Friday, March 27, 2015

Tax Refunds: Why Smaller is Better

FROM DEPOSITACCOUNTS.COM

Some people do a little victory dance when that tax refund check comes in the mail. But truth is, in the long run there’s nothing really to celebrate.

"Getting a refund check for $5,000 or more each year is like an addictive habit for some people. They get a rush from a big check arriving in the mail like they hit the lottery. Unfortunately, it’s just their own money they are getting back," says Jon Ulin, founder and managing partner of Ulin & Co. Wealth Management.

"We advise our clients to pay in only enough in federal income taxes from their paychecks throughout the year to come as close to breaking even on their federal income tax liability as possible. Do not overpay your federal taxes," says Ulin.

At the end of the year, if you’re a bit short on your federal income tax obligation, you simply just send a check to the IRS. If you’re getting more than $1,000 back in refunds from the IRS, then this proverb applies to you, "To Uncle Sam, you will neither a borrower nor a lender," says Ulin.

when you get a refund, it means you gave the IRS an interest-free loan for the year
Maybe you convince yourself that the refund money will be used to pay for a vacation, knock off some debt, or make house or car repairs. But when you get a refund, it means you gave the IRS an interest-free loan for the year. "Anyone else, even a bank, would pay you interest on the money. But not the IRS, it returns only the amount you overpaid, regardless of how much money you gave or how long you ‘loaned’ them the money," says Richard Reyes, a certified financial planner with Wealth & Business Planning Group.

Short-term gain can mean long-term regret

Your money being held by the IRS is not liquid. If you have a job loss or personal emergency, you can’t just call up the IRS and ask them to send you your money when need it most.

Instead of giving Uncle Sam a loan, you could be investing that money or paying bills. Take for example, if you have a credit card debt charging you 18% per year, you would save yourself $900 in interest payments by paying off your debt, rather than overpaying your federal income taxes, says Ulin.

Then too, if you defer less in federal income taxes and put your money to work in a before tax retirement account, such as your employer sponsored 401(k), you could end up saving a decent amount of money in federal income taxes based on your personal blended tax rate, adds Ulin.

How to get your withholding right

Estimate how much in federal income taxes you will owe for the year and then divide that amount by the number of paychecks you expect for the year. If your income and deductions do not change much from year to year, you can simply look at what you owed in federal taxes for last year and allocate the same amount for this year but increased for inflation if your income is adjusted up as well, says Ulin.

Most people pay the bulk of their annual tax bills through payroll withholdings. Through this process, a percentage of your pay is taken out each pay period and sent to the IRS where it is credited toward your final tax bill. Review your employer W-4 withholdings at least once a year. Many circumstances can affect the amount of tax you’ll eventually owe, says Ulin.

The IRS has a withholding a calculator that can help you figure out how much should be taken out. However, "Most times it will still have you withholding too much. My bias is to work with a professional to get it within the right range," says Chris Hardy, managing director of Paramount Tax and Accounting.

Also, once you complete the withholding calculator and you find that you are between exemptions, you can choose a lesser exemption amount and add a flat dollar amount on line 6 of the W-4 before turning it in to your employer.

If you’re getting substantial refunds each year, talk to a tax professional to make sure you’re claiming all the exemptions you can.

"I recommend that you increase the number of exemptions you claim by 1 for every $2,000 of tax refund you get back. Then when your deductions change, take the extra money and put part of it in a savings or investment account. At the end of the year, you will still have the money and you will have earned interest on it," says attorney Edrie Pfeiffer, an attorney with Hampton Roads Legal Services.

Another source of help, says Jayson Mullin, CEO of Top Tax Defenders is the IRS’ "lock in" department at 855-839-2235. "They may be able to walk you through how many allowances you should be able to take. If the agent is wiling, they can access your past year tax returns and use this information to calculate a reliable allowance amount."

Finally, points out Hardy, "The majority of people focus on preparing their tax return, not tax planning. Tax planning is where you can get the biggest ROI for your money. April 1 is not the time to be tax planning for the prior year."

Thursday, March 26, 2015

Which Legal Fees Can You Deduct On Your Taxes?

