Tax Day Survival Tips for a Better Return
Winter and Spring can move aside because what we are really in the midst of is tax season. Yes, tax season is the time of year between January 1 and April 15 when Americans gather all their financial information from the year before so they can begin the tax filing process.
While it may seem daunting at first, all it takes to survive tax season is organization and determination. You can and you will be able to get this done. Just take a deep breath and give yourself a little pep talk before you begin. Tax season doesn’t have to be quite so taxing if you follow these tax day survival tips.
It is a bit dramatic to say that tax day needs to be survived. But you know what we mean. It can be stressful, especially if you’re not sure what you’re supposed to be doing and when. But these tips are here to help. So let’s jump into it.
Begin Early
You’ll do a better job collecting the information you need and executing your return if you don’t wait until the very last minute to get it done. This is a project you only tackle once a year so you’ll have to get in the proper mindset without being rushed.
Getting your tax return completed earlier in the season usually means any refund you’re owed will arrive sooner than if you wait until more taxpayers are in the midst of filing. Tens of millions of people will receive refunds and receiving that cash can be incentive enough to get started early. Once your return is completed you will also know if you owe any taxes and can prepare to make that payment.
Our tax day survival tips include getting your return filed early as a way to protect yourself from identity fraud. If you’ve already completed all your paperwork no one else can come along and try to claim to be you to receive your refund.
The IRS advice is that you plan ahead to electronically file and select direct deposit for any refund you’re owed. Those are the fastest options.
Collect Your Documents
Tax returns require a lot of paperwork. Even if you prefer to live in a digital environment, you’ll be receiving plenty of necessary papers in the regular mail. Official documentation will arrive with details of all of your earned income from the year. That includes wages, salaries, tips, professional fees, taxable scholarships and fellowship grants. You will also receive statements with your unearned income. That includes dividends, capital gains, interest earned on savings account and unemployment compensation. You are looking for an exact figure of your gross income for the year. Gross income can be money, property, goods or services.
These are our tax day survival tips on what you might be receiving. Employers have until January 31 to send out W-2 forms documenting wages. By mid-February, companies will have sent out 1099 forms that detail everything from freelance payments to interest income.
If you made contributions to your IRA you’ll receive Form 5498. If you are paying down student loan debt you’ll receive a Form 1098-E. If you paid any interest on a home mortgage you’ll receive Form 1098. Health insurance benefits information should come to you on one of the 1095 forms. The SSA-1099 will arrive if you received any Social Security benefits during the year. You should also gather proof of any payments you made as quarterly tax estimates. Pull together documentation of any unreimbursed medical expenses, charitable donations or property tax payments. Tax day survival tips include carefully keeping up with and storing all documents that arrive that may be necessary to complete your tax return.
You also need a name, date of birth and identification number for anyone who appears on your returns. Even the tiniest dependents need a Social Security number.
And take time to review your filing status and whether you are going be filed as single, married filing jointly, married filing separately, head of household or as a widow(er).
Find Your Platform
There are many ways to make sure your return gets into the hands of the IRS. The IRS offers its complete library of forms online. You can print them out, do the calculations by hand and send them through the U.S. Mail.
The IRS offers two other options on its website for filing free with online tools. Families that make less than $69,000 a year are eligible to use Free File Software. That is a partnership between the IRS and private sector tax preparation companies to provide free return preparation and electronic filing.
For families with an income greater than $69,000 the IRS also offers Free File Fillable Forms. The taxpayer downloads and prints the forms, fills them out and then electronically files.
Choose the software that looks like it will be the most intuitive for you to use. There is no need to struggle to learn too many new things when it comes to preparing your return and filing it.
The IRS recommends filing with them electronically because the program will catch common areas like incorrect birthdays and spellings. The electronic system will also prompt you when needed information is missing.
And no matter how you are working on your return, the IRS Website is a complete question and answer taxation resource and it’s as close as your keyboard.
Know Your Deductions
A deduction is something that can be subtracted from the amount of your income that is subject to taxation. The lower your taxable income is, the lower your tax bill will be. There are two different ways to claim deductions on your return – Standard or Itemized. It might take some calculating to figure out which will be the most beneficial to you.
A Standard deduction is a dollar amount you can deduct that is determined by your filing status. Itemized deductions are personal to your situation and are added together.
If your Standard Deduction is more than all your Itemized Deductions added up you should use that calculation.
If your Itemized Deductions add up to be more than your Standard Deduction, use that. It takes more time and more forms to itemize, but it might be worth it in terms of your tax liability.
Our tax day survival tips include a reminder that the Standard Deductions were increased significantly in 2018. So now even people who are accustomed to taking Itemized Deductions may be better off with Standard Deductions.
There are hundreds of deductions available but the most common include deductions for student loan payments, some medical expenses, charitable donations, mortgage interest payments, contributions to IRAs, contributions into 401(k) plans, some self-employment expenses, some home office deductions and some educator expenses.
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Understanding Tax Credits
Tax Credits are not the same thing as tax deductions. Tax credits are a dollar-per-dollar reduction in the taxes you owe.
Our tax day survival tips encourage you to research the available credits. You can earn credits for many things including child and dependent taxes, lifetime learning, adoption costs, and residential energy costs.
