Why You Should File Your Taxes Now

(Image credit: Nora Sahinun)

published 28 January 2020

Ryan Ermey: Have you gotten your W-2 yet? If not, you'll be getting it shortly, which means you should get started on filing your taxes. Why so soon? Sandy tells you all about it in our main segment. On today's podcast, we discuss annoying fees and how to avoid them, and I break down why you should get renter's insurance if you don't already have it.

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Ryan Ermey: Yes, and so the story has it broken out into five categories, travel, wireless plans, banking, investing, and home. And we encourage everyone to go read the entire story, which we will put up in the show notes, but we wanted to highlight a few that we thought were especially interesting and starting with travel. One of the things that we talk about here is airline baggage fees, which people are increasingly dealing with.

Sandy Block: It's really hard to... you take everything with you on the plane and even that doesn't always work because some airlines -- as we point out in this story -- will charge you for carry on. But if you want to check your bag, which means you're not fighting with everybody on the plane for space, which can get so ugly. Almost always, unless you're flying Southwest, you will pay for that and it can really add to the price of your ticket, especially if there's a couple of you flying.

Sandy Block: Right. And we have done this because we fly Delta a lot to Detroit. So we have the Delta card and you can do the math on this. Just figure out how many trips you're going to take and how many times you'd have to check bags to overcome the annual fee. And it's not really a lot and it really is nice since we're going home and sometimes we have more than we can carry on the plane to be able to check those bags. So I think that is worth looking into if you are a regular flyer of a particular airline.

Ryan Ermey: Meanwhile, United among sort of major U.S. carriers, you may get charged a $25 gate handling charge if you're in basic economy and they have to check your a full-sized carry on. So that's something to watch out for. And if you book on one of these budget carriers such as Frontier or Spirit, they're going to charge you for carry on bags. So when you're comparing pricing and I know that some... I think you can toggle it on Google Flights to include or maybe even go on an Expedia, like if you're looking around, make sure that you're calculating what you're going to be charged for those bags when you're pricing out the entire cost of your fight.

Sandy Block: Right. And one of the complaints about this is that it tends to low ball the amount that you're paying for the hotel. If you see what looks like a really good rate and you book it and then you get there. And according to our story, the average fee is about $23 a day. Well you add that for every day you're there, that really adds up. And they charge you this whether you use the amenities or not. So you need to check and see if there is a resort fee first. So you can include that in your budget and challenge it. I mean, they are under fire. Tell the hotel you're not going in the pool.

Sandy Block: Right. And I think people have gotten more savvy about this now, but I remember when people first started using cell phones, they didn't know about this. And they would go overseas and come back with hundreds of dollars in bills. I think people are a little more... maybe because there are more work-arounds. At the very least, I remember this when we went on a cruise a few years ago, you just turn off your phone and wait until you get wireless somewhere and...

Ryan Ermey: And a number of the sort of major phone plans also have solutions for this. Verizon, AT&T. If you know you're going abroad, you can sign up for a plan that's going to charge you about $10 a day to use your phone in more than 100 countries overseas. And if you travel abroad, often T-Mobile and Sprint plans have deals as low as 25-cents a minute for voice and deals on texting, as well. For people who are frequent travelers, that's certainly worth looking into.

Sandy Block: Right. And this can get really expensive, but I also think it's the one that's easiest to avoid. Just plan ahead. Don't pop into some place with no cash that doesn't have your bank. It's easy to find out if if there's a bank or an affiliated branch in the area. And if that's just not a possibility, one option we recommend is if you use your debit card, ask for cash back. Now there are a few places that will... a few grocery stores that might charge you a fee for that. So watch out for that. But oftentimes you can get cash back so then you've got your cash with no fee. But I think mainly this is just a planning thing. Don't go around if you need cash, make sure you have enough before you leave.

Ryan Ermey: It's like $6 or something. So one of the things that we recommend is to sign up for a checking account that reimburses ATM surcharges. If you have a lot of money and qualify for a premium checking account at your bank, they might have a service that lets you do this or you can try an online bank. And we highlight Ally Bank's checking account, which gives you access to 43,000 ATMS in the Allpoint network, more than 43,000. I feel like I've quoted that number in a story as it's gone up over the last five years. And they'll refund you up to $10 monthly and in out of network fees. So if you're not going to the bar too, too much, you probably can come out ahead there.

Ryan Ermey: Now under the investing banner, we've talked plenty on this show about expense ratios. We talked about it very recently, and one that we've also touched on is an asset management fee. Now this is if you have an advisor, these can run typically to about 1% of your investing balance. But you might not need that much attention, and you might have a lot of money. I mean that can add up to quite a bit of money. If you're going to an advisor a little bit more intermittently with just sort of strategic questions like financial planning or like when to take social security or what have you. You may benefit from paying an advisor or subscription model rather than a percentage of your total assets.

Ryan Ermey: So we typically recommend advisors in the Garrett Planning Network. And they typically offer services on an hourly basis, between $180-$300 an hour. If you don't need to see your financial planner that much, that can be a... you can come out way ahead rather than paying a percentage of your assets. Although, if you do want to pay a percentage of your assets either because you want a little bit more handholding or because that's palatable to you because you don't have a ton of assets -- and we talked about this on the show before -- is consider our robo advisor. And we'll put that story back up in the show notes, but for example, Betterment charges just 0.25% as an annual fee for its basic robo service and that's an algorithm based investment management.