FROM FORBES.COM

No one likes paying legal fees, but tax deductions make them a lot less painful. A combined 40% state and federal tax rate means $10,000 in legal fees costs you only $6,000. But personal legal fees are non-deductible, and that makes them the least desirable fees. If you pay legal fees to get divorced or because a family member sues you for slander, your legal fees are purely personal and non-deductible. That hardly makes divorce less taxing.
Distinguish purely personal expenses from investment expenses. Legal fees paid to help your business reputation could be a business or investment expense. Business legal fees are the best, for they are fully deductible by everyone: corporations, LLCs, partnerships and even proprietorships.
Fully deductible means not subject to limitations or alternative minimum tax, AMT. But you really must be in business. For many individuals not regularly filing as proprietors, even business orientated legal fees are generally treated as miscellaneous itemized deductions, triggering numerous limitations. Legal fees up to 2% of the client’s adjusted gross income aren’t deductible, deductions are phased out at higher incomes, and you get no deduction when computing the dreaded AMT, a separate 28% tax. To avoid it, some people file a Schedule C, claiming to be a proprietor, but you must actually be in business to make this work.
How about contingent fee lawyers? If you recover $1 million in a lawsuit and your contingent fee lawyer keeps 40%, you might assume that—at worst—you have $600,000 of income. Actually, you have $1 million of income even if you only net $600,000!  That means you need to worry how to deduct the $400,000 of fees.
Fortunately, damages in personal physical injury cases are tax-free. So if you hire a contingent fee lawyer in a personal physical injury case (say an auto accident), your entire recovery is tax-free. It doesn’t matter if you measure it before or after fees.  Unfortunately, there is great confusion about what is tax-free. Personal physical injury and physical sickness recoveries are tax-free, but punitive damages and interest are taxable.
If you hire a contingent fee lawyer in an employment case, the most you will be taxed on is your net after attorney fees. Most employment lawsuit recoveries are income and don’t qualify for the physical injury/sickness exclusion. A settlement may be wages (subject to withholding) or non-wage income (on anIRS Form 1099). But fortunately, the client can deduct the legal fees above-the-line so there’s no AMT and none of the other limitations.
Here are a few more lawyer’s fee tax rules:
  • Capitalizing Fees. Some business and investment legal expenses must be “capitalized.” If you are trying to sell your business and spend $50,000 in legal fees, you must add it to your basis. Ditto if you pay legal fees to resolve a lot line dispute with your neighbor (add the legal fees to your basis in your home).
  • Tax Advice. Legal fees for tax advice are deductible, and any tax qualifies: income, estate, gift, property, excise or sales and use tax. The fees may involve tax planning or controversies, and even fees for purely personal tax advice qualify (as miscellaneous itemized deductions).
  • Beware Combined Cases. If you receive tax-free and taxable damages (like punitive damages or interest), you’ll need to apportion your attorney fees. For example, say you’re seriously injured in your car and recover $500,000 in compensatory damages and $500,000 in punitive damages from the other driver. Your lawyer gets 40%. Since punitive damages are taxable, half your lawyer’s fees are income, and you can probably deduct them only as a miscellaneous itemized deduction.

Tuesday, March 17, 2015

Tax Preparation Tips for the Self-Employed

There are few Americans who do not dread the hassle of filing their taxes, but while it can be a headache for some, it can be an absolute migraine for those who are self-employed. There are more than 800,000 self-employed Americans, according to the Bureau of Labor Statistics. And while they can enjoy setting their own hours and take pride in being their own boss, they are also responsible for taking the tax preparation reins.
As in all things tax-related, what one doesn’t know (not to mention slipshod or incomplete recording keeping) can cost you. Here are some tax tips for the self-employed:
  • Self-employment income can include pay you receive for part-time work you perform out of your home. This could include income you earn in addition to your regular job.
  • You must file a Schedule C, Profit or Loss from Business or Schedule C-EZ if your expenses are less than $5,000 with your standard 1040.
  • Use Schedule SE to figure your self-employment tax, which must be paid in addition to income tax. Self-employment tax includes Social Security (12.4 percent) and Medicare taxes (2 percent).
  • People typically make estimated tax payments quarterly to pay taxes on income that is not subject to withholding. There are penalties if you fail to do so or if you underpay.
  • Be sure you are taking all the deductions to which you are entitled. If it relates to your business, it’s deductible.  Among what the IRS deems “ordinary and necessary” expenses you can claim are: mileage, gas and tolls; equipment, postage, business meals and entertainment, and subscriptions to appropriate publications.
  • If you pay cash, keep receipts. Record all transactions, including bad business debt. Putting money into a retirement plan is not only good planning for the future. It also affords a tax break if you make salary deferrals up to $18,000 this year.
  • In addition to your 401(k), you can also deduct your health insurance as well as benefits paid to employees.
  • For those to whom the process is daunting, perhaps the most welcome write off might be for tax preparation software or professional assistance.

