We've all grown up being taught things about money and taxes, but how many of them are actually wise, or even true? In this blog post, we explore some common beliefs about money and taxes that may not be as accurate as one would think.
"I deserve this, even though I can't afford it (yet)"
So I'm not trying to say you don't deserve it, but purchasing something you can't really afford is never a good idea. Though you can do your best to look ahead, raises and bonuses are never guaranteed and things can always change right at the last minute (like, I don't know, a global pandemic could hit?). The last thing you want is to be stuck purchasing a home or car that is way outside your regular budget, and lose that future income you thought you were going to get. Even purchasing smaller things can have long term effects.
Instead, say "you deserve the financial peace". Think through if the item or purchase is a need or a want. If it's something you decide you need, start saving for it. Put a little money aside, from the paycheck you currently receive, and purchase it when you can actually afford it. That way you'll avoid credit card bills you can't afford or being late on other bills.
2. "Getting a big refund is always a good thing!"
Please do not confuse your tax return as free money from the government. The money you get back in your refund is money from your paycheck you've been paying in throughout the year. Though it feels good to get that huge return, you're essentially giving the government an interest free loan, and missing out on some extra cash throughout the year.
If you get a large return, you may want to adjust your withholdings. This will allow you to have (and save) more money throughout the year, rather than have a giant check in April that's all too tempting to spend on something you may not need.
3. "I can depend on Medicare and Social Security when I'm older, I don't need to save."
Social Security is not meant to be a sole source of income. Most social security payouts are not much more than a paycheck from a minimum wage job. Though you could potentially live off that, you've also got to think about things like increased medical bills. Plus, I'm sure if you really asked yourself, one of the only reasons not to start saving now, is so you have more money to spend.
Ultimately if you've ever pictured having a stress free and relaxing retirement, you should start saving now. Start considering your retirement fund as your first bill each month and start setting money aside. Look into opening an IRA fund. You will thank us later!
4. "Big medical expenses make for a big tax break"
You probably shouldn't get too excited about larger medical bills. Though medical bills are deductible, it might not have the effect you might be thinking of. In order to really be able to take advantage of your medical bills, your expenses need to exceed 10% of you adjusted gross income, which is a lot. On top of that you have to be itemizing which might not make sense for the rest of your return!
5. "I don't need to report my side gig on my taxes, I'm not making that much extra!"
According to the IRS website, any income you make is reportable income. Even if you just started your business and aren't making much money, you should still report it on your taxes. If you don't, and you were to get audited, you could end up paying a significant amount in fees.
If you're not sure where to start with your side business or gig, we're here to help! We offer services for tax registration, LLC set up, to just planning for taxes and business expenses. Being small business owners, we posses the expertise you need to successfully and legally kick start you business!
6. "My credit card is free money!"
Let's just start this with the saying "There's nothing free in the world". Your credit card is not free money, and abusing it will probably cost you significantly more in the long run than if you paid cash up front. In Wisconsin, the average credit card debt person is $4,961, and we have one of the lowest averages in the country! (source) No one likes being in debt, and a simple way to avoid credit card debt is to stop using your credit card.
Don't buy things you can't afford with the actual money in your account. Use your debit card instead. Honestly the rewards and points probably aren't worth the late fees you can potentially receive. Take time to learn about credit cards, and the dangers of over-using them.
We could probably add 100 more, and we will probably have another couple parts later on in the year to this. Be smart with you money. Don't spend it on things you can't afford, and don't always believe everything you've maybe been told. As always, never hesitate to call and ask us if you have any questions regarding taxes and budgeting.