments will be $769.58, and pay a total of $64,700 in interest.

    That is a lot of money to pay back over the next 20 years. So how does one justify taking out a loan?

    Incomes With and Without a Degree

    There are a lot of variables that go into determining income. For instance, there are a number of very high paying jobs that do not require a degree at all. And there are some jobs that require a degree, but pay hardly anything. When you take everything into account, we can determine the average incomes for various educational levels (statistics are for the year 2012).

    • Average annual income with a Bachelor’s Degree: $46,900
    • Average annual income with a high school education: $30,000

    Let’s suppose that you go to a state school and get out with just $35,600 in loans, and you are able to land a good job right away. You will be making an additional $16,900 over your peers that have just a high school education. How does that look for the next 20 years (ignoring raises and promotions)?

    • High school education: $600,000
    • College Degree: $932,000

    Even after you deduct the cost of the education ($35,600) and the interest that you paid ($19,194), you have still made $877,206; or $277,206 more than if you had skipped the degree. Factor in raises and promotions that allow you a larger income over those who did not get the degree and you have an even greater advantage.

    Using Student Loans

    Getting your degree without the help of parents, scholarships, or other means is still possible with student loans. The good news is that the interest that you pay on those loans is tax deductible. This means that while you are repaying those loans you get to experience a lower tax bill because of your write-offs.

    If you are in need of simple tax preparation services, we can help you maximize the deductions available for student loans and others.   Practical Taxes is a full service accounting firm with services ranging from payroll, to business planning, to tax needs.

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    Tips to Paying Off Your Holiday Debt

    Holiday-Debt-300x224Christmas is barely over, and the New Year is rapidly approaching. Now isn’t exactly the time you want to think about what to do about the debt that has crept up from spending on the holidays, but it is a great time to make a plan to wipe out that debt as quickly as possible. Most people end up spending more than they would like to every year. This causes them to go into debt; and if that debt isn’t taken care of it can be a huge drain on your finances. Here are some tips to get out of debt quickly, and get on track for next year’s holiday season.

     

     

    Determine Your Holiday Debt

    The first step to getting out of holiday debt quickly is to figure out just how much you have. This shouldn’t be difficult, since you will soon be getting statements showing what you owe. If you have more than one credit card that you owe on, create a simple spreadsheet that shows the amount and the interest rate.

    Call Your Card Companies

    Most people don’t understand that the interest rate they are paying is not set in stone. A five minute phone call can help to reduce that rate immensely, and help you pay off your holiday debt sooner rather than later. Keep in mind that the first person you speak to will likely say that they can’t change your interest rate. Politely ask to speak with someone who has that authority. If they push back, tell them you have a 0% interest balance transfer card ready to go, and you will be canceling your account with them if a deal can’t be reached. Be prepared to back up your statements.

    Pay Extra on the Highest Interest First

    Once you have negotiated the interest rates on all of your cards, it is time to make a plan to wipe them out. Your spreadsheet will tell you how much you owe and what the new interest rates are. Pay the minimum on the lowest interest cards, and put all of your extra money toward the highest interest card. When that one is paid off, move on down the line.

    Slash Expenses and Earn More on the Side

    Until your holiday debt is gone, no more extra expenses. Cut the cable out, stop dining at restaurants, avoid frivolous purchases, and even keep the lights off to save on your utilities. The goal is to have as much money as possible to wipe out that holiday debt. You may want to pick up some extra money by selling unneeded items, shoveling sidewalks and driveways, or starting your own side hustle.

    Use Your Tax Refund

    If you haven’t paid off your holiday debt by the time you get your tax refund, you can use that to wipe out the remainder of it. But then take it one step further. Anything that remains from your refund should be set aside to avoid debt when next year’s season comes around. Set up a side account at your bank (most will do this for free), and then put another $50 into it every month. Use that money for Christmas presents and avoid the fiasco in the future.

    Hire an Accountant to Help

    If you need help planning your holidays, an account in Billings, Montana is probably not going to help you out too much. But  here at Practical Taxes can help you get the biggest tax refund possible. You may be surprised that you have more coming back to you than you originally thought. With his services you can get your holiday savings back on track quickly.

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    Overpaying Your Taxes May Be a Good Thing

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    Large bills fanned out and held in hand

    If you follow any personal finance blogs, you will probably notice that a lot of them tout the advice to “stop giving the government an interest free loan!” This advice is based on the fact that the average income tax refund is around $3,000. When we overpay our taxes, we let the government keep that loan, but they never pay us interest. Sounds like a bad deal doesn’t it? It might not be so bad.

     

    More in the Paycheck

    The idea is to reduce your withholdings in order to keep more money in each paycheck. Let’s suppose you were to accurately estimate your taxes so that when you filed your return, your refund was $0. Based on the average refund amount, you will have around $115 extra dollars in your paycheck every two weeks.

    Now suppose that you did have the discipline to actually save that $115. You put it into a savings account and let it grow earning you interest all year long. At the end of the year you would have less than $3,030. Based on current interest rates of around 1%, your hard work and discipline would net you less than $30.

    Of course, most people won’t have the discipline to save the $115 from each paycheck.

    A Bigger Tax Refund

    On the other hand, let’s suppose you didn’t worry about estimating your taxes so precisely. After you file your taxes you get a refund of around $3,000. You rejoice that you have some money back, and you dump $2,700 into a savings account and then splurge the other $300 on buying something nice for yourself.

    At the end of the year you have $2,700 in your savings.

    Which Would You Rather Have?

    Most people, if they have the extra $115 in their paycheck will spend that $115. They will see the extra money and think they can stay for that extra drink at the bar. They will go out to eat one more time this month. They will buy a new pair of shoes or a new coat. Now there is nothing wrong with those things, but if your “refund” is being spent on them, it defeats the purpose of taking a bigger paycheck in order to save more.

    The reason is that psychologically we see the money coming in differently. When it comes in slowly, as part of our paycheck, we think of it as money that we earned and we can splurge on whatever we want. We also don’t see the harm in small purchases of $20 or $25. However, when it comes in as a big chunk, it’s seen as a windfall. Even though $2000 all at once is the same as one hundred $20 purchases, it feels different. We are more inclined to save large chunks of money than to spend them.

    So if you are trying to minimize the size of your tax refund by taking more in every paycheck, you may be setting yourself up to spend more money than if you were to let the government hang on to your money “interest free.”

    Hire an Accountant for Maximum Refund

    Practical Taxes can help you get the most out of your taxes. We know tax laws. By hiring him to do your taxes you free up your time, make sure they are done right, and most likely your refund will be larger than if you try to do your taxes on your own (even after paying the modest accountant bill). Contact Practical Taxes today to learn more about what we can do for you.

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