Monday, March 16, 2015

Getting Ready to File Your Taxes? Don't Miss This Checklist

Tax season is upon us again. April 15th may be the official deadline to file, but now is the time to start gathering everything you'll need so that you aren't scrambling in the eleventh hour.
Whether you're planning on doing your taxes yourself or turning your paperwork over to a CPA, there are certain documents you need to make the filing process as easy (and accurate) as possible -- and certain things you need to know to net yourself the biggest possible savings.
Here's your tax preparation game plan.
Getting Your Paperwork in Order 
Here's a comprehensive checklist of the paperwork and documentation you may need to file your taxes. Not all of these items will apply to you, but look this list over carefully to make sure you've got the ones that do.
Personal Documentation
  • Social Security numbers and dates of birth for yourself, your spouse (if you're filing jointly) and your dependents
  • Records of any alimony paid to an ex-spouse (and his/her full name and Social Security number)
  • Tax returns for the past 3 years (if you'd like your CPA to check them for accuracy)
  • Income Documentation
  • W-2 forms for yourself and your spouse (if filing jointly)
  • Investment and interest income forms, such as interest you paid on your mortgage or student loans (1099-INT, 1099-DIV, 1099-OID, etc.)
  • Income records from any cancelled debt (1099-C)
  • Income records for sales of stocks or other assets (1099-B, 1099-S)
  • Records for any rental property income
  • Records of any income for a side business that you run
  • Records of Social Security income (SSA-1099) and IRA/pension distribution forms (1099-R, 8606)
  • Records of any other miscellaneous income -- unemployment benefits, alimony, gambling income, jury duty compensation, prizes and awards, Health Savings Account (HSA) reimbursements, etc.
Maximizing Your Deductions 
Every year, taxpayers miss out on potential deductions they're not even aware they qualify for. Here are 10 of the most commonly overlooked tax credits and deductions you may be eligible for this year.
1. Charitable Contributions
If you made any cash or property donations to charitable organizations like churches, schools and other nonprofits, gather up written proof of those donations (including estimated value of your property donation). You may be able to deduct up to 50 percent of your Adjusted Gross Income (or AGI).
2. State Sales Tax
People in all 50 states are allowed to deduct either their state income tax or the state sales taxes that they pay. However, unless you've made significant purchases in the past year and properly tracked everything, it's probably easier and more advantageous to simply deduct your state income tax. The exception, of course, happens if you live in a state with no income tax.
If you live in a state that doesn't impose an income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming), you can claim a deduction for sales tax you paid over the year. You may not get much ROI from saving every single grocery and convenience store receipt, but you could definitely net the rewards if you bought any high-cost consumer goods like vehicles, major electronics, jewelry or home furnishings.
3. Medical Costs
HSA contributions can be taken as an above-the-line tax adjustment, which means that you can deduct these contributions regardless of whether or not you itemize your deductions. Gather together all records of your HSA contributions. You may also be eligible to deduct qualified medical expenses like doctor's visits and prescription drugs if your total cost for the year exceeds 10 percent of your adjusted gross income (AGI), but you'll need to itemize these expenses, so be prepared to gather up lots of receipts and call up your doctors and pharmacy for printouts of any expenses you may have missed.
4. Work-Related Expenses 
If you moved for a new job and weren't reimbursed for moving expenses (or if you're self-employed), you could claim a deduction for your moving bills. You can also claim job-hunting costs, such as resume preparation, and employment-related costs, such as the cost of buying a workplace uniform.
5. Childcare Costs
You can claim childcare expenses for qualifying dependents age 13 or younger (up to $3,000 for one child or up to $6,000 for two or more children) under the Child and Dependent Care Credit -- something many working parents will be happy to hear about, as childcare costs are hardly inexpensive.
6. Caring For An Elderly Parent
If you're in the "Sandwich Generation" that's paying to care for both children and aging parents, you may also qualify for the Child and Dependent Care Credit. The deduction amounts are the same as for childcare costs, but you can apply them to caring for a person of any age who is physically or mentally incapable of caring for him/herself.
7. Educational Expenses 
Education credits like the American Opportunity (Hope) Credit and the Lifetime Learning Credit can be subtracted in full from your federal income tax. Whether you're paying for your own secondary education or for a child's, gather up your tuition statements (form 1098-T), student loan interest statement (form 1098-E) and receipts for any qualified educational expenses like textbooks. If you're a K-12 teacher, you can also claim classroom expenses, so gather up receipts for supplies and other materials you purchased for your students.
8. Energy-Efficiency Credit 
You can no longer get a tax credit for installing energy-efficient home improvements like insulation and windows, but under the Residential Renewable Energy Tax Credit, you can claim 30 percent of solar-electric property, solar water-heating property, fuel cell property, small wind-energy property and geothermal heat pumps.
9. Earned Income Tax Credit (EITC)
If you had low-to-moderate income in 2014, you may be able to claim this credit, which is designed to help out working people who earned under certain amounts for their household (such as $20,020 AGI for a married couple filing jointly with no children and $43,941 for a married couple finding jointly with one child). To find out if you qualify, visit the IRS's EITC Assistant.
10. Retirement Tax Credit (Saver's Credit) 
Also for low-to-moderate income earners, the Saver's Credit allows you to claim a credit of 50 percent, 20 percent or 10 percent of your IRA contributions (up to $2,000 for individuals and $4,000 for married couples filing jointly).
Bottom Line
Before you start diving into your taxes, spend a few hours making sure you have proper paperwork in place. The IRS has the right to ask for your documentation, so keep your files organized and store everything in a safe place.


