Taxes are past due for 2020 (unless you filed for an extension)
A lot of clients who receive W-2 paychecks are getting their tax returns back and calling in to tell us if it was “good” or “bad”.
This is obviously open to interpretation, and we want everyone to feel like they did a good job with tax planning. Unfortunately, not everyone feels this way every year and there are some ways to stack the deck in your favor.
What is Better: Getting a Refund or Owing Money?
We generally see people refer to getting a tax refund as doing a good job on taxes. All this really means is that you paid too much during the year and loaned the IRS money (for free) and they are legally obligated to give it back to you.
This is not necessarily bad, but we are not looking for investments that will guarantee our clients a 0% return.
On the other side of this is owing money. No one ever likes to owe money and they certainly don’t want to have to stroke a big check to the IRS. This often makes people feel like they did a bad job of tax planning. All this really means is that you underpaid during the year and the IRS is looking for you to make up the difference.
This is not necessarily a positive strategy, but we regularly look for loans at the lowest interest rate possible for clients (see our post on refinancing your student loans).
Here is how we believe tax planning was meant to be done:
“Anyone may so arrange his affairs that his taxes shall be as low as possible…there is not even a patriotic duty to increase one's taxes.” - The Honorable Judge Learned Hand
Our goal is to try to minimize the tax burden that clients face by using the well-documented and legal strategies that are available. The result is generally a cash-neutral return. You pay what you owe throughout the year and do not owe or receive any tax return at end of the year.
This means that your money was hard at work for you the entire year.
So, what should you do?
If you need help with forced savings, the easiest ‘trick’ is to have your payroll increase your withholdings. This will make them hold additional tax dollars back from each of your paychecks. At the end of the year, that money will come back to you in the form of a larger tax return.
We would rather see you do proper tax and cash flow planning in advance so that you have all the money available to you earlier, but we certainly understand that not everyone is in that position quite yet.