Prepare for Your 2009 Tax Return Today

by Kevin on April 27, 2009

A few months ago I showed you the Tax Return Spectrum (See below). The idea being essentially that you want to target your tax return to be in the green area. If you had the perfect return and owed nothing and were also owed nothing, you’d be on the black line.

The likelihood of your nailing your taxes 100% perfectly has about the same chance that one of the big three automakers will produce a car of true significance anytime in the next three years. Nonetheless it is something to shoot for (the taxes, not the car companies).

tax return spectrum

It’s too late to do anything about your 2008 taxes. But you’ve got a lot of time to fix everything for your return due in April 2010.

Evaluate Your Latest Tax Return

First things first — let’s assess the damage. Are you in either of the red or white areas on the tax spectrum? Did you owe a ton of money this year (and probably paid fees for owing too much)? Did the federal government write you a $4,000 check? Are you still owed a refund from your state?

If you were in any of these situations you need to make some changes.

For us the major problem this year was simply having to wait to get our Alabama state refund back. Seriously. It took two months to come back via direct deposit. I’d like to avoid that situation next year if at all possible.

The Good News: You Got a Huge Tax Refund

If you got a huge refund this year you are in luck. The changes you are about to make can help you save toward your goals faster and pay down that debt quickly.

All you need to do is just adjust your withholding rates so less taxes are taken out of your paychecks. For the person that gets paid every othe week, instead of getting a $4,000 refund check your paycheck will go up roughly $150 ($4,000 divided by 26 weeks in a year).

Force Yourself to Save Your Witholdings Difference

Here’s the real kicker — suddenly your paychecks go up $150. That’s a nice little bump in the monthly income! Woohoo! Let’s go buy a televi— woah woah woah. Hold up. Is that what you would use your massive refund check for (please say no, please say no, please…).

No? You use it for savings and paying down debt? Let’s make sure you do that with this increase in your paycheck, too. Set up an automatic transfer to a seperate bank account for $150 every two weeks. Give the money a name and a task. Don’t blow it by not knowing where it goes.

The Bad News: You Owed a Lot of Taxes

This situation is a bit more tricky. You need to adjust youwithholdings so more taxes are taken out every week. This will prevent you from getting a massive tax bill at the end of the year.

The bad news is that means your budget is going to take a hit. It’s six in one and half a dozen in the other — would you like to pay your taxes more accurately now so you owe less (or get a refund) at the end of the year, or do you wanto maximize the money you get now and somehow figure out how to pay your big tax bill next April?

Your choice, but I’d rather adjust my withholdings so more taxes came out. I’d avoid a huge tax bill if at all possible. Spreading things out over the year makes it easier to plan for rather than not knowing how big of a bill will come due in April.

How to Adjust Your Withholdings

To make these adjustments just fill out a new W-4 form and give it to your employer. For state tax adjustments you will need to fill out your state’s withholding form (in Alabama it is the A-4). Once you turn in the form you should see a change in your paycheck within 1 or 2 checks depending on how quickly your human resources department moves.

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The Strump
May 2, 2009 at 7:45 pm


Baker @ ManVsDebt April 27, 2009 at 7:59 am

We got a huge return, because I grossly underestimated the tax benefits of our daughter being born in 2008. So, this year we are going to be lowering our estimated payments and our withholding. The absolute last thing I want to do is loan the government my money at 0%!

Wojciech @ Fiscal Fizzle April 27, 2009 at 8:11 am

Great advice – I often joke about my own “pursuit of the $0 refund.” I just wish I could convince my wife that loaning money to the government is a bad idea. Fortunately, the little money we got this year went straight to savings and isn’t going anywhere.

Kelly April 27, 2009 at 11:03 am

Keep in mind that this year we also have the stimulus package, so you may not need to adjust your withholding as much as you think!

I’m a little freaked out since the stimulus package passed we had $0 taken out of all our checks!

I ran the numbers and we will probably still get a refund, but I’m glad I checked now instead of freaking out later.

Stephanie PTY April 27, 2009 at 2:08 pm

I hope that someday my tax return will be predictable! My taxes this year were so different from last year’s, which were so different than the year before! And next year, I won’t have the same jobs (again) and I won’t be claimed as a dependent anymore, which will throw another wrench into the works. I’ve stopped trying to predict, and I have as much as possible withheld to offset self employment earnings, and I put aside money for taxes on top of that. The safe side, for me, would be getting a refund. I’d rather give out a 0% loan than be surprised with a big tax bill!

TStrump May 2, 2009 at 7:07 pm

This post is bang on – people should start their tax planning now.
As an accountant, so many people bring me their tax returns and are nervous because they have no idea how much they’re going to get back or owe.
Planning is an ongoing process – by the time the tax deadline hits, it’s usually too late to take advantage of many deductions.

Kevin May 2, 2009 at 11:16 pm

@Baker: True, but I’d rather be on that end that owing several thousand dollars (“Surprise!”). Good job on the fixes. Will anything change with you all going to Australia and potentially earning income there?

@Fiscal Fizzle: I wish there was a way to estimate exactly how much you would owe so that you could adjust. Then again our tax code is hundreds of pages thick and thus impossible to know exactly. Too many potential deductions and different situations. This is why we need a flat tax…

@Kelly: Not sure what you are referring to. Can you elaborate?

@Stephanie: Ouch. Sounds like a lot of changes. I can definitely see how that would make it complicated. Hopefully with starting a career things will settle down for you.

@TStrump: I don’t exactly know how much I am going to owe, either, but you can at least get a ballpark figure. Preparation and changing are key — if you owed a ton of money this year and things will be pretty much the same next year, you need to adjust your withholdings.

Baker @ ManVsDebt May 3, 2009 at 6:54 am

Yeah. I researched foreign taxes a little bit when I was preparing (although we didn’t have anyone come in with foreign taxes). First, not being here in the U.S. 12 months does effect some of our credits negatively.

The good news that is up to a certain point you can take an exemption for any taxes you paid in the foreign country. Let’s say we make 20,000 in AUS for that half of the year. Well, if we pay taxes in AUS most of that won’t be taxed in US. This is not true once you start making a lot of money. Luckily, we don’t have that problem ;-0.

It’s something I should probably learn more about before we go, instead of waiting til next April!

The Tax Club September 10, 2009 at 5:12 am

Would consulting/hiring a tax consultant/expert not be a viable option if we are talking about multiple incomes and their tax issues here? I believe it is always good to have a professional advise you in your financial matter, no matter how knowledgeable you are. Thoughts?

Kevin September 11, 2009 at 10:32 pm

Of course if you are running a business or side business and have a very complicated return then having a professional look over things makes sense (and will likely save you time).

However I wonder how many Americans are in this situation? How many are going to H&R Block or some other company to do their tax return that they could easily (and inexpensively) do themselves?

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