Stop lending the IRS your cash, time to get it back
Pretty much no one likes tax time – except for the part when money might come back to you. But truthfully, if you get a large refund, all that means is that you lent the government your money – at zero interest, all year long… then they gave it back to you. Not financially wise.
I’m here to share 7 things every taxpayer should know…
File by the deadline. The absolute worst thing you can do in the tax world is to fail to file on time. Even if you owe money and have no way to pay it, file. You will pay interest charges not sending your owed taxes in on time. For individuals, you will pay 0.5% interest on the owed amount. Failure to file and to pay results in a whopping 5% interest charged, plus a failure to file penalty of $205! It's best to file on time, and figure out how to pay your owed taxes over time, rather than to avoid filing.
For 2017, the deadline is Tuesday, April 18th. This is because the 15th is a Saturday, and the 16th, which is Emancipation Day, is a Sunday. Emancipation Day will be celebrated on Monday the 17th, pushing Tax Day to Tuesday.
Think filing for an extension gives you more time to pay owed taxes. Just like not avoiding filing, don't think that requesting an extension to file will give you more time to pay any owed taxes. It only gives you more time to file. You are still required to send in your estimated tax amount by the April 18th deadline. Failing to send in your money will get you audited and incur the interest charges mentioned above.
Claim a home office if you meet the guidelines. Tax codes have made claiming a home office more difficult, but you can really reduce your tax liability if you qualify. A couple examples include claiming 20% of deductible mortgage interest and real estate taxes; and 20% of home maintenance, insurance, and utilities. Check IRS.gov for details and guidelines.
Loan the government your money all year. If you get a large refund every year, and there isn't a specific reason for it, it may be exciting to get that check every spring, but it's not financially wise. All a large refund means is that you lent the government your money – at zero interest, all year long… then they gave it back to you. Consider changing the amount of tax you have withheld to reduce this and keep more of your money in your wallet. Before making any changes, however, seek personal, professional tax advice.
Calculate if you qualify to deduct medical expenses. To deduct medical expenses, you need to have spent over 10% your adjusted gross income out-of-pocket. (7.5% if you or your spouse is 65 or older.) Remember any after-tax medical insurance premiums count; along with doctor and hospital bills, transportation costs to and from medical care, and prescription costs not covered by a health care plan. Make sure you have all receipts and proofs.
Waste your time itemizing. Unless you have a home office, enormous charitable donations, large medical expenses, and/or high mortgage interest and real estate taxes, adding up every little expenditure is likely a waste of your time. Of course, each taxpayer should carefully calculate which is better for their situation – to itemize or not to itemize. But to itemize, your deductions need to exceed the standard amounts to which every taxpayer is entitled. For 2016, filing in 2017, they are… $6,300 for single or married, filing separately; $12,600 for married, filing jointly or qualifying widow(er); and $9,300 for head of household.
Gather your documents and file early, even if you owe. There are two benefits to this:
- If you owe in taxes, you can submit the tax paperwork, but then wait to mail the money. Payments are not required to be sent with your return. This gives you time to adjust your budget to send the money before the April 18 deadline.
- Filing early can help protect you from identity theft. An unbelievable number of taxpayers are the victims of tax return fraud every year. Thieves file early, using stolen social security numbers and birth dates, and make off with refund money. The real taxpayer finds out when they file and their return is rejected. The IRS is working on limiting this crime, but criminals are crafty and rarely caught. The victims are left to sort everything out with the government – a stressful and slow process.
Here is a short (not complete) list of common tax documents:
|– W2s||– 1099s|
|– Social Security numbers||– Self-employment records|
|– Charitable contribution statements||– Business expense receipts|
|– Investment statements||– Proof of health insurance for 2016|
|– Mortgage interest statement||– Business income records|
|– Last year’s returns||– Mileage statements|
|– Work-related expenses not reimbursed by your employer||– Home-use for business statements|