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Do you know what you need to be aware of when it comes to tax planning and bankruptcy?

The date of the first result found in a search of Google for “2015 tax year planning” is January 22nd of this year. That is pretty early, considering that the end of the year is less than two months away as I write this. There is still time to make sure that you prepare before the opportunity to take actions that might help you this year is gone.

What do I need to be aware of when it comes to tax planning and bankruptcy?

  • Most important: file all of your tax returns on time if you possibly can.
  • Second: avoid under withholding or under payment of your quarterly tax obligations.
  • Third: if you are in a Chapter 13 plan, and you owe more than $1,500 in taxes for a year after the filing of the case, you pay your tax debt off quickly if you possibly can. If you cannot, please come in to see me for a consultation. Read on to learn more about the steps that we may decide to take later in this article.

In this article, we will primarily cover tax-planning advice that is applicable to most people, regardless of income or assets.

Tax Return documents

Higher Contribution Limits in 2015 are Accompanied by Limits on IRA and FSA Rollovers

Investopedia summarized “Five Tax Law Changes in 2015 You Need To Know”  that apply to savings plans, including IRA, 401(k), and Flexible Savings Accounts for healthcare. Most of the news is good; limits have been raised on contribution to retirement savings plans. However, employees are now limited to a single IRA roll over in any twelve-month period. And If you have a balance in your FSA at the end of 2014 and you carry over $500 of it into 2015, you will be ineligible to participate in a HSA in 2015. This restriction does not apply to FSAs for specific uses, such as dependent care or dental expenses.

The IRS Lays out Changes in 2015

The article, “In 2015, Various Tax Benefits Increase Due to Inflation Adjustments”, lists changes in bullet point form, including tax rates, deductions, and exemptions. These inflation-based increases mean that you will keep more of your money, or be able to claim higher level of deductions than in previous years.

What do These Changes Mean? Ideas for Action this Year

While most of these changes are generally good news, they do not eliminate the requirement to file federal income taxes.

  • If you are in the midst of a bankruptcy filing, or if you are in a chapter7, chapter 13, or chapter 11 plan, then according to IRS Publication 908, Bankruptcy Tax Guide, the Bankruptcy Code requires a debtor to file an individual tax return, or request an extension. If this does not happen, the bankruptcy case can be converted or dismissed.
  • In addition, the bankruptcy trustee is required to file an estate tax return, form 1041, for the bankruptcy estate. However, this is usually not a concern to the vast majority of my clients, as it usually involves “big” cases
  • In the case of a Chapter 13 bankruptcy, the debtor pays disposable income into a monthly “plan” to pay creditors. In this case, you as the debtor are obligated to file your taxes on time, and, if you are directed to do so, to provide your returns to the trustee along with any refunds for payments to creditors during the bankruptcy repayment period.
  • There are a number of other helpful articles and resources on my website. This article, “How to Prepare and File your Federal Income Taxes for Tax Year 2014” contains a number of recommendations and resources that are as applicable today as they were when originally published on my site. If your concerns are more technical in nature—for example, on the tax consequences of property sales during foreclosure—I wrote a series of articles that are available on my site here.

Tax planning in bankruptcy can be complicated for some, but not most, of my clients. Remember the most important point I mentioned at the beginning of this article:failure to file your taxes on time can lead to new problems that you will have to deal with.

If you are in a Chapter 13 repayment plan with my firm, and you owe the IRS money for a year after the year in which you filed Chapter 13, you must file your return on time, and then come talk to me. We need to let the Chapter 13 Trustee know that you are facing an obligation, and that you going to see a professional to get into a tax repayment plan. For some people, we might even be able to lower the Chapter 13 plan payment a little while you are in a repayment plan for the taxes that you incurred.

If you find any of this confusing, please make an appointment to come in and discuss your situation. We are here to help you through your bankruptcy—before, during, and after the filing and completion of your case.

We’re With You. All the Way Back.

I have compiled a record of service to my clients that is based upon my determination to be of help to them long after their case is over. Most of the articles on my site and the newsletters I’ve authored contain financial planning advice, including those linked above. The newsletter archive is posted on my site in case you would like to review previous editions at a later time. I am both proud and humbled by the comments my clients say in person and the reviews they’ve freely left about my staff and I on the web. I am committed to helping my clients resume their lives on a solid footing—all the way back after bankruptcy.