Gathering the necessary paperwork holds the added benefit of making sure you don't miss any legitimate write-offs. By maximizing your tax deductions, you'll be able to keep more money in your pocket -- and that's cash that you can use to pay off debt, invest, or build your savings.

Sunday, March 15, 2015

A Breakdown of the Tax Implications of an S Corporation

When it’s time to think about the best business structure for your company, taxes shouldn’t be the only factor. After all, you are going to want to think about all the aspects, such as liability protection, ownership allocation and the amount of paperwork and administrative obligations.
However, taxes are usually front and center in people’s minds, as no one wants to pay more taxes than they need to. So below I'll outline the tax impact of the S corporation to see if it’s the best structure for your new or existing business. Keep in mind that this is general information and sometimes it’s best to seek expert tax advice pertaining to your particular situation. 

The main difference between a C corporation and S corporation

Income earned by a C corporation is typically taxed at corporate income tax rates. Then, after the corporate income tax is paid, any distributions made to stockholders are taxed again as dividends on the stockholders’ personal tax returns. This is called “double taxation” since corporate profits are first taxed on the corporation and then dividends are reported on the individual stockholder’s return.
When a corporation elects “S corporation” treatment, it no longer has to pay taxes on the profits. Instead, all profits are passed through to the stockholders, and each stockholder needs to report their share of the corporation’s profits or losses on their personal tax return. 
Let’s say you own 40 percent of a corporation that elects S corporation tax treatment. If the company makes $100,000 in profit for the year, you will be responsible for paying taxes on $40,000.
A term such as “double taxation” sounds like something that should be avoided in all circumstances. However, careful tax planning can minimize the downside. For example, when the top individual tax rate is higher than the top corporate rate, it can be preferable to have more money taxed at the corporate rate than individual rate. And if you plan on keeping profits in the business (and not passing them out to stockholders), the regular C corporation might be better tax wise.

