Taxes Decoded - What You Need to Know Before You File This Year

I admit - taxes are not an exciting thing for us.

Shocker, I know. It’s kind of strange hearing that from someone who has been writing about personal finances for 10 years, but it’s true.

While I don’t jump for joy when tax season comes around, my husband and I have come to appreciate that preparing ahead of time makes things less stressful.

Less stress is good.

As an added bonus, since we’re not as anxious, we’re able to objectively review our numbers to make sure we’re taking advantage of the tax benefits we qualify for. Doing so either means we owe less for the year or we get a refund - both are wins in our books.  

What You Need to Know About Taxes¹

If you’re in the same boat - looking to make filing taxes less of a chore and hopefully a bit more to your financial advantage, it really does pay to learn some essentials about taxes.

The more informed you are about taxes and how they fit in with your financial lives, the better choices you can make now as you go about your day to day as well as tax time when you’re filing your returns.

I want to share three areas that can make a big impact on your finances now and give you a leg up later.

Tax Deductions Vs Tax Credits

One of the biggest areas of confusion when it comes to preparing for your taxes is understanding some of the key terms. Two big ones are tax deductions and credits.

Typically these are used together, but there are differences. With a tax deduction, you are lowering your taxable income.

On the other side, a tax credit can lower the taxes that you owe. There are two types of tax credits - refundable and non-refundable.

With the refundable credits, if what you owe is less than your credits you get that portion refunded.

Check Your Paycheck: Withholding

One of the biggest ways you can help your family financially is making sure you’re withholding the right amount of money.

What’s withholding and how does it work?

You may remember getting a big packet from the Human Resources department when you started working (or maybe it was an email with attachments). Within that paperwork, there was a W-4 form.

When you filled out that form, it was to help your employer get an idea of how much federal taxes needed to be withheld from your paychecks.

At the time, it may have been accurate, but if you have had some changes - getting married, having kids for example - and haven’t updated it. You could be having the wrong amount withheld.

Why is that a problem?

If too much is withheld, you’d have to wait until your taxes are filed to get that money back (in the form of a refund). Wouldn’t rather have the bigger paychecks now so you can use it as you need it?

If too little is withheld, then when it comes to tax time, you’ll be owing, which for many families is a bit stressful.

Taking some time now to review your withholding can make things go smoother and depending on your situation, help you keep more of your hard-earned money in your paychecks!

Retirement Contributions: Save More Now (and Later!)

How would you like to lower your taxable income now and set up yourself for a stronger retirement later?

If you’re contributing towards a traditional 401(k) or IRA, you can have some major wins. Your contributions are pre-tax, giving you a lower taxable income for that year.

Since you’re saving up and investing ahead for your retirement you can get the benefits of compound interest and have that money grow.

You can also invest in a ROTH 401(k) or IRA, but since that money is going in after taxes, you won’t get the immediate benefit of lowering your taxable income. However, when it comes time to use it during retirement, you can withdraw that money tax-free.

Here’s where having a financial advisor can help you run some scenarios based on your unique circumstances to get an idea of what the best option is for you.

Making Taxes Less Stressful

I hope these tips help you understand your taxes a bit more. If you want to dig into it more and optimize your money, you should start approaching your finances holistically.

Set up an appointment with Coastal Wealth Management available through CFS² so they can work with you on crafting a plan that fits your goals and family.