Sandy Block: Then the last one we want to talk about is home costs, closing costs. I've been through this twice with home purchases and I think I'm pretty smart, but the process of closing on a home is completely opaque and complicated. It's horrible. And that makes it easy for lenders to pile on extra fees. You're so overwhelmed by the time you get to closing, you just want to sign the papers and start moving into your house. But you shouldn't do that, because there are a lot of junk fees and you should ask your lender to explain each fee and see whether they can remove or reduce any that seem redundant or excessive. And that really goes for any fee. I mean if you're not paying attention, they will come on. That applies to just about anything you buy and vigilance is your friend here.

Ryan Ermey: We are back and our main segment is tied to the start of tax season. Now you may be thinking, isn't tax season in like March or April or something like that. We here at Kiplinger like to be a little bit more proactive, and most employers are required to send you your W-2 by January 31st. This episode is coming out on January 27th. So Sandy, why should people be filing as early as possible?

Sandy Block: Another big reason to file early is it's the most effective way to protect yourself from identity theft. This isn't as much a problem as it used to be, but it's still a problem where you know people would create fake returns in your name and take your refund. Well, if you've already claimed your refund, then they can't do it. So once you claim your refund, you're pretty much good to go as far as that goes.

Sandy Block: And I guess the last reason, and maybe the most important is that you're giving yourself time to claim all of the tax breaks that are due to you. Most people these days claim the standard deduction. So that may mislead you into thinking that, "Well my tax return is easy." But more and more Congress has adopted laws that allow people who claim the standard deduction to claim all kinds of credits and deductions either above the line or credits available to everybody. These are particularly important to people who have kids who paid to care of kids, who have kids in college, are paying off their student loans and want to deduct the interest. It's just all kinds of tax breaks that are available to you. But if you're rushed, you might overlook them.

Sandy Block: No, for everybody. Yeah, it's for everybody. That's just the cutoff for anyone or any tax return. But if you qualify, it doesn't matter how complicated your return is, you can prepare and e-file, at least your federal return, and in some cases your state return for free. So that's sort of your first stop. If you make more than that, and we're going to be talking in a future episode about tax software. We're working on reviewing it now. But the other thing you need to be aware of is that a lot of the major providers engage in a little bit of surge pricing. If you prepare and file your taxes now, there's a very good chance that you will pay less than if you wait until April 15th, because they know they've got you by then. Right.

Sandy Block: In most cases, most of the things that you need to do, you need to do by December 31st. But there are a couple of things you can do now that will lower your 2019 taxes and again, starting early will help you figure out if you can afford to do these things. One is to contribute to a health savings account. If you have a high-deductible insurance plan, which whole lot of people do, and you set up an HSA, you have until April 15th to put money in an HSA that will reduce your taxable income for 2019. So if you're single, you can contribute up to $3,500 to an HSA. You don't have to put all of that, but you can put up to that. And if I have family coverage, you can put up to $7,000 and that's going to give you a big tax break.

Sandy Block: Right. Another thing that you can do before April 15th that will reduce your 2019 taxes is contributing to a deductible individual retirement account. Now, if you don't have a retirement plan at work, you don't have a 401(k) or 403(b) or whatever, you can deduct contributions to an IRA no matter how much money you make. And in 2019 you can put $6,000 in an IRA if you're under 50 or a $7,000 if you're 50 or over. Again, that's going to reduce the amount of money that you have to pay taxes on. So that's a tax break. You may also qualify to deduct some or all of the contribution to an IRA if you are covered by a plan at work but make below a certain amount. And we'll put those thresholds in the show notes.

Sandy Block: By any chance, I sure did, Ryan. This is the cover story in our March issue that will be on the stands and online in a few weeks. So watch out for that. We have a rundown on all of the things, all of these hidden or perhaps overlooked credits and deductions that you can claim. Last minute tax tips and also what you should do to adjust your withholding if you get a really huge refund or are absolutely shocked at how much you owe.

Ryan Ermey: We are back. And before we go, a new 'Explain Like I'm Five' segment. Inspired by a few of my friends who I found out don't have renter's insurance even though they rent an apartment. People seem to not think that they need it and we never like telling people how much they need to eat their peas on this show. But I think this is a relatively inexpensive one for most people and one that can save your bacon if things go wrong.

Ryan Ermey: I mean, your landlord is going to be responsible for some things, but your renter's policy is going to cover a few key things for you. One is your liability. So if you're hosting a Twister night at your... you always do that, right? If you're having people over for Twister and one friend falls on the other, it's your fault because you have set up this Twister game in your house, your liability is covered under renter's insurance. That's one thing.

Ryan Ermey: Well, that's why I thought this would be particularly timely. You get your tax refund back, you're kind of... I've always kind of used my tax refund to try to like get everything in order. If I have some some debt hanging around from the holidays; if I want to maybe put juice up my retirement plan a little bit or add to my emergency fund. It's a good way to kind of get a lot of things done financially. And one of those things, if you rent, I think should be renter's insurance. It should be, I imagine given the average refund that you quoted, I'm sure some people adjusted their withholding and probably won't be quite as big. But if you have a refund, a relatively small portion of it, can go toward a renter's insurance policy that will cover all of your stuff, all of your midnight alcohol fueled games of Twister. And you'll be in quite a bit better shape.

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Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.