A potential S corporation hiccup: ownership allocation

Any business owner considering the S corporation needs to keep in mind that all profits and losses pass through strictly based on a shareholder’s percentage of stock ownership. If you own 40 percent of the stock, you must take 40 percent of the losses, profits and credits on your tax return. 
This is an important difference between an S corporation and a partnership or limited liability company (LLC). In partnerships or LLCs, the operating agreement can define the percentage that each partner or member should be taxed. For example, you might own 40 percent of the business, but did the bulk of the work one year and it’s decided that you should take home 60 percent of the profits. An LLC or partnership gives you this flexibility for reporting income on your taxes. 
Can an LLC elect “S corporation” tax treatment?
When a corporation elects S corporation status, it’s still treated like a regular corporation in all aspects except taxes. This means a high level of paperwork and legal obligations -- and these can be too onerous for some smaller businesses. By contrast, the LLC requires fewer forms for registering and you’re not required to have formal meetings and keep minutes.
One option is to form an LLC and request S corporation status for the business. The company remains an LLC from a legal standpoint, but is treated as an S corporation for tax purposes. One advantage here is that S corporation status gives you the option to divide up the company’s earnings into salaries and then passive income in the form of distributions. Salaries are subject to FICA tax (social security and Medicare), but the distributions are not. Again, a tax advisor can help you determine if this configuration is right for your situation.

The upcoming S corporation deadline

To elect S corporation tax treatment, you need to file Form 2553 with the IRS. This paperwork is time-sensitive. For brand new companies, you need to file it before the first two months and 15 days for it to take effect for the current tax year. 
Existing companies need to file their paperwork within the first two months and 15 days since the beginning of their tax year. If you have an existing company and you want S corporation tax treatment for tax year 2015 (assuming you report on the calendar year), then you will need to get Form 2553 in by March 16. To qualify, your business can only have one class of stock, have no more than 100 shareholders, and all shareholders must be U.S. residents. 
Take some time to consider if S corporation status is right for your business, and be sure to get your paperwork in on time to take advantage for tax year 2015.

Saturday, March 14, 2015

Avoid These Top 10 Tax Mistakes

In the beginning of March, our thoughts turn to the (unpleasant) tax-filing season. This necessary evil goes with the territory of being a wage-earning citizen, and it has its pros and cons. Our taxes contribute to the great lives we inhabit here in the U.S., providing us with clean water, good roads and public schools for our kids.
Even though we file our taxes annually, it never seems to get any easier. In fact, if your salary goes up and you earn a bit more money, filing your taxes may become more difficult.
Before you begin to get your records in order and complete the paperwork (or ship it off to a tax preparer), take a moment to review your tax forms and avoid these top 10 tax filing mistakes.
1. Sign your return and double-check your Social Security number, name and address. Countless returns are delayed or sent back for careless errors. Double check to make sure your Social Security number and those of your spouse and children are correct. Sign your return before filing. Always review your return before sending it out. And while you’re at it, double-check your math. It’s so easy to plug in $520 when you meant to type $250.
One of my least favorite tax duties is checking my accountants work. That’s right, even if you hire someone to do your taxes, you still need to check it. Tax preparers are human, very busy and make mistakes, just like you and I.
2. Understand the new tax law changes, each year. I know this sounds like an ominous task. But most years, the tax requirements change a bit, and you are responsible for being aware of the changes. That means that if the standard deduction increases, and you don’t know about it, you could be leaving a lot of money on the table. Years ago, I used to order all of the IRS tax booklets and review them. Other years I might just buy the updated J.K. Lasser book (this year's book is titled, "J.K. Lasser's Your Income Tax 2015: Preparing Your 2014 Tax Return"). Now, with the internet, the IRS.gov website can be your best resource.
Use the search function for questions, and check out the changes for this year's section of the site. The government does an excellent job of explaining the tax laws on their website.
3. Include all of your income. It’s easy to file your taxes if you just had one job, and your employer issued a W-2 form with your wage and tax withheld information. But what if you and your spouse each had a job, and each of you earned a bit of income on the side as freelancers or consultants? Some of your clients may issue a 1099 form and others may not. It’s your responsibility to include all of the income you earned, whether you received a 1099 form for that income or not.
Even with interest rates at rock bottom, you may have received some interest and dividend payments. Don’t forget to include them on your return. Financial institutions are required to inform the IRS about the interest and dividends you receive.
4. Take all of the deductions you’re entitled to. Especially if you earned some side income, you may be able to deduct a host of expenses. The main aspect to consider is, what did you need to spend in order to earn the extra income? Did you have to buy certain supplies? Did you use a dedicated room in your home as an office? What about advertising costs? Review the Publication 501 tax booklet and Publication 529 and claim all of the deductions for which you are eligible. It could save you lots of money.
5. Remember to deduct all of your charitable gifts. Do you donate clothes, furniture and household items to Goodwill, the Salvation Army or other nonprofit charities? Don’t forget to deduct their fair value. Check out the Publication 526 tax booklet to see if you qualify. You may be surprised to find out the value of these gently used items. Some tax planning software even values your charitable clothingand donations for you. Cash and check donations are deductible as well.
6. Don’t miss credits for which you are eligible. Credits are even better than deductions. A credit is deducted right from total of taxes owed. There are credits for children, low-income credits and educational credits. Study all of the available “credits” on the IRS.gov website. 
7. Don’t forget the date. Your return must be postmarked or filed electronically by April 15. If you miss the deadline, you will owe penalties. If you fear you may not be able to make the filing deadline, there is an out. You can receive a six-month filing extension on your tax paperwork by completing Form 4868 by April 15. This will give you an extension to file until Oct. 15, but you still need to pay the full amount owed by April 15. The extension doesn’t apply to money owed, only to sending in your tax forms.
8. Make a copy. Don’t forget to keep a copy of your tax return. In the future, you may receive a letter from the IRS describing an issue regarding your return. If you don’t have a copy, you’ll have to order a copy of your return in order to handle the problem. It’s so much easier to make a copy for your personal records in the first place.
9. Attach all relevant schedules and mailing information. Some tax items require separate forms. If you have self-employment income, did you complete and attach a Schedule C? After completing the forms, make sure to attach them in the correct order. Use the numbers on the upper right hand corner to properly order and attach them to your 1040 form. Finally, after checking your return, make sure to mail it to the correct address and put on the proper amount of postage. A simple mistake can mean extra work later.
10. Use the IRS website to help keep your return free from common errors. Visit the IRS Topic 303 website for a list compiled by the IRS of the most common filing mistakes. The government informs you of pitfalls and errors of other tax-filing citizens. A few minutes reviewing your return for potential errors can save you headaches and time in the long run.

