Tax Return Not What You Expected?

By Dawn Kellogg

Although our goal should always be to accurately prepay our taxes, there will be those times when you either get money back or have to fork out. How do you handle these situations?

Using Your Tax Refund Wisely

If Uncle Sam sent you a nice check in the mail, your first inclination might be to spend it on a nice evening out, a new piece of furniture, or some designer label clothing.  However, it’s important to think about ways that may be wiser to make your money work for you. Here are 5 tips:

Make a deposit into your emergency fund

51% of Americans don’t have enough cash in an emergency savings to get them through 3 months if something were to happen. Use your tax return to bulk up your emergency fund so that you can sleep a little easier at night knowing that you’re covered.

Pay off credit card debt

51% of Americans have credit card debt. Use your tax refund to pay off a chunk of your credit card debt to avoid rising interest rates.

Pay off student loans

Now is a great time to put some money toward your student loans. Although the government has extended the student loan payment pause, they have also extended the 0% interest rate, so any payments you make now go right toward the principal.

Put it toward a savings goal

Thinking of buying a new car or new house? Planning a wedding or expecting a new baby? Use your tax return for this special savings goal.

Contribute to your retirement account

It doesn’t matter whether you are planning on retiring next year or in the next 20-30 years. We ALL need to think ahead about our needs for retirement. You could use your tax return dollars to increase your investment in your future.

Need to Pay More on Your Taxes?

Firstly, be thankful that you did not give Uncle Sam a year-long, interest-free loan. But maybe you weren’t prepared to owe additional tax or have the funds to cover how much you have to pay. It’s common for self-employed people to get this jolt out of the blue, or maybe you received unemployment and were surprised at the amount you owe.

Remember that even if you can’t pay the full amount that you owe, you are still obligated to file your tax return.  Not filing will incur a penalty (approximately 5% of what you owe for each overdue month, plus interest). If you file, but can’t pay on time, you’ll incur a penalty, but a much lower one (0.5% – 1% of what you owe, plus interest, per month.) So, the lesson is: file on time and pay as much as you can.

You can consider taking out a loan or paying by credit card – the interest rates will be far less than the penalties and interest set by the IRS.

If that is not a possibility, you will need to figure out how to pay what you owe and when you will be able to pay it off. The government has options if you meet certain qualifications:

Short-Term Agreement – if you can pay the total within 180 days of April 15. There are no fees, but penalties and interest will be charged. 

Installment Agreement – if you cannot pay the total by 180 days of April 15. There will be fees associated with this.

Temporary Delay – If you don’t know when you’ll be able to pay, the IRS could delay collection until your financial health improves.

Offer in Compromise – if you don’t know if you’ll ever be able to pay, this option may allow you to settle the debt for less than you owe. Although its rare for the government grant this, it does sometimes happen.

Whatever your case, be upfront. Creditors in general are more apt to work with you if they understand your situation.

PLEASE NOTE: If you have questions specific to your situation, please contact a tax professional.

The Summit Federal Credit Union, Elevating the ordinary™ since 1941.

Updated from original publishing date of April 15, 2022.