Welcome to tax month! Perhaps welcome is not quite the right word, but to help lighten the mood, included in this month’s newsletter is a fun state tax quiz plus answers to the most common questions taxpayers ask during the month.
Also read about ideas to manage your emergency fund while in our new inflationary environment and information regarding knocking down scholarship barriers.
Enjoy! Please feel free to forward the information to someone who may be interested in a topic and call with any questions you may have.Upcoming dates
- April 18
- Individual income tax returns for 2021 are due
- First quarter 2022 estimated tax payments are due
In this issue:
- A Fun State Tax Quiz. Go Figure…A quiz to celebrate April tax month!
- Protect Your Emergency Fund From Inflation
- Common April Tax Questions Answered!
- Knocking Down Scholarship Barriers
A Fun State Tax Quiz. Go Figure…
A quiz to celebrate April tax month!
With this year’s April tax deadline right around the corner, here’s a fun quiz that explores how states tax their citizens. So you think it’s rough in your state? Try answering the following questions:
The moral of the story? Logic does not drive tax laws…legislatures do!
Protect Your Emergency Fund From Inflation
Most financial experts suggest keeping three to six months worth of household expenses in savings to help in case of emergency. But with record inflation, that task just got a lot harder to accomplish as virtually every safe place to put your emergency funds will not provide interest rates that keep pace with inflation. But that does not mean you cannot increase the rate of return on these funds.
Here are some ideas to reduce the impact of inflation on your emergency funds.
- Actively monitor your savings account rate. Earlier this year the Federal Reserve increased interest rates for the first time since 2018. In addition, the head of the Federal Reserve is suggesting there may be several of these rate increases in the next twelve months. This should increase the interest you can earn on the cash in your emergency account.What you need to know: Not all savings accounts are created equal. When the Fed increases the interest rate, your saving account rate should also go higher…immediately. But this is not always the case. If your bank is slow to raise your savings rate, be willing to monitor and shift funds to a bank that does. Just make sure the funds are still FDIC insured and are kept at a reputable bank.
- Take a look at Series I Savings Bonds. Series I Savings bonds are issued and backed by the U.S. government and feature two interest rate components: a fixed rate and an inflation rate. The fixed rate is set when the bond is issued and never changes during the life of the bond. The inflation rate resets semi-annually based on the Consumer Price Index.What you need to know: You must hold an I bond for at least 12 months before redeeming it. And although you can redeem it after one year, you’ll have to pay a penalty worth the interest of the previous three months if you redeem the bond within five years. And remember, you must be prepared to pay the penalty if you need the funds for an emergency.
- Creative use of Roth IRA funds in an emergency. Roth IRAs are funded with after-tax dollars. Because of this, early removal of the initial contribution is tax and penalty free. If you dip into the earnings, however, you will not only be subject to income tax, but also may be subject to a 10% early withdrawal penalty.What you need to know: Use of a Roth IRA is often a creative way to fund your emergency account while achieving higher returns with conservative investment choices, but it is not for the faint of heart. If you get this one wrong, it could cost you in taxes, penalties and lost fund value in a bear market. Prior to removing funds from any IRA, it makes sense to conduct a tax planning session.
Please call if you have questions about how to reduce the impact of inflation on your emergency fund.
Common April Tax Questions Answered!
The individual tax deadline of April 18th (yes, this year it’s April 18th!) is fast approaching. Here are answers to five common questions that taxpayers typically ask in April.
- What happens if I don’t file on time?
There’s no penalty for filing a tax return after the deadline if you are set to receive a refund. However, penalties and interest are due if taxes are not paid on time or a tax extension is not requested AND you owe tax.To avoid this problem, file your taxes as soon as you can because the penalties can pile up pretty quickly. The failure-to-file penalty is 5 percent of the unpaid tax added for each month (or part of a month) that a tax return is late. - Can I file for an extension?
If you are not on track to complete your tax return by April 18th, you can file an extension to give you until Oct. 17, 2022 to file your tax return. Be aware that this is only an extension of time to file — not an extension of time to pay taxes you owe. You still need to pay all taxes by April 18th to avoid penalties and interest.So even if you plan to file an extension, a preliminary review of your tax documents is necessary to determine whether or not you need to make a payment when the extension is filed. - What are my tax payment options?
You have many options to pay your income tax. You can mail a check, pay directly from a bank account with IRS Direct Pay, pay with a debit or credit card (for a fee), or apply online for an IRS payment plan.No matter how you pay your tax bill, finalize your tax payment arrangements by the end of the day on April 18th. - When will I get my refund?
According to the IRS, 90 percent of refunds for returns that are e-filed are processed in less than 21 days. You could end up waiting several months, however, if you paper file your return. The IRS is still processing a backlog of several million paper-filed tax returns from last year.You can use the Where’s My Refund? feature on the IRS website to see the status of your refund. The refund information is usually available 24 hours after receiving confirmation that your e-filed tax return was accepted by the IRS. - I hear the IRS is still backlogged with last year’s tax returns. Is this true?
Yes. Late changing tax legislation created tons of extra work for the IRS, all while the pandemic played havoc on staffing. During a testimony made to Congress, the Director of the IRS claims the backlog will be cleared up by the end of the year…assuming no major demands for are made on their resources.
Knocking Down Scholarship Barriers
There’s plenty of money available for you to pursue a post-secondary education for either you or your child! Here are several barriers that could be getting in the way of securing money to pay for school.
Common misconceptions
Scholarships are only for top scholars and athletes. Many of the splashy news stories are certainly about high-profile students who snag a fully-paid-for scholarship. There are an unbelievable number of scholarships, however, that do not take grades or athletic ability into consideration whatsoever.
Scholarships are only for students attending college. Enrollment in vocational and trade schools has nearly doubled since 2000, according to the National Center for Education Statistics. And the good news for prospective students is that scholarships for vocational and trade schools are just as plentiful as scholarships for four-year colleges and universities.
You have to be a great writer. Winning scholarships is more often about what you write than how you write. And for some scholarships, following the application’s directions and answering the questions that are asked is more important than how well you write.
You have to be a high school student. Scholarships aren’t just for soon-to-be high school graduates. Many schools have degree programs – and corresponding scholarships – aimed at older adults who are looking to learn new skills or make a transition in their career. Scholarships are also available for graduate students.
Finding scholarships takes too much time. Yes, you’ll need to invest a certain amount of time to find and apply for scholarships, but finding financial aid may not require as much of a time investment as you may think with tons of available online tools.
What to do
- Follow the directions! You’d be surprised how many applicants don’t read or follow the rules of the scholarships. Take the time to read through all instructions, and thoughtfully answer the questions that are asked.
- Apply every year by January. For every year that you’re attending a post-secondary school, consider setting aside some time in the fall and early winter to complete scholarship applications for the upcoming school year. Many applications need to be completed by January for the following school year.
- Ask your school. Nearly every college in the U.S. offers some form of merit-based financial aid. You’ll likely need to complete the Free Application for Federal Student Aid (FAFSA), as many colleges have all students apply for scholarships by completing the FAFSA. This includes students who may qualify for only merit-based scholarships.
- Ask local businesses. Many local businesses, civic groups, foundations, and religious or community organizations offer scholarships. So ask around in your community about available financial aid.
The early bird often gets the worm, but the bird that does not go looking for one will never get one!
As always, should you have any questions or concerns regarding your tax situation please feel free to call.
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