Taxes – Breathing Room

Should You Use an FSA?

Published on June 2, 2022June 1, 2022 by JesseLeave a comment

My sister asked me the other day if she should set up a Flexible Spending Account (FSA). Of course, my answer was yes! You’re able to set aside money for healthcare or childcare/dependent expenses on a pre-tax basis when you create an FSA. In her case, she was asking this question because she is in the re-enrollment period for her company-sponsored health insurance. Many of us are in the same boat, that have healthcare plans that begin July 1^st.

A flexible spending account is a great, tax-advantaged tool that can help you save for health and dependent care expenses. Tax-advantaged means you can automatically transfer money from your paycheck into the FSA, prior to taxes being taken out. It is a win-win. You save money on taxes and have money set aside for eligible healthcare and dependent care expenses.

Tax-advantaged or pre-tax dollars means that the money is set aside before taxes (Federal, FICA, and State) are taken out of your paycheck. Setting money aside in this way, before taxes, has two benefits: (1) Setting this money aside before taxes lowers your end-of-year tax bill. When the money is set aside, prior to taxes, it is though that money never existed. (2) Because the money is going into the FSA account before taxes are taken from it, you get a little extra – because the taxes were not deducted.

The draw-back to an FSA account is that it’s a “use it or lose it” account; you either use your money by the end of the year or forfeit it. Calculating how much you want to put into the FSA account is very important and if this is your first year using one, I suggest that you underestimate. Although, there is some flexibility as you roll into the next year, and you can reassess your needs during your open enrollment period. For more information, read the factsheet that I co-wrote on Flexible Spending Accounts.

Filing Taxes – To Wait or Not to Wait

Published on April 16, 2020April 15, 2020 by JesseLeave a comment

When I originally thought about writing this blog, it was mid-March. My initial thoughts were to focus on what to do if one did not meet the tax deadline of April 15, but COVID-19 has changed everything.

Every year, there are individuals that wait to file their taxes until April 15, but with the new extension many will wait until July 15, 2020. Due to the extension there are a few things to consider if you decide to delay filing your taxes.

When thinking of when to file taxes there are a few things to keep in mind. For example if you are expecting a refund or typically get a refund you may want to file sooner rather than later. In other words, get your money back as soon as you can. Even if you file now, you can pay later (July 15) if you owe money to the IRS, it is good to file early because once you get it, you have it, and you can cover current expenses or even save it if possible.

The America Saves initiative provides some suggestions as to what to do with your refund. Some items to consider include paying debt, creating an emergency fund, saving for financial goals, and retirement.

When paying down debt, you should come up with a plan. Some people prefer to pay their highest interest debt (debt avalanche method), while others prefer paying their smallest debt first (debt snowball method). Doing research to find which method works best for you can help you figure out how to use your refund money effectively.

Utah State University Extension has a great program called PowerPay. It assists in developing a debt elimination plan. A good rule of thumb is “when you get out of debt, stay out.” You shouldn’t pay off one debt just to start another.

The next item to consider is an emergency fund. An emergency fund should cover three to six months of expenses and can come in handy during times of crisis like this pandemic, or if you find yourself in a situation where you lose your job. Financial goals and retirement are your mid- to long-term plans. It always feels good to jump start your goals with a tax refund.

Another reason to file early is to avoid identity theft and scams. The longer you wait the more chance you are taking that someone else will file your taxes without your knowledge. The IRS has a site that focuses on identity theft. If you have been a victim of identity theft, visit the Federal Trade Commission’s website.

If you have not filed your taxes yet, the IRS has some free file options depending on your income. For more information, click here.

For information about the tax filing extension visit the IRS Coronavirus Tax Relief and Economic Impact Payments website. Many states extended deadlines, so check with your state about any changes.

Don’t Panic! Tax Season is Here

Published on February 13, 2020February 12, 2020 by JesseLeave a comment

This is the time of year when most people start to panic about filing their taxes. As you know, April 15th is right around the corner. Why is this date important? It is the filing deadline for state and federal taxes. But never fear, in this blog, I will share some of the forms you need and provide you with resources to assist in preparing your taxes.

Let’s start with income. By now you should have all of your W-2s. This is the form you get from your employer indicating how much money you made last year. Employers are required to get this to you by January 31st. Guess what? The IRS gets a copy of this form as well.

The other income forms you will get are the 1099 forms. These are forms of income you receive such as interest on a savings account (1099-INT) or dividends you received on investment accounts (1099-DIV). A good way to know the difference is anything you receive beginning with 1099 are income from sources other than your paycheck.

Your next decision is to standardize or itemize your deductions. I am not an accountant and so I won’t tell you what to do but what you need to consider if itemizing your deductions will be greater than taking the standard deduction. The best advice I can offer is sharing a resource from the IRS titled “Should I Itemize?”

Here is the good news, there are free resources out there for you. The IRS site, Free File: Do Your Federal Taxes for Free can help. If your income is below $69,000 there are free online options by many of the companies you see on TV, just click here to see your options. If you make over $69,000, you have access to free fillable forms.

There are two other programs worth mentioning — Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE). VITA is for people that make less than $56,000, have a disability, or limited English speaking. TCE is for those who are 60 years of age or older. To find the nearest provider click here. If you need a tax preparer, the IRS has some tips to consider. Check out this resource.

Some of you want to know what changed between last year and this year. I found two resources with that information: Michael Kitces has a nice blog that talks about changes with the SECURE Act. The other is Dave Ramsey’s article on Tax Season 2020.

Let me close with happy travels as you navigate your taxes this year!