By Pat Melgares, K-State Research and Extension news service
MANHATTAN, Kan. – For some taxpayers, income tax season is a time to look forward to an anticipated windfall. For others, it’s the sign of a big bill coming due.
But whether you are expecting a refund from the IRS or will owe money, Kansas State University family resource management specialist Elizabeth Kiss says you should have a plan well ahead of this year’s April 18 filing deadline.
“If you’re getting a tax refund, there are a couple things to think about,” Kiss said “One is what to do with the money, in which case you can think of that as windfall income. But the other thing to think about is that if you’re getting a refund, that’s essentially a loan that you’ve given to the government to use until you get it back.”
Kiss said consumers should plan for how to use the extra boost of cash, which may include paying off outstanding debt, catching up on bills, or boosting savings accounts. But she also said it’s okay to think about having a little fun.
As an example, she suggests portioning the money between several goals.
“Let’s say you’re getting $1,000 back. If you put 30% toward paying outstanding debt or bills, that’s $300. And if you put 40% toward your needs and wants – having some fun – that’s another $400. And then you can put 30% to establish or build up your savings, that would be $300.”
Kiss adds: “I’m a big proponent of thinking about your plan once you’ve filed your taxes and you know how much you’re going to get back. While it’s great to have it come back by direct deposit to a savings or checking account, having a plan is even more important. Otherwise, it can just get frittered away if you don’t have a plan for it.”
Kiss said taxpayers who receive a large refund may want to re-think their income withholding options. Rather than letting the government keep your money for most of the year, consider keeping a little more of that money to yourself on each paycheck.
“That way, you’ll have a little more on which to live on a regular basis,” she said. “If you have the money upfront, you can plan for how to use it. Even if you’re saving it, you may not be saving the same 30% of a lump sum all at once, but you may be saving smaller amounts on a regular basis, which in the end you are saving the same amount over 12 months…and taking advantage of the time value of money in the form of interest.”
For those who anticipate owing money to the IRS, Kiss suggests completing your return early.
“The earlier that you can know how much you actually owe, the sooner you can figure out what your situation is,” she said. “Then, you can make plans for paying back that money. You don’t need to file or pay the money until the deadline, so you will have some time to plan ahead.”
Kiss said the IRS offers payment plans for those who can’t pay their tax debt right away. The web address for more information is irs.gov/payments. This year’s deadline is April 18 because of the weekend and the District of Columbia’s Emancipation Day holiday, which falls on April 17.
Also, free tax help is available across Kansas and the U.S. through the Volunteer Income Tax Assistance program. From the IRS website, search for free tax help and enter your zip code to find free help in your area.
Whether getting a refund or paying now, “we all have to pay our tax obligation,” Kiss said. “So, the earlier you can complete your return, the better so that you can begin to plan for how you will use the return or how you will accumulate the funds to pay for what you owe.”