It is just two weeks before the dreaded tax season ends for another year. If you're a procrastinator you are probably planning to gather the necessary documents this weekend. If you're terrified (like we were) you probably had it done two months ago.
We have a love/hate relationship with taxes. The first year we were married we came out about even. The second year we owed $7,000. The third we overcompensated for the prior year by paying in extra on every paycheck at every job (Zac averages four jobs at all times) and got a $7,000 return. That was last April, so thank goodness we had just gone through FPU and didn't blow it all, we actually made logical decisions: paid cash for new tires on both vehicles and used the rest to jump start our debt snowball.
That was one year ago. This year we met with our tax accountant and I think I held my breath the entire appointment. It only took a half an hour, but it felt like a day. You might be wondering what I was so worried about if we had gotten a $7,000 return the prior year?
We had to pay off all of our credit cards by December of 2014 or we would get hit with a $3,000 interest charge. That meant we needed all possible income in our bank account. Once we had paid in the amount of taxes we owed the previous year, we stopped paying. (Side note: the majority of our return came from federal taxes, almost nothing came from state, so state deductions remained the same.) For federal withholdings Zac claimed married plus 7 and I claimed exempt. Let me reiterate, this was only AFTER we had paid in the amount of taxes we owed for 2013.
When our tax accountant asked why I was so nervous I told him, "Well, because we stopped paying federal taxes around September." The look on his face resembled Finn's expression after he eats a bite of zucchini...something between shock, disgust and sadness.
Before I tell you what happened, I will foreshadow my next post. We did successfully pay off all the credit card debt prior to December, so the plan had worked from that regard. It literally came down to the penny and we had to sell a few things to make it happen, so the change in tax deductions was necessary. However, because we knew we were risking owing money on our taxes, we took a break from our debt snowball in December and January and started stock piling all extra money in a savings account. Read more about it here. That way we would be able to cover the bill if we did need to pay in. Thankfully, we didn't.
We did not owe money in and we even got a small return, enough to fund Zac's spring classes and add a little extra to our savings. We don't plan on using this tactic again...ever...
Dave Ramsey just released a new FREE online budgeting tool: everydollar.com. I bring this up because our tax strategy would have never worked if we weren't using a STRICT budget. It's impossible to know if your extra money is going toward debt reduction if you aren't already telling every other dollar where to go.
"The plans of the diligent lead surely to abundance,
but everyone who is hasty comes only to poverty."