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Thanks to the Washington D.C.’s Emancipation Day holiday, taxes this year aren’t due until April 18th. That means you get the entire weekend to catch up and get your returns in on time. Hooray! Taxes are one task that I tend not to procrastinate on, so I had mine filed back in mid March.
Woah, That’s My Refund?
I got a lot back in refunds this year, which was great, but it also made me realize that I didn’t do the best job with my estimated tax calculations last year. What are estimated taxes? Estimated taxes are primarily intended for those who are self-employed. If you’re a typical employee and only receive W2 income you shouldn’t have to worry about estimated taxes.
When you’re self-employed though, you often earn income that doesn’t have taxes withheld. For example, if you’re a freelancer, your clients pay you the amount that you invoice. Your clients don’t take out taxes on your behalf and send them to the government like a normal employer does.
If you earn more than $600 from a client, you’ll receive a 1099-MISC tax form at the end of the year that lists all of the income you received. The government wants you to guesstimate what your 1099-MISC total income will be, calculate how much in taxes you would owe on that amount, and then pay installments electronically each quarter. Basically, the IRS doesn’t trust people to set aside enough money over the course of an entire year to pay their annual income tax bill, so they want you to send money in on a regular basis.
Human Error Strikes Again
Anyway, I thought I had calculated my 2015 estimated tax payments pretty accurately so that I would only owe a small amount of taxes or receive a tiny amount back. So I was really shocked when I went through my tax filing and found out I was getting a huge refund back. Of course I’m glad I got a lot of money back versus owing a ton, but it would have been better if I had come out much closer to flat.
Why? The government had my overpayments in its greedy big hands throughout the year when I could have invested it instead and used time to my advantage to let it grow. I would have earned peanuts if the money was sitting in my bank account because interest rates were so low, but I could have earned a couple percent if I had put it into some ETFs or steady mutual funds.
When I went back and looked at my estimated tax calculation spreadsheet, I figured out that my big mistake was essentially double counting. Although I had 1099 and other self employment income last year, I also had W2 income that already had withholding taxes taken out of it. Even though I knew this, I was doing something weird with the formulas in my spreadsheet and was using the wrong summation to calculate how much I should pay. The upside is now I know not to make the same mistake this year!
I Filed My Mom’s Taxes For The First Time
My sister and I also filed our mom’s taxes for the first time this year. She had been paying an accountant to do her returns for years, but my sister had the idea for us to start doing them for her this year. Not only does it save money – filing online is super cheap and so easy now – it also helps us get a much better picture of her finances.
We didn’t realize how much she was deducting in mileage and medical expenses each year. It’s great she’s been able to take those deductions because they make a big difference in her tax liability. We also learned how important it is to understand what type of retirement and pension accounts you have and to keep track of how much you make in contributions and withdrawals from each type of account.
Another thing we learned is that the state of Virginia makes you pay personal property tax on your vehicle every year. That’s nuts! It makes me so annoyed when I learn about rules that are essentially like double taxation or when the government makes retroactive tax code changes. Augh.
Learn, Share, Grow
Anyway, it’s hard when your parents get older, especially if they are in bad shape financially or starting to have trouble doing things on their own. But the best part though is being able to help them. If you have no idea what your parents’ financial situation is like – please take some talk to them about it. Seriously, the sooner the better.
I know all too well that money is not an easy topic to discuss with family, but it’s not something to ignore. The longer you wait, the worse things tend to get. If your parents need help you should start putting together a plan now because it could literally have a major impact on your own financial situation.
My sister and I are trying to get more involved with our mom’s finances even though it is not easy. Filing her taxes was one of many steps towards trying to rectify her situation. If your parents are in great financial shape you are super lucky – they deserve big hugs for not putting money burdens on you and your siblings.
I encourage all of you to get curious about taxes. Taxes are a PITA but they teach you so much. The more you learn about how to maximize your deductions and reduce errors on your returns, the more empowered you will feel. Plus, the more money you’ll likely be able to save in taxes and fees.
Beating the tax deadline doesn’t have to be stressful. With TaxAct, everything you need to confidently prepare and e-file your taxes is right at your fingertips. You got this. File your simple federal and state return FREE today with TaxAct.