Once you have calculated the federal income tax you owe you can subtract tax credits from the total to give you a new amount of taxes owed.
Tax credits are created as a way for the government to reward behaviors that are beneficial to the economy or the environment.
Make an IRA Contribution
You can reduce the taxes you owe by making a contribution into your Individual Retirement Account, or IRA. Even though your return is for the year that has just passed, you can make a contribution to your IRA anytime before April 15 and it will count against your tax liability for the previous year.
Taxpayers put away $6000 in a calendar year in a traditional IRA. The contribution is deductible for the current year and you don’t pay taxes on it until you begin making withdrawals in retirement. In a Roth IRA, the same $6000 limit applies but the contribution is not deductible and you pay taxes at the time it is made. When it’s time to withdraw the money in retirement you take it out tax-free.
Another one of our tax day survival tips is that taxpayers 50 and older are allowed to add another $1000 per year to either kind of IRA. It’s called a “catch-up” and there are no additional fees or penalties.
File By the Deadline
The IRS deadline to file your tax return isn’t just a suggestion. It’s the law. It’s important to meet the April 15 deadline to avoid penalties and interest on money owed. The penalties for not filing on time are higher than those for not paying taxes on time.
The due date for filing your tax return is typically April 15 if you're a calendar-year filer. With weekends and holidays sometimes the deadline date moves away from the 15th.
I Can’t Afford the Taxes I Owe. What Now?
You finally got to the bottom line and what you see is making you panic. Just because you don’t have the money on hand to meet your tax liability that doesn’t mean you should skip out on filing by the deadline. We have these tax day survival tips is you come up short:
Pay any part you owe. You’ll owe interest on the remaining balance but every little bit helps when it comes to paying down what you owe.
Apply for an installment plan. There is a form on the IRS website that allows you to request a payment plan for the taxes you owe. If your paperwork is in good standing and you owe less than $50,000 you might qualify for a long-term payment plan. If you owe less than $100,000 you may also qualify for a short-term payment plan. The application is straightforward and you probably have all the information they need right in front of you since you just finished doing your taxes. Sometimes the IRS charges a fee to setup an installment plan and that fee is added to the total you already owe.
An offer in compromise is a last resort. That is when you make an offer to the IRS to agree to pay less than the amount of your tax debt. The IRS only accepts offers in compromise if agents believe that the offer is for the amount of money the agency can ever reasonably expect to collect. If you think that the IRS might consider your personal financial situation for an offer in compromise, begin with this online booklet that explains these offers and how to apply. There is even an Offer in Compromise pre-qualifier tool available on the website.
One of our tax day survival tips is to regularly review the amount of money your employer is withholding or the amount of quarterly payments you send the IRS. If you come up short on tax day, you need to pay more in throughout the year.
But I'm Just Not Finished!
All kinds of things can happen on your way to getting your annual tax return prepared. Someone might owe you a document that never arrived. You may believe there is an error in a form that came to you. You might be in the midst of a health crisis or a family emergency and just cannot get your return completed. So what are your options then?
You can file an IRS Form 4868 asking for an extension to file your taxes. That is an automatic six-month extension to turn in all your paperwork to the IRS. It is not an extension to pay any taxes you owe.
These are the tax day survival tips if you are planning to file for an extension.
Use Form 4868 as a worksheet to determine if you owe the IRS a payment.
If you do owe you are not required to make a payment. But if you don’t pay your tax obligation then, the amount you owe will be due with interest and maybe even penalties.
You can file the form for an extension electronically or you can fill out a paper copy. Either way the request for an extension is due at the deadline.
The IRS expects you to at least “rough out” the taxes you owe and make an appropriate payment to cover them at the time you file the extension. Our tax day survival tips strongly encourage you to make a payment to cover this obligation even if your paperwork isn’t complete. The IRS charges interest and fees on overdue tax payments. It is better to file for an extension than just ignore the deadline and file late. The penalties for not filing are usually higher than any interest owed on late payments.
Conclusion
Our federal, state and municipal governments are all fueled by tax payments and the law says all Americans over a certain threshold of income are expected to pay. One of the hallmarks of our system is voluntary compliance which means reporting earnings and calculating tax liability on IRS forms each year. That’s what brings us to tax deadline day each year. Filing taxes doesn’t have to be a nightmare if you follow the steps of our tax day survival tips. Don’t let the deadline sneak up on you.
Begin by organizing yourself early. Collect all the necessary documents you need to fill out your tax forms and assess whether you have received everything you need for reporting. Decide how you are going to file your taxes. Are you a pen and paper person who likes to slap stamps on an envelope and drop it in the mailbox? Do you have a favorite software that you just update every year? Do you qualify for free filing through the IRS website? Go carefully through the deduction possibilities and decide if you qualify for any of those. Do the same things with available credits.
Remember that you can reduce your tax liability with contributions to your IRA right up until you file. Get your return to the IRS before the deadline to save yourself interest and penalties. Even if you can’t afford the taxes you owe, still file on time and work out the payments. And if you just aren’t going to get it all done in time file the IRS form for an automatic six-month extension before the deadline. Knowing all these tax basics will help you every year, and make this entire thing much less stressful.