How to Prepare and File your Federal Income Taxes for Tax Year 2014

As I write this, tax day for federal income tax year 2014 is only a few weeks away. You may have some unfinished business to clear up, whether it be to file your taxes for 2014, to make preparations to make for a smoother tax season next year, or to understand how to handle unpaid taxes. Let’s examine some topics that I hope you will find beneficial now and useful throughout the coming year.

Tax Return documents

The most important thing is to file your tax returns on time, and to prepare them correctly, even if you owe money to the IRS and can’t afford to pay the entire amount before April 15th. You should also let your tax return preparer know you have filed—or are thinking about—filing for bankruptcy protection.

Tax Preparation Software

According to an opinion piece published in the Wall Street Journal, “…more than three-fourths of all individual tax returns will be filed electronically [this year].” For those taxpayers who use their own computers and tax preparation applications, “Taxpayers who employ an accountant or other preparer have some protection from daunting penalties if the IRS finds mistakes. Software users who prepare their returns without help have little or no protection.”

Some pretty famous people have had problems, or claimed to have problems, with tax preparation software. According to the story, “During the confirmation hearings of Treasury Secretary Timothy Geithner three years ago, we learned that he failed to pay self-employment tax on income from the International Monetary Fund. Mr. Geithner partially blamed the oversight on the TurboTax software he had used…”

Today, the IRS and the tax court have not sided with taxpayers who claim “the TurboTax defense” like Secretary Geithner. In fact, the article states that, “So far the U.S. Tax Court has nearly always rejected the TurboTax defense. Only two cases have offered taxpayers penalty relief for software reliance.”

Ideas for Action

  1. The primary responsibility for accurately preparing a return with tax preparation software still resides squarely on you, the taxpayer. Careful review of your return manually remains important, especially if your tax situation is complex.

How to Fix a Botched Return

Jonnelle Marte’s column on the MarketWatch site picks up the thread, and offers a good backgrounder on when and how to fix mistakes in a previously filed income tax return. According to the article, “Tax pros say you should come clean about mistakes on your tax return as soon as possible, but exactly how you do so depends on the mistake. In fact, not all errors require filing an amended return, the Internal Revenue Service says.”

Ideas for Action

  1. Don’t file another original return on IRS form 1040. Use IRS form 1040X, even if you’re amending a previously filed return.
  2. You have up to three years to refile a return that will produce a refund. The article explains the conditions that apply, and when the three year deadline ends for each tax year.
  3. Tax due situations are nothing to mess around with. If you owe a substantial amount, engaging a tax professional is a very good idea. According to the article, if the IRS discovers the error, “the government will bill you for: (1) the unpaid tax amount plus interest (currently at a 3% annual rate), (2) the additional failure-to-pay interest charge penalty (at a 6% annual rate), and (3) maybe other penalties too. But the IRS can waive penalties if you show you had a reasonable cause for the underpayment.”
  4. The article concludes by advising us to “be sure to use the current version of Form 1040X http://www.irs.gov/pub/irs-pdf/f1040x.pdf, which you can print out from the IRS website at http://www.irs.gov/. (Right now, the current version is dated December 2014.) If you need to attach corrected or additional tax forms, be sure to use the forms for the year you’re amending. For example, if you’re filing Form 1040X to claim additional itemized deductions for 2011, you’ll need to attach a corrected 2011 version of Schedule A. The IRS website has prior-year tax forms too. Click the following link, http://www.irs.gov/app/picklist/list/priorFormPublication.html, then you’ll be able to search for the form(s) you need, or sort by headings, or simply page through the many, many forms to find the one(s) you need.

Budgeting

There are plenty of books, articles, software, and other media that explain how to establish a budget. Perhaps the hardest part is to commit to the plan you establish, regardless of how you intend to implement it. Thanks to the wealth of information about budgeting available today, at least the cost to establish a budget has gone down dramatically.

Intuit, the company behind Quicken and TurboTax, has a free online budgeting tool for families and individuals called Mint https://www.mint.com/. Intuit claims to have 10 million individual users. The product is pretty simple to use, and may be all that you need to help you see where your money is going, and help you perform some rudimentary tax planning to avoid surprises in tax years to come.

Columnists like Dave Ramsey, Suze Orman, and other “celebrity financial experts” all have good plans, and will sell you tools, books, and programs to manage them in some cases. Whatever approach you take, it is never too late, and never too early, to make a financial plan and follow through on it.

