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For all the things I adore about finance, which I assure you are many, I just can’t get hyped up for tax time. Maybe it’s the needing to sit still for about three hours while I file or the general anxiety that I’ll massively screw something up resulting in an audit. Or that I won’t screw anything up, and still have to prove everything to Uncle Sam’s boys at the IRS. But one thing occurred this season that resulted in a little smile – I owed money back to the government (both State and Federal).
[taken from Giphy]
Yes, I’m serious.
WHY I WANT TO OWE AT TAX TIME
For years I’d heard my Dad’s general grumblings about how getting excited about a tax return is shenanigans. You’re giving the government a free loan all year and then you’re supposed to get excited when Uncle Sam returns money that’s rightfully yours without interest?
[taken from Giphy]
This year I joined my Dad’s team. Instead of getting all excitable about a couple thousand bucks back from the IRS and New York State/City, I kept that money and invested it in the market so I could get some return on it before forking it over.
I’ve also started to owe more money to the IRS because my freelance income is steadily increasing. This is because taxes are taken out of contract gigs upfront and the amount I pay in taxes all year from my full-time job doesn’t eclipse what I owe on side hustle income (I do pay some taxes during the year, I just don’t “over pay” if you will). Yes, this means I have to start looking at quarterly estimated taxes in 2015, but that’s an entirely different topic.
Let’s get back on track and overview how I prepare for owing Uncle Sam money come tax time.
HOW I PREP FOR OWING UNCLE SAM
1. Collect all my documents – and hound a few clients for 1099s
Whether you plan to owe the IRS or have the government owe you, don’t start filing without first prepping all your paperwork. Here’s what I needed this year:
- W2: I had two because I switched jobs in April
- 1099: A handful from clients who hired my freelancing services
- 1099-DIV: tax form on investments
- 1099-SA: tax form for distributions taken from my HSA (health savings account)
- 1099-R: tax form for 401(k) roll overs (even though I didn’t take a distribution)
I’ve never paid an accountant to handle my taxes and always use tax prep software.
2. Save 75 percent of my freelance income
Freelancing is income I make in addition to my day job salary. I don’t need any freelance income for my day-to-day living, so I elect to put 75 percent away in savings (much of which goes into investments) and 25 percent gets earmarked for my travel fund.
By saving 75 percent, I never stress about having available funds to pay off the taxes owed. Even when I need to start paying quarterly taxes I’ll be in good shape thanks to this strategy.
I know a lot of my peers see a tax refund as a great way to save or in their minds, be saving all year. I prefer to have the dedication to handle my savings and finances myself and not leave it in the hands of the government. Even if that means I owe $1,600 on April 15.
3. Max out a traditional IRA (for the tax break of course)
The IRS restricts how much you can put into an IRA when you have a company-sponsored retirement fund. In 2014 I made less than that threshold and was able to contribute to a 401(k) with a match and fully contribute to an IRA ($5,500).
While I’m a big fan of Roth accounts, I elected to max out my traditional IRA in 2013 and 2014 to take the tax break. This year, I anticipate I won’t be able to fully contribute to an IRA due to income restrictions, so I’ll put some towards traditional and the rest into Roth.
4. Invest in the stock market throughout the year
I’m all set on the emergency fund and don’t have any debt. Thanks to these two factors, I keep a significant amount of my money invested. I prefer to owe the government because I can make my money work for me all year and then cut Uncle Sam a check come tax time. Now, if you also share this mentality it’s important your money isn’t just sitting in savings, losing value to inflation, because then you might as well give the free loan to Uncle Sam.
TIME TO SWITCH YOUR MINDSET
It’s up to you, but I wouldn’t leave my money sitting in a 0.01% interest rate savings account at Bank of America, Chase, Wells Fargo or Citibank and I sure don’t plan to let Uncle Sam use it for free.
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