How will you use your tax refund? Some wise advice.

Reposted from AICPA Insights - 

In the News: Using Tax Refunds Wisely

Posted by James Schiavone on Apr 05, 2013 in CPA Profession in the News, James Schiavone, Tax,Trends & Hot Topics

Do you see your neighbor waiting by the mailbox for their tax refund? Chances are it’s not so they can use it on a fancy vacation or a new spring wardrobe.

This year, workers are most likely to save their refund or use the money for day-to-day expenses, according to a recent survey conducted for the AICPA by Harris Interactive for National Financial Capability Month. And that refund money is substantial. An AccountingWEB article on the survey results states that through March 22, the average refund this tax season is $2,827. That’s trending slightly lower than this time last year, when the average individual refund was $2,860.

“Last year the IRS sent checks totaling nearly $310 billion to taxpayers, underscoring the significance of tax time to American households,” said Ernie Almonte, CPA, CGMA, chair of the AICPA’s National CPA Financial Literacy Commission.

Asked to select all the ways they will use their tax refund, nearly half of U.S. adult respondents, 46 percent, said they expect to save some portion this year; 37 percent will use it to pay for day-to-day expenses; and one-third, 33 percent, report that they intend to use it to pay down debt.

A likely cause for this responsible financial behavior is that a substantial portion, 43 percent, of those who are expecting a refund consider it more important to their finances this year than in years past. Part of the reason that refunds are so important in 2013: the expiration of the payroll tax cut. In January, Social Security withholding returned to 6.2 percent from 4.2 percent and effectively reduced take home pay by 2 percent.

According to the survey results, 71 percent of those employed have felt some impact from their paycheck reduction. And nearly all of those, 96 percent, have made some kind of adjustment. According to the survey, 51 percent are cutting back on cable and digital entertainment; 45 percent are contributing less to retirement accounts; and 17 percent are skipping payments on credit cards, utilities, rent or mortgages.

“This year, in the wake of a paycheck squeeze, many Americans are counting on those refunds for relief – a way to bolster savings or shore up budgets. It’s critical that they have a well thought out plan for using the funds to maximize the benefit to their financial well-being,” said Almonte.

In the AccountingWEB article on the survey results, Almonte advises clients who are receiving a refund to:

1. Set aside money for immediate household expenses.
2. Build up an emergency fund to cover at least six months of expenses.
3. Set aside some of the money for a retirement fund.
4. Pay down credit card debt.

The CPA profession has a comprehensive financial education program—360 Degrees of Financial Literacy—to help Americans achieve long-term financial success. A robust website (360financialliteracy.org) is the centerpiece of the program with tools, calculators and advice to help Americans understand and manage their financial needs during 10 life stages, from childhood to retirement.

Since 2007, the AICPA has conducted an annual survey of Americans to determine their top financial concerns and assess their financial well-being. Harris Interactive conducted this year’s telephone survey on behalf of the AICPA within the United States between March 14 and March 17, reaching a nationally representative sample of 1,011 adults aged 18 and older by landline and mobile phone.

James Schiavone, AICPA Staff.

Six Tips on Making Estimated Tax Payments - IRS Tax Tip 2013-49

Some taxpayers may need to make estimated tax payments during the year. The type of income you receive determines whether you must pay estimated taxes. Here are six tips from the IRS about making estimated tax 

payments.

1. If you do not have taxes withheld from your income, you may need to make estimated tax payments. This may apply if you have income such as self-employment, interest, dividends or capital gains. It could also apply if you do not have enough taxes withheld from your wages. If you are required to pay estimated taxes during the year, you should make these payments to avoid a penalty.

2. Generally, you may need to pay estimated taxes in 2013 if you expect to owe $1,000 or more in taxes when you file your federal tax return. Other rules apply, and special rules apply to farmers and fishermen.

3. When figuring the amount of your estimated taxes, you should estimate the amount of income you expect to receive for the year. You should also include any tax deductions and credits that you will be eligible to claim. Be aware that life changes, such as a change in marital status or a child born during the year can affect your taxes. Try to make your estimates as accurate as possible.

4. You normally make estimated tax payments four times a year. The dates that apply to most people are April 15, June 17 and Sept. 16 in 2013, and Jan. 15, 2014.

5. You should use Form 1040-ES, Estimated Tax for Individuals, to figure your estimated tax.

6. You may pay online or by phone. You may also pay by check or money order, or by credit or debit card. You’ll find more information about your payment options in the Form 1040-ES instructions. Also, check out the Electronic Payment Options Home Page at IRS.gov. If you mail your payments to the IRS, you should use the payment vouchers that come with Form 1040-ES.

If you need help determining if you need to make estimates or the amount of your estimates, please call our office at (630) 986-0540. For more information about estimated taxes, see Publication 505, Tax Withholding and Estimated Tax. Forms and publications are available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).