Ideas for Action:

  1. Always file your tax returns on time–even if you can’t pay. You can get an automatic six month extension to enable you to complete your tax return filing for the year. Here’s an article on the IRS web site with more details on the procedure.
  2. The IRS has a “Fresh Start” initiative to help struggling taxpayers. Here’s an article that describes the program.
  3. Tax problems can be complex. I may be able to help you understand your situation; I can certainly help you by discussing certain trade-offs and options concerning your situation with the IRS and bankruptcy.

What about Tax Consequences of Foreclosure Sales?

I published a series of articles on my web site that cover the tax impacts of foreclosure:

In this series of articles, I define some of the terms and situations that can trigger Federal Taxes on a foreclosure sale. This area requires expertise and experience that you may not find at firms that churn out bankruptcy filings using a factory approach. If you are concerned that you may have a complex foreclosure transaction as part of your bankruptcy case, please engage my firm to help you work through the details by contacting us right away. We can help!

IRS Debt and Bankruptcy

Generally speaking, taxes are exempt from discharge through bankruptcy. However, in some cases, you can discharge an IRS debt using a Chapter 7 bankruptcy filing. The only IRS debts that can be discharged are those that are over three years old. There are certain conditions that must be met first. Read more about IRS and bankruptcy in an earlier article I posted on my site.

If All This Seems Confusing or Too Complicated, Please Call Us for Help

Tax problems can be complex. I may be able to help you understand your situation; I can certainly help you by discussing certain trade-offs and options concerning your situation with the IRS and bankruptcy. Contact my office for a free, no obligation consultation right away!

Federal Income Tax Tips for Filing, Refund Allocation, and Unpaid IRS Debt

Update: If you use TurboTax, and you’re still working on your taxes for tax year 2013, you should probably change your password. This article discusses a serious vulnerability in the web server software in use by some organizations. Take precautions to protect your information and identity.

As I write this, tax day for federal income tax year 2013 is only a few days away. You may have some unfinished business to clear up, whether it be to file your taxes for 2013, to make preparations to make for a smoother tax season next year, or to understand how to handle unpaid taxes. Let’s examine some topics that I hope you will find beneficial now and useful throughout the coming year.
Tax Return documents

Tax Preparation Software

According to an opinion piece published in the Wall Street Journal, “…more than three-fourths of all individual tax returns will be filed electronically [this year].” For those taxpayers who use their own computers and tax preparation applications, “Taxpayers who employ an accountant or other preparer have some protection from daunting penalties if the IRS finds mistakes. Software users who prepare their returns without help have little or no protection.”

Some pretty famous people have had problems, or claimed to have problems, with tax preparation software. According to the story, “During the confirmation hearings of Treasury Secretary Timothy Geithner three years ago, we learned that he failed to pay self-employment tax on income from the International Monetary Fund. Mr. Geithner partially blamed the oversight on the TurboTax software he had used…”

Today, the IRS and the tax court have not sided with taxpayers who claim “the TurboTax defense” like Secretary Geithner. In fact, the article states that, “So far the U.S. Tax Court has nearly always rejected the TurboTax defense. Only two cases have offered taxpayers penalty relief for software reliance.”

Ideas for Action

  1. The primary responsibility for accurately preparing a return with tax preparation software still resides squarely on you, the taxpayer. Careful review of your return manually remains important, especially if your tax situation is complex.

How to Fix a Botched Return

Jonnelle Marte’s column on the MarketWatch site picks up the thread, and offers a good backgrounder on when and how to fix mistakes in a previously filed income tax return. According to the article, “Tax pros say you should come clean about mistakes on your tax return as soon as possible, but exactly how you do so depends on the mistake. In fact, not all errors require filing an amended return, the Internal Revenue Service says.”

Ideas for Action

  1. Don’t file another original return on IRS form 1040. Use IRS form 1040X, even if you’re amending your return for tax year 2011.
  2. You have up to three years to refile a return that will produce a refund. The article explains the conditions that apply, and when the three year deadline ends for each tax year.
  3. Tax due situations are nothing to mess around with. If you owe a substantial amount, engaging a tax professional is a very good idea. According to the article, if the IRS discovers the error, “the government will bill you for: (1) the unpaid tax amount plus interest (currently at a 3% annual rate), (2) the additional failure-to-pay interest charge penalty (at a 6% annual rate), and (3) maybe other penalties too. But the IRS can waive penalties if you show you had a reasonable cause for the underpayment.”
  4. The article concludes by advising us to “be sure to use the current version of Form 1040X http://www.irs.gov/pub/irs-pdf/f1040x.pdf, which you can print out from the IRS website at http://www.irs.gov/. (Right now, the current version is dated December 2011.) If you need to attach corrected or additional tax forms, be sure to use the forms for the year you’re amending. For example, if you’re filing Form 1040X to claim additional itemized deductions for 2010, you’ll need to attach a corrected 2010 version of Schedule A. The IRS website has prior-year tax forms too (click on Forms and Publications; then click on Previous Years http://www.irs.gov/app/picklist/list/priorFormPublication.html).”

