A K-State expert provides information about filing tax returns and how to strategically spend your refund.
MANHATTAN, Kan. – The income tax season is upon us, as W-2 and other tax forms arrive in mailboxes and electronically to people across the United States. Elizabeth Kiss, assistant professor in the Department of Family Studies and Human Services at Kansas State University and family resource management specialist for K-State Research and Extension, recommends filing tax returns early and planning ahead for what to do with a potential refund.
Kiss said it is hard to generalize tax return filing, because people use different tax forms. The best place to start is to gather all tax documentation and use a system that works best for you. Getting an early start could be beneficial.
“I have seen data that shows people who wait until the last minute, at least with the paper forms, were more likely to make errors than those people who were methodical, deliberate and didn’t wait until the last minute,” Kiss said. “Under pressure sometimes we forget things or try to cut corners. With taxes, there aren’t any corners you can cut.”
She recommends completing the federal tax return first, followed by the state return.
“The state return typically needs your federal information,” Kiss said. “Start with the federal form, because you can transfer some of that information to the state form.”
What to do with an anticipated refund
After the documentation is completed for your federal and state tax returns, people will either owe money or be issued a refund. Kiss said there are a couple of different philosophies when it comes to refunds.
“One is that if you get a refund, and especially if it’s a large refund, this means you’ve overpaid and you might want to review your withholding,” Kiss said. “That is money that you do not have on a month-to-month basis throughout the year that you could be using immediately for your own goals. A different philosophy is that this is like forced savings. When you file your return and get your refund back, then you have a lump sum of money. That’s where the 30-40-30 plan might come in.”
When using this plan, she said, people apply 30 percent of their refund to pay off debt or bills, 40 percent to use currently for immediate needs and things they want to do, and the final 30 percent for future goals or an emergency fund.
For the first 30 percent, Kiss suggested paying off debt with the highest interest rate first, as well as any outstanding bills for necessities such as heat, electricity, water or insurance.
When planning to use the 40 percent for current purposes, think about something you need or want that you can pay cash for immediately, rather than using credit, Kiss said.
The last 30 percent focused on the future might take some additional thought. If you don’t already have an emergency fund, Kiss said, consider putting that at the top of the list.
“Research has shown that fewer than half of Americans could come up with $2,000 within 30 days to meet an emergency,” Kiss said. “If you don’t have $2,000 set aside that you can access fairly readily, then an emergency fund might be a place to start with this 30 percent.”
In addition to having an emergency fund, another good goal would be to save at least three months of living expenses, Kiss said. If you have three months of living expenses saved, think about saving 6 to 9 months of expenses.
“You might also want to think about your longer term needs, like retirement, buying a house or buying a car,” she said.
If you start to think of yourself as a saver—someone who puts money aside on a regular basis and is prepared for emergencies—then many times you are less stressed and have more peace of mind. Kiss said it is ok to start saving modestly, as every little bit adds up. It doesn’t have to be a big amount but an amount that works for you.
“A motivation for many people is that over time you see the money adding up,” she said. “It’s like having a piggy bank as a kid. As you add money, it gets heavier, and it shows your actions are having a result.”
More information to help
For those seeking help on filing their tax returns, especially the elderly and low-income individuals and families, many volunteer income tax assistance sites around Kansas are available for those who qualify. Kiss said your local K-State Research and Extension Office could link you to tax preparation sites for assistance.
Kiss recommends visiting Kansas Saves or America Saves to make a pledge and set goals to save money.