Monday, February 17, 2014

Double Down this Tax Season {No Casino Necessary}

amandagrossman for the Houston Chron writes:  Isn’t it human nature to want just a little more?
This time of year can feel like winning the jackpot for some, and a time to pay the piper for others. I’m talking about taxes. You can bet that if you are anticipating a tax refund, you are much more likely to file your taxes as soon as you’ve collected all the forms.
Who wouldn’t be in a hurry to receive a big, fat check or deposit? (Notewhether or not it’s a sound financial decision to get a refund each year is an entirely different discussion).
So before you figure out how you want to spend those crisp twenties, I want to show you how to insteadincrease your holdings without gambling at a casino, under-reporting income earned, or taking on any risk at all. Intrigued?
Double Down Strategy #1: Double Your Tax Benefits
If you are a taxpayer who is eligible for the Saver’s Tax Credit, then I’ve got an exciting way to double your tax benefits (and yes, it is double the fun).
First, use your IRS refund to contribute to a retirement account.
Next, claim the Saver’s Tax Credit on next years’ return in order to receive up to $1,000 for Single households (IRS code for just you living in a household), or up to $2,000 for households of Married, Filing Jointly just for contributing to your retirement (IRA, 401(K), etc.).
Ready to add some icing to that pretty cupcake? If you contribute your refund money towards a traditionalretirement account, then you will also receive the Traditional IRA tax deduction!
Let’s recap:
  • Get a tax refund
  • Fund a traditional retirement account (such as a traditional IRA)
  • Next year, get a tax deduction for the traditional retirement contribution, and a tax credit from the Saver’s Tax Credit…all funded by your tax refund to begin with
  • Did I mention you should roll this as long as you can? Take that money you gained from the Saver’s Tax Credit and Tax Deduction, and use it to fund next year’s retirement account contributions…get tax credit and tax deduction…rinse and repeat {suddenly retirement’s not looking so bleak}

Pretty cool, huh?
And you can get the party started early by setting up a traditional IRA right now and contributing an amount into it that you anticipate you will get back in a refund. The IRS allows you to fund last year’s retirement contributions until you file your return (or else you will need to amend it), or by April 15th, whichever comes first. That way you can claim your Saver’s Tax Credit and Traditional IRA deduction on this year’s tax return, starting the cycle early.
Double Down Strategy #2: Stuff an Interest-Bearing Account with It
Savings accounts aren’t earning that much interest at the moment (oh, for the days of 5% interest!). But you still earn something, and money earning its own money is pretty exciting anyway you cut it. This one tip alone can earn you thousands; since opening my savings account in December 2005 I have “earned” our household $2,204.83.
Did I mention that this extra two grand accrued while I was showering, eating, and watching Meet the Fockers for the millionth time?
Double Down Strategy #3: Put it Towards Your Mortgage
It’s not sexy-sounding to take your new check and put a chunk of it onto your mortgage. But let’s see if we can add to the allure. What if I said you can:
  • Turn $1,000 into $4,121.67*
  • Turn $2,000 into $8,140.94*
  • Turn $3,000 into $12,059.96*
Much sexier, right?
(*examples assume you make this payment at the beginning of a 30-year, 5.5% interest, $200,000 mortgage). To easily calculate your own interest saved check this out.
Double Down Strategy #4: Use it to Pay Down Debt
It may not feel like you are “doubling down” when you choose to take your tax refund and pay down part of your debt. But you must remember that you are most likely paying interest on top of your loan. In other words, any deduction in your balance now is a deduction in the amount of future money leaving your pocket.
Take our situation for an example of how much money you can earn back by paying down your debt: we paid our debt off ten years before the last creditor wanted to be through with us. So far (as in, more savings are to come), we’ve added an estimated $2,700 of not-paid interest to our pockets since the fall of 2010. Now that’s what I call doubling down!
P.S. pink editedInterested in doubling down on the backs of your own creditors? Subscribe to be the first to know when my new course, The Debt Manipulator 3.0, is released. You wallet will thank you!