Budgeting

There are plenty of books, articles, software, and other media that explain how to establish a budget. Perhaps the hardest part is to commit to the plan you establish, regardless of how to implement it. At least the cost to establish a budget has gone down dramatically.

Intuit, the company behind Quicken and TurboTax, has a free online budgeting tool for families and individuals called Mint https://www.mint.com/. Intuit claims to have 7 million Mint users. The product is pretty simple to use, and may be all that you need to help you see where your money is going, and help you perform some rudimentary tax planning to avoid surprises in tax years to come.

Columnists like Dave Ramsey, Suze Orman, and other “celebrity financial experts” all have good plans, and will sell you tools, books, and programs to manage them in some cases. Whatever approach you take, it is never too late, and never too early, to make a financial plan and follow through on it.

Ideas for Action:

  1. Always file your tax returns on time–even if you can’t pay. You can get an automatic six month extension to enable you to complete your tax return filing for the year. Here’s an article on the IRS web site with more details on the procedure.
  2. The IRS has a “Fresh Start” initiative to help struggling taxpayers. Here’s an article that describes the program.
  3. Tax problems can be complex. I may be able to help you understand your situation; I can certainly help you by discussing certain trade-offs and options concerning your situation with the IRS and bankruptcy.

If You’re Due a Federal Tax Refund

Congratulations! Your refund as a consequence for paying too much in tax withholding will hopefully arrive soon. What should you do with this windfall? I wrote an article for tax year 2012 that offers seven alternatives for allocating your refund that I recommend to you.

IRS Debt and Bankruptcy

Generally speaking, taxes are exempt from discharge through bankruptcy. However, in some cases, you can discharge an IRS debt using a Chapter 7 bankruptcy filing. The only IRS debts that can be discharged are those that are over three years old. There are certain conditions that must be met first. Read more about IRS and bankruptcy in an earlier article I posted on my site.

If All This Seems Confusing or Too Complicated, Please Call Us for Help

Tax problems can be complex. I may be able to help you understand your situation; I can certainly help you by discussing certain trade-offs and options concerning your situation with the IRS and bankruptcy. Contact my office for a free, no obligation consultation right away!

Hollywood secrets: 7 big stars and their almost unknown bankruptcies and bonus: 8 best uses for the first $1,000 of your tax refund

Even after a long day of sympathizing with clients as they share financial troubles, I still have ample appetite to consume the latest news story of a celebrity’s financial train wreck.   I cannot pass up a headline announcing the latest financial woes of the famous and telegenic.  Even after a 20 client day, I will still pause to read about a celebrity debt default.   I sometimes ask myself:  How could all of that talent, fame and fortune leave one insolvent? How ever did it happen?

 The layout of this blog post is unique:  following every (ho-hum, yawn) financial inspiration tip of what one might do with the first $1,000 of any tax refund is a little tiny tidbit of irresistible celebrity financial muckraking.

 You will get seven celebrity financial crashes and eight financial advice tips about how you might spend the first $1,000 of your tax refund – all mixed in one package.  I think that is a square deal.

Enjoy!

The average tax refund is $2,913.00 – some of this is understandably might used for “catch-up” on household obligations or to repair aging vehicles.  But if you can spare $1,000.00 of the refund, consider using the $1,000.00 for the benefit of your financial future – so I present eight tips about how to best use $1,000.00 of your 2012 tax refund.

 But on to the crashing celebrities:  We almost all know about Mike Tyson’s 2003 filing for bankruptcy protection and Anna Nicole Smith’s two filings.   But did you know about Walt Disney’s bankruptcy filing?  After bankrupting at age 21, he went on to found a company that grossed $38 billion in revenue last year.

Some of our most loved and respected celebrity entertainers have faced financial woes and were able to reconstruct their lives and finances with the assistance of the US Bankruptcy Courts.

