Give Me A (tax) Break! Part 2

Ok, we talked about the bush tax cuts in the first part.  In this part, we are going to talk about Obama’s tax cut and ways to keep more of your money next year if these tax cuts don’t get passed. 

President Obama signed a “Making Work Pay” tax cut.  Basically, this tax cut was a part of the American Recovery and Reinvestment Act of 2009.  With this cut, a single employed person received a tax break of $400 yearly and a married couple received a tax break of $800.  This tax cut is different in that with the Bush tax cuts everyone received a tax break whereas with this one, it only applied to people making up to $95,000 individually and up to $195,000 married.  AGIs (adjusted gross income) were $75k and $150k respectively.  This tax break is also set to expire at the end of this year and while you won’t lose a lot of money (estimated to be about $9 a week individual and $18 a week married), that plus the bush tax cuts will significantly reduce your salary come January 1^st.   

I have given you all the bad news so is there anything you can do to prevent losing more of your money?  The answer I have is “maybe”.  I know it doesn’t sound promising but here are a few ideas I have seen that have been suggested that I will rank as “practical” and “extreme” based on degree of difficulty and your mindset about money.

PRACTICAL- If you have not maxed out your retirement contribution, now maybe the time to consider increasing it as they are pretax dollars which lowers the amount that you will be taxed next year.  I mean let’s face it, YOU ARE GOING TO LOSE THE MONEY!  Do you want to lose it to Uncle Sam or to your 401k?

EXTREME- If you are getting a refund from the IRS every year, you are not maximizing your withholdings.  Let me break it down this way.  A tax refund is basically money you should have gotten during the year but you let the federal government hold it for you until the end of the year.  If you talk to a tax professional, they can figure out how much you are to withhold during the year so the IRS doesn’t get an interest free loan from you to pay back the following year.  Downside to this is you won’t get a refund.  Upside is you only give the IRS what they deserve.

PRACTICAL- Don’t let your uncle do your taxes this year.  Just because he has the new version of turbotax does not mean he is familiar with all of the changes to tax law.  In some cases, I actually advise against you filing your own taxes as well.  If you don’t know all of the changes in the law this year and are just depending on whatever updated software you buy to know what you need to do, I advise against it during these times.  Not saying that the software is bad, but I can’t tell you how many times I have heard people say that they lost money filing their own taxes and didn’t know it.  You need a professional who will know which forms to file to maximize your return and most accountants are not as expensive as you think.  Some places will file a 1040 for less than $100 (which is about how much you are paying to file it electronically anyway).  I know the family is going to be mad because Joe been doing the family taxes since you was a baby but this is your money, nothing wrong with verifying if he is doing it the right way.

I realize that some of you are still uneasy about using a tax professional so let me propose something to you.  Look at your 2009 tax return and see how much money it cost to do the taxes and how much you got back for a refund.  Use a tax professional this year and see if you made or loss money.  If you lose money, I’ll admit it was a bad idea (cuz I ain’t giving you no money), but if you get a bigger refund, let me know I was right.  I would be happy to post both successes and failures.