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Budget for Taxes & Refunds

When Albert Einstein said, “The hardest thing in the world to understand is the income tax,” he was wrong. It’s much more difficult to comprehend why it is so exciting to get a tax refund. Why? A tax refund means that you gave the government an interest free loan. While a refund is certainly psychologically more compelling than a tax bill, it is financially less appealing.

With April 15 just around the corner, working with a CERTIFIED FINANCIAL PLANNER™ professional can help you properly budget for payments owed or refunds to be received. A CFP® professional can assist you in understanding how to adjust your tax withholding or estimates so you are closer to break even at next year-end.

Options for Your Tax Refund

If you are receiving a refund, you have three choices: spend it, save it, or apply it to next year’s taxes. Some people view their refund as forced savings. But wouldn’t it be better to have the appropriate amount of tax withheld and saved monthly into your savings or investment account? Those refund dollars are far better utilized in maximizing your retirement plan contributions or funding your health savings account. Instead of using your refund to save for a vacation, set up automatic payments deducted from your checking account into a vacation fund. You can even have your refund directly invested in currently high-yielding I savings bonds if you really want to let the government keep your money!

What If You Owe Taxes?

Owing taxes is a different story. If you pay 90% of your current year’s tax liability or 100% of what you owed last year, you will avoid underpayment penalties. Those penalties are more than you earn on your savings account. If you owe money and are eligible to fund an SEP or a deductible IRA, then those investments will reduce your taxes. Make sure that you take advantage of the allowed deductions, including up to $600 of charitable deductions for joint filers who don’t itemize.

Pay close attention to your tax situation this year so that you don’t get penalized next year. You can withhold tax from your retirement plan’s required minimum distributions if you are age 72 or older and avoid the hassle of estimated tax payments. If you are self-employed, you can set aside a percentage of your income to pay for taxes and fund your retirement plan. Lastly, if you earn a bonus in your job and you realize you have under withheld, you can have more of the bonus go to taxes.

Plan Ahead to Avoid Surprises

Don’t get caught doing your tax and budget planning retrospectively. When you work with a CFP® professional, they will guide you through strategies to help you avoid tax surprises that can be frustrating. For more information on budgeting for taxes and returns, visit

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Budgeting Tax Preparation