If you are besieged with bills and collectors (or know someone who is) – then reach out to us for a consult and let us open the door to a bright post-bankruptcy future.  Just consider Walt Disney…. he did just fine after bankruptcy.

1.   Tip:  Use $1,000 of your tax refund to open a Roth IRA for yourself, a child or a grandchild (or even a nephew or niece!).  If you, your child or grandchild had taxable income for the year (even if no tax was due or paid) you can usually contribute up to $5,000.00 into a Roth IRA for yourself or that child or grandchild.  But lets take it easy, as $1,000 would be more than a generous.  The Tax Code provides the rest of the generosity as this contribution will grow tax-free year after year, and it can be withdrawn tax-free after age 59.5 years.  What greater gift than to begin the creation of a nest egg for yourself, a loved child or a grandchild – so toss in $1,000.00 and watch it grow!  Even if you or your loved one has financial troubles in the future, the money in the Roth IRA is virtually unreachable by creditors.  Now on to the celebrity financial woes……

2. Celebrity bankruptcy:  Actor Sherman Hemsley “a/k/a George Jefferson” filed for bankruptcy protection in June 1999.  He was unable to repay a $1 million dollar loan and had IRS issues to boot.  After some time he did withdraw his bankruptcy petition after negotiating repayment arrangements with his creditors.

3. Tip: Use $1,000 of your tax refund to replenish your emergency fund – set up a separate savings account for this purpose at a bank where you don’t normally do business.  If you want to REALLY  go for it, set up a paycheck allotment or auto-deposit of $100 monthly into the same emergency fund.  In just two years, this fund will grow to nearly $5,000.00.

 4. Celebrity bankruptcy: Actress Kim Basinger filed in 1993 after a town she purchased in 1989 (at the encouragement of relatives) turned into a financial nightmare.  She had hoped to turn the whole town into a theme park of some sort, partnering with investment company Ameritech.  Also compounding her financial challenges was an $8.1 million dollar judgment against her for withdrawing from the film “Boxing Helena”.  Eventually Kim bounced back well, winning an Academy Award for her film role in “L.A. Confidential” and eventually settling the $8.1m lawsuit for about half of what she owed.

5. Tip:  Get a Professional Review of Your Finances from a fee-only non-commissioned financial advisor – which usually costs less than $1,000.00.  How is this different from calling Edward Jones or Charles Schwab?  There is a big difference, as your local stockbroker is a salesperson, not a truly neutral financial advisor.  Contact the National Association of Personal Financial Advisors for a local referral.  A note of caution: if you have not yet filed your own bankruptcy to be rid of burdensome debt, I doubt that your friendly financial advisor will be able to instantly resolve financial woes.  But once free of hopeless debt, you may have a little extra in the household budget – and this could be wisely invested  in mutual funds, IRAs, GETT educational credits or other funds to suit your family’s long-term needs as recommended by your professional (non-commissioned) Personal Financial Advisor.

6. Celebrity bankruptcy: Crooner Wayne Newton  “a/k/a Mr. Las Vegas” filed for bankruptcy protection in 1992.  His woes then included $20 million in unpaid bills related to a libel lawsuit he had filed against ABC for claiming that organized crime was involved in some of his casino dealings.  By 1999, Mr. Newton was doing better, but again faced financial problems by 2005, including a $1.8 million IRS taxes and $60,000 in unpaid airplane storage bills.

 7.  Tip:  Improve your home’s curb appeal with a $1,000 tax refund trip to Home Depot.  Yes!  You get to go shopping!   $1,000 will buy a trip to Home Depot for some new landscaping shrubs, a stylish new front door with fancy door knocker, a gallon of paint and three pink yard flamingos.  There are two reasons for sprucing up your home: If you have to suddenly relocate and sell your home to chase a new job, you will be glad you took care of this “sprucing up” when you had the extra funds and time.  Plus, coming home to a pretty home after a long day of work or job hunting is truly gratifying.  Don’t own a home?  Then plan “B” for those not owning a home is a little weird – spend $500 on professional wardrobe items and save the other $500 for your emergency fund – because should you eventually want to purchase a home or change apartments,you are going to need that $500 you placed safely in your emergency fund!  Likewise, looking professional at work is never a poor investment.

