Tax Tips & Smart Tax Refund Investing Plan!

Tax Tips & Smart Tax Refund Investing Plan!

Tis tax filing season! Here I’m sharing some smart tips and a plan of action as to how I approach filing my tax return, how I use my tax refund to invest or pay things off, and how I go about comparing online tax processors to ensure I have a smooth experience.

Please remember, I’m just some person on the internet, and this is not tax advice nor tax recommendation. With that being said, please enjoy some of the humor I bring to this dry subject!

As tax time draws near, I do some calculations to figure out my tax bracket based on my last paycheck of last year. I think having an idea of what one’s tax bracket might be based on our earnings is useful to give us some guidance as to how much we might end up owing in federal IRS taxes.

I then also play with some online tax calculators, including the handy dandy IRS Tax Withholding Estimator. Prior versions of this were not so appealing or easy to use. Now it is!

I try to gather all the relevant forms until it looks like I have all the necessary documents. When I evaluate which online tax processor to use, I look for a combination of what’s cheapest and which forms can be filed.

I also experiment with multiple online tax processors to see which process I think is more smooth and if the questions to complete the forms are easy enough to understand. If one of the processors leads me to a dead end or not leading to the result I expected, I try another processor to see if I can complete my return.

I discuss a high level example of a single filer with $75K gross income who might have made contributions to the 401k and HSA, and how much tax this hypothetical tax filer might’ve paid, and the approximate income tax owed, followed by a potential federal tax refund after claiming the standard deduction.

Psychologically it might feel more reassuring to get a refund even though someone might’ve paid the government a bit too much money ahead of time. Would you rather owe the government, instead?

Some self-employed or those who were accustomed to getting 1099-MISC now will get 1099-NEC as of the 2020 tax year for nonemployee compensation.

I encourage people to figure out any and all tax credits they may be eligible for, such as if you’ve paid for some qualifying education tuition last year!

Finally, I share a list of priorities of what I would do with my tax refund (if I’m so lucky to get one), if I haven’t already accomplished some of the following: add to my emergency fund, pay off debt, pay my rent and utility bills, contribute to my Roth IRA and other tax-advantaged investment accounts, and how I would invest the rest of the money, including into people and causes I care about.

All of us are on the journey towards FIRE (Financial Independence, Retire Early) and it is one filled with much gratitude and enlightenment, and I look forward to making more investor friends.