Tax time can be exciting or overwhelming, depending on whether or not you get a refund. If you get a refund, you feel like you’re on top of the world. If you owe money, it can send your budget into a tailspin.
Relying on a refund is not the right choice. Everyone should be prepared to NOT receive a refund, by planning and budgeting throughout the year.
At Creditaid, we want our clients to be prepared for the tax season financially, rather than letting it derail their finances and cause financial destruction. It’s not as hard as it seems. You just need to budget and plan long before tax season begins.
Put Money Aside for Taxes
We suggest making room in your budget monthly for taxes. This way if April rolls around and you owe money, you won’t panic. You’ll have the money set aside and can pay your liability.
If you’ve owed taxes before, use that number as your baseline. Divide it by 12 and save at least that much each month. If you’ve never owed, but worry you might this year because of CERB, save money every month based on what you can afford. Put the money in a separate savings account so you aren’t tempted to spend it.
Create a Better Budget
We know many people who rely on their tax refund. They have their purchases planned or the money spent before they receive it. What happens if they don’t receive a refund? Their budget implodes, and they scramble to recover.
Instead, create a budget that works for your current finances outside of your tax refund. Act like a tax refund doesn’t exist. Now, what can you afford and where should you cut back?
If and when the tax refund comes, use the money wisely. Treat it like found money. Saving or investing it is the best choice – as it lets your money grow and gives you an emergency fund if you need it.
Planning for your Taxes
It’s always a good idea to work with a tax advisor well before tax time comes. No one likes the unpleasant surprise of a large tax bill, especially when you didn’t budget for it.
Working with a tax advisor or financial advisor will help you determine if you need money set aside for taxes. They can look at your withholdings, potential deductions, and determine your estimated tax liability, and if you’ll owe money in April.
Bottom Line
Don’t operate without a budget and never rely on a tax refund. If you get one, great, you can set yourself up financially in other ways whether with an emergency fund or investing for retirement.
If you don’t get a refund, it shouldn’t create havoc for your finances. By planning correctly and being prepared, you should be able to function without it. If you didn’t, the experts at Creditaid are here to help you get back on track, and to stop relying on a potential tax refund.