It’s that time of year again: our bodies are craving long days of sunlight after months of cold, our beer is looking green and tax season is upon us. Since nearly 80% of us are getting a refund, you think we’d be more motivated to fill out those forms, but I totally get it – it’s just not that fun.
What if we viewed our taxes a different way? What if we used them to reflect on our careers, side hustles, and financial goals and set new ones?
Within the chaos of the year-end holiday season, we rarely take time out to truly reflect on our past year before we jump into setting goals for the new year. And, by the time March comes around, we often lose sight of those fresh, new year goals. Enter your friendly goals reminder and reflection activity: filling out your taxes.
Let’s break it down by goals, and you’ll see what I mean.
Do you want a raise, to take a new job, or a take new step in your career?
Taxes are a map of our careers over the past year. We collect and input our W-2s (or 1099s for contractors), reminding us about who we work for and how much bacon we’re bringing in. This is a good time to reflect where you’re at in your career – did you finally ask for that raise? Did you get promoted? Did you finally switch jobs if you wanted to make a move? Are you where you want to be?
If not, good news – you have nine months left this year to make it happen. Now is a good time to think about where you want to take your career and lay out the steps it takes to get you from point A to point B.
Did you start that side hustle?
One in two millennials have a side hustle, often to boost income or chase longer term passions or career goals. Are you one of them? Do you want to be?
From consulting, freelancing and tutoring to dog walking, our sharing and gig economy makes it easier than ever to pursue other interest outside of our 9-to-5s. Usually those side hustles come with a paycheck, often in the form of a 1099-Misc.
The good news is: side hustles mean more money (who doesn’t like that?). The bad news is you have to pay taxes on that money, and your employer doesn’t withhold taxes from you (AKA it’s on you to make sure you don’t spend it all, because you still owe tax on it).
Here’s my trick to help: if you DO have a full-time employer, you can have them withhold an additional flat fee every paycheck. Estimate the taxes you think you will pay from your side hustle, and have your full-time employer withhold that additional flat amount. If you can’t do it through self-service, ask someone in the accounting or HR department to help.
Did you start your own company?
Maybe your side hustle turned into something a little more, or maybe you have a great idea that you can’t stop thinking about – maybe it’s time to consider starting an LLC. Yes, that means more tax forms – but it also means more legal protection and (oftentimes) lower tax rates on the money you make through your company. With the new 20% deduction on income for pass-through entities (such as LLCs), 2018 is a great year to take the leap if you’ve been on the fence.
Is it time to start investing?
Listen, nobody likes paying money on investments. I often take a “set it and forget it” approach to a lot of my investments, and I’m often shocked by the dividends (even if they are nominal) that I pay taxes on from the prior year. But let’s think about it like this: every dollar that you invest is a little employee working for you, making you more money. It’s not fun paying taxes for money you put away, but it’s a really good sign – you’re only getting taxed on money if you’re making more of it!
If you aren’t filing 1099-DIV, it’s time to think about investing. Investing can be intimidating, but the with technology available today and the minimum required balances to start, it’s never been easier.
Do you need a budget?
One of the first questions I ask myself when I’m reflecting on my income information is, “where did all this money go?”
I think that’s a natural reaction for anybody to have – and I’m an avid budgeter (seriously, I check in with my budget nearly every day and have for years). But if you find yourself really at a loss for what you spent your hard-earned paychecks on, it might be time to get a budget. Check out LearnVest and Mint for automated ways to get you started and keep you on track.
Is home ownership a goal?
As a home owner, you can deduct mortgage interest and property tax payments as well as certain other expenses from your federal taxable income. While renting allows for more flexibility, it does not offer the same tax benefits. While home ownership is not a priority for everyone, tax season might be a good time to take a step back and consider your living roadmap over the next few years. Is owning a home a goal for you? If so, start thinking about your timeline and take those first steps.
Are you saving enough for retirement?
Up to $18,500 of contributions to your 401(k) can be tax deductible, AND you can stack that on top of an IRA (Individual Retirement Account) where $5,500 of your contributions can be tax deductible. By the way – this doesn’t include what your employer contributes for you, so if you contributed $18,500 and your employer contributed another 4% of your salary in addition, that’s just gravy on top (that you won’t get penalized for)!
Now, most of us are not in the position to be maxing out all our retirement contributions every year. But can we be doing more? More money into our retirement accounts means less money in taxes, and more financial security later in life. To the extent you can tick up your contribution another 1-2%, your future self will thank you (and, let’s be honest, you probably won’t even miss it).
How much are you giving back?
While there are limitations and thresholds for tax deductions on charitable contributions, there can be a lot of perks if you itemize on your tax return. A lot of us are givers anyways, regardless of the tax consequences – but to the extend we can get rewarded for it, why not? That’s more money in our pockets to go do more good.
If you don’t feel like you have enough spare change to make a monetary donation to your favorite cause, consider volunteering instead. If you travel for charity work, some of those travel expenses may lower your taxes, too. Now is a good time to reflect on your charity for last year and set some goals for this year – monetary-based or volunteer-based – it all makes a difference.
Are you loaning money to Uncle Sam?
While getting a tax refund feels great (free money!), it means you paid too much upfront to the government that you could have put “to use” last year. People say this is giving the IRS “an interest-free loan”.
If you do get a substantial refund this year, maybe it’s time to evaluate your withholding amounts for 2018 and lower them accordingly. Money that goes into your pocket today might be better used to pay down debt, save or invest – and those are financial goals worth working toward.