8. Celebrity bankruptcy: Singer Vince Neil a/k/a Heavy metal band “Motley Crue” frontman.  Mr. Neil has actually filed for bankruptcy twice, the most recent time in 2010.  One of his creditors was his lawyer, to whom Mr. Neil owed $16,000.00, for getting him out of many a heavy metal jam.

 9. Tip: Hire a lawyer to write your will for $1,000.00 from your tax refund.  Yes, you can cheaply use an online form downloaded from the internet from legal zoom or worse and avoid the lawyer fee – but watch out!  There are many issues you might overlook, and legal situations are treated differently state to state, so your Florida oriented form might not work so hot in Washington.  Here are a few examples of subtle issues a lawyer might better address:  Nominations in your will of a guardian to care for minor children, care for pets upon your passing, “health care directives” which direct when the medical establishment should back-off providing medical care to you and finally, addressing confusion between the death division of “non-probate” assets such as life insurance policies, IRAs and 401k’s and “probate assets” such as homes and realty investments.  Special note: if you have not revised your will or changed financial asset beneficiary designations since completing a divorce, you had better get on it!

 10.  Celebrity bankruptcy:  Baseball player Jose Canseco walked away from his 7,300 square foot Encino, CA mansion in 2008.  While technically not a bankruptcy, abandoning your mansion seems pretty darn close to bankruptcy to me.  Jose retired from baseball in 2002 after a long and highly compensated career with the Oakland Athletics.  In 1988, he was the first player in major league history to steal 40 bases and hit 40 home runs in the same season.  Two costly divorces and a steroid scandal laid low Jose’s finances and his mansion was foreclosed.  He tried out for the L.A. Dodgers in 2004, but was passed over.

 11.  Tip:  Hire a personal fitness trainer and diet coach with $1,000.00 from your tax refund.  Try two sessions per week (one hour per session) at between $50 and $75 per hour to learn modern fitness technique.  This seven to ten week investment may be the best money you ever spend.  Fitness trainers and diet coaches are not just for movie stars any longer.   I know that trainers work: Before starting with my trainer, I had never heard of “short burst cardio” – “burpees” – “bosu balls” – “kettle bells” – “arnolds” or “skull crushers”.  With a richer vocabulary, a slimmer midsection and a much more positive mental attitude I strongly recommend a fitness coach.  I revolutionized my diet with the trainer’s help and went from 219 pounds down to 201, dropping six inches off of my waist from 38 to 32.  If not for the personal trainer, I would still been stuck in the same old unsuccessful exercise rut.  Try the trainers at the YMCA for economy – but if you want the best, then try “The Club at Gig Harbor”, where I meet my trainer.

 12. Celebrity bankruptcy: Mark Twain filed for bankruptcy in 1894 after a failed investment in an automatic typesetting device called the Paige Compositor.  The investment cost Mark Twain his fortune (and also cost much of the inherited fortune of his wife), but he bounced back after bankruptcy.  He went on to replace at least a portion of his fortune as a lecturer.  Ironically, the man who coined the phrase “the Gilded Age”, Mark Twain, went broke.

 13. Tip:  Spend $1,000.00 of your tax refund to beef up career skills.  Consider courses at community colleges or some on-line courses to strengthen the weaker portions of your resume and experience.  A stronger resume can ease a transition into a new position with your current employer, or provide you with a new classroom learned skill that will be a focal interview “talking point” if you are interested in reaching out to new potential employers.

 14. Tip:  If you have not yet paid off your debts in full, then invest $1,000.00 of your tax refund money in the bankruptcy services of James H. MaGee.  Each year that you toil along with debt means one less year to accumulate adequate retirement savings and one more year of hope-robbing and health-corroding stress.  A bankruptcy case can often mean quickly restored creditworthiness – call us for a consult, and I can explain how and why!  253-383-1001 www.washingtonbankruptcy.com

Winning Ways to Distribute Your Tax Refund

If you’re receiving a tax refund for tax year 2012, or any tax year, congratulations! The government is refunding the no interest loan that you made in that tax year. Your refund may be small, in which case you deserve congratulations again for not making too large a loan to Uncle Sam, or it may be larger, in which case it may make sense to review your withholding options.

Those topics are for another day. Let’s take the case of the typical taxpayer.