Friday, March 13, 2015

Do you want a big tax refund or bigger paycheck?

Americans may hate the annual tax-filing season, but they certainly welcome the refunds that are issued each year.
In fact, more than half of those who participated in Bankrate's March Money Pulse survey say that they expect to get or have already received their IRS tax refund from the Treasury Department.
That's not surprising. The IRS reports that most taxpayers do get money back each year when they file their returns.
What is surprising is that this phenomenon continues, despite the best efforts of tax and financial advisers to teach the public more efficient money management skills.
Are you getting a refund or will you have to pay?44%7%26%16%7%Expect to get tax refundAlready got tax refundHave to pay additional taxWon't get refund or owe taxDon't know/refused to answerSource: Bankrate.com Money Pulse survey, March 12, 2015

Many interest-free loans to Uncle Sam

Money managers regularly counsel taxpayers against having too much income tax withheld from paychecks. While this will produce a refund upon filing, it means that taxpayers surrender use of their own money for months.
The worker essentially provides the federal government a 12-month (or longer) interest-free loan.
"Most people think getting money back is a good thing, a windfall, but you're simply getting your own money back," says CFP professional Douglas Boneparth, vice president at Life and Wealth Planning in New York City.
The average refund amount so far this year is around $3,000. "That's $250 a month you could have used throughout the year for saving or spending," says Boneparth.

Refunds preferred across all income levels

The desire for a refund is strong at all income levels. More than half of respondents in the Bankrate Money Pulse poll say they prefer tax refunds to breaking even at filing time or owing Uncle Sam a bit.
And nearly 4 in 10 (38 percent) of all Americans say they would like a big IRS tax refund.