Tax Return documents
In 2012, for the 2011 tax year, taxpayers received a tax refund that averaged $2,700. That’s more than a month’s worth of income for two thirds of US taxpayers.
So, what would you do if you received an extra month’s pay?
I agree with most personal finance advisors who recommend that you pay yourself first. The one thing that you can count on is the need to save for events in life that you didn’t count on. You may not have planned for an event that involves an unexpected expense, but if you have a savings plan, you have better options than someone who has no plan.
OK, so how much of the refund should I save? Let’s pick $1,000.
Here are some ideas—winning ways—to make that payment to yourself.
1.       Make savings a habit. Start a Roth IRA. If you don’t qualify yourself, consider opening one for a family member. If you or your family member had taxable income for the year (even if no tax was due or paid), you can usually contribute up to $5,000.00 into a Roth IRA. The Tax Code provides that this contribution will grow tax-free year after year. What’s more, it can be withdrawn penalty free and tax-free after the person who owns the Roth IRA reaches age 59 1/2. Even if financial troubles occur in the future, the money in the Roth IRA is virtually unreachable by creditors, even if you or your loved one has to file for bankruptcy.
2.       Create a personal financial emergency fund. Set up a separate savings account for this purpose at a bank or credit union. Financial planners recommend that this fund cover three to six months of your typical living expenses. Most employers’ payroll systems can help you set up a paycheck allotment or auto-deposit of $100 monthly into your emergency fund. In just two years, your fund will grow to nearly $5,000.00.
3.       Get a professional financial review. If you feel that you might have enough income for some modest retirement counseling, then get a professional review of your finances from a fee-only non-commissioned financial advisor. You should expect to pay less than $1,000.00 for your personal review, leaving the balance to allocate as your advisor recommends. How is this different than calling Edward Jones or Charles Schwab?  There is a big difference: your local stockbroker is a salesperson, not a truly neutral financial advisor. Contact the National Association of Personal Financial Advisors for a local referral.
4.       Invest in your home. Whether you concentrate on a specific room in your home—the kitchen, a bathroom, the family room—or spread your efforts inside and out, you can make noticeable improvements by doing it yourself. Not only will you enjoy living in your upgraded home, you may find that the home improvements you made improved the resale value of your home should you need to sell your home someday.
5.       Invest in yourself. Some people may not like it, but those who “dress for success” usually do succeed more than someone with the same skills and personality who don’t pay attention to their appearance at work and socially. The book at the link was originally published in 1975. The advice is just as good today as it was then. Don’t overspend though. Limit yourself to $500, and follow the guidelines in the Dress for Success book or other business-friendly sources. You can always upgrade your wardrobe again after you get that big raise because you showed your bosses that you take your work, and your appearance at work, seriously.
If you feel your wardrobe is covered, there are other good ways to invest in yourself—your skills, your mind and body, even your creativity.
6.       Extend the life of your car. The tips at the link helped one car owner keep his machine running for 3 million miles. Keeping your car running well, and avoiding major expenses—like purchasing a replacement car—is a great way to save. If you already do a great job of maintaining your vehicle in tip top condition, you may want to treat yourself to a great detailing job for the exterior and interior. Tacoma’s own Griot’s Garage has great tips and videos that will help.
7.       Hire a lawyer. There are events in life that require professional advice and services. You’ve seen several of them in the 6 winning ways I covered above. A lawyer can help you author key documents that establish plans that cover events in life that many of us don’t want to think about, but must be addressed sooner or later. Starting with a will to simply cover the division of your assets, nominations of a guardian to care for minor children, care for pets upon your passing, “health care directives” to instruct health care providers about how you want your care handled under certain circumstances, and finally, directions for the division of “non-probate” assets such as life insurance policies, IRAs and 401k’s and “probate assets” such as homes and realty investments in your will. Your lawyer can help you ensure that your wishes are clearly established in a will that will help your loved ones avoid surprises and unnecessary stress that your family after your passing. If you divorce your spouse someday, the same lawyer who helped you establish your will is in a great position to help you to address any changes to your beneficiary designations as a result of your divorce.
You or someone you know may want to turn over a new leaf, and implement one or more of these ideas. Great! However, if indebtedness is too great, you may need to take steps to deal with that past debt before you can return to positive net financial worth. If you can’t see a way clear to paying off your debts in full within two years, filing a bankruptcy case can often quickly restore your creditworthiness and put you back on the path towards a brighter financial future. Call us at (253) 383-1001, or visit our site:washingtonbankruptcy.com/contact-us, to schedule a free personal consultation with me so that I can explain how and why. Don’t wait; stop procrastinating! Act now to regain your peace of mind right away.