Preferences for a refund by income category

Preference$75,000+$50,000 to $74,999$30,000 to $49,999Less than $30,000
Large refund32%39%41%40%
Small refund21%24%21%17%
Total who want some amount of refund53%63%62%57%
Bankrate.com Money Pulse survey, March 12, 2015
Only 27 percent of Americans say they want to hit that tax sweet spot of not getting a refund, but not owing Uncle Sam any money when they file their 1040 forms.
Laurie Ziegler, an enrolled agent with Sass Accounting in Saukville, Wisconsin, is not surprised about the refund preference.
"I do encounter it a lot," says Ziegler, who is working her 23rd filing season as a tax preparer. In fact, one of Ziegler's clients is getting a five-figure refund because the filer doesn't want to owe the IRS.
When it comes to taxes, says Ziegler, people typically want to err on the side of caution.

Forced tax-savings accounts

Many taxpayers also use their annual refunds as forced savings accounts.
That's somewhat understandable, considering interest rates on most liquid savings instruments are so low. But you also limit your access. "You can't go to (the) IRS to get money to replace the furnace," says Ziegler.
Still, many taxpayers apparently are comfortable with leaving their money in Uncle Sam's hands. "We're creatures of habit," says Ziegler. "If it's not broke, don't fix it. But it is broke."
"Is (forced savings) a good excuse? No, it is not. There's no excuse for improper planning," says Boneparth. "From a financial perspective, the reality is that it's an inefficient, inferior way to save."

Dealing with debt

What is surprising and a bit more encouraging from a financial standpoint is that more than a third (34 percent) of tax refund recipients plan to use the money to pay down debt.
Another 33 percent plan to save or invest the tax cash. About a quarter of poll respondents say they will spend their refunds on necessities, such as groceries or utility bills.

What will you do with your tax refund?

Plan to use tax refund toFebruary 2015*March 2010
Pay down debt34%30%
Save or invest33%28%
Spend on necessities (food, utilities)26%26%
Splurge (vacation, shopping spree)3%7%
None of above/don't know3%9%
*Based on respondents who expect to or have already received refunds.
Source: Bankrate.com Money Pulse survey, March 12, 2015
Retailers will be dismayed to learn that only 3 percent of taxpayers plan to splurge with their tax refunds.
Overall, taxpayers this year are a bit more conservative with their refunds than they were when surveyed five years ago.
"People are still very, very nervous about the future," says Tim Gagnon, a tax attorney and accounting faculty member at Northeastern University in Boston. "They had to take on more debt and see a refund as an opportunity to get some of it down so they won't be so leveraged."
That's a laudable goal. Still, Gagnon would like to see taxpayers get their money throughout the year.
Those who wait for an annual lump-sum refund not only waste use of their money while interest charges on debt grow, Gagnon says, but they also run the risk of not getting the money when they expect or need it if they encounter tax return processing delays.

All taxes are local

When asked what programs they would be most willing to pay higher taxes for, Americans narrowly favored higher education. Not surprisingly, the free tuition option was particularly popular among 18- to 29-year-olds, chosen by 43 percent in that age group.
For what program would you be most willing to pay highertaxes?25%24%22%4%23%2%Free college tuition for allRepairing roads, bridges, etc.Free health care for allHousing financial assistanceNone of the aboveDon't know/refused to answerSource: Bankrate.com Money Pulse survey, March 12, 2015

Tax planning beyond refunds

While the general lack of tax planning is disconcerting, Chris Browning, an assistant professor of personal financial planning in the department of personal financial planning at Texas Tech University in Lubbock, Texas, is somewhat more sanguine.
Browning says there actually is some planning behind getting a refund. The problem is that many taxpayers don't go beyond that.
"There generally is too little understanding of the trade-offs between getting a tax refund or not," says Browning. "What you plan to do with a refund is what you could have done anyway with your money earlier."
And, says Browning, many people don't realize that tax planning is not just fancy financial maneuvering. Something as simple as filing a new W-4 to adjust withholding is tax planning. It's a way to be more proactive in how to receive your money, says Browning.
Still, the receipt of a large refund that's used for generally sound financial purposes could be viewed as the optimal suboptimal situation, says the Texas Tech professor.
"The optimal thing would be for people to have a zero tax refund and zero tax liability, to plan it right to maximize their money for optimal consumption over a set period, such as a tax year," Browning says. "But if saving through a tax refund leads to people having money to set aside for saving, paying down or paying off debt, it's not the optimal, but it could be the suboptimal solution."