Do you like to get a tax refund? Silly question! Regardless of how much income you received, you would want to get a tax refund and even maximize the amount. Statistics prove that most American taxpayers aim at getting a tax refund. As per a CNBC article, about 170 million people filed tax returns in 2020, and the IRS issued approximately 126 million refunds, which is nearly 74% of all filers.
As enticing as a tax refund may seem, tax filing time is not easy for everyone. You can, however, make it easy with better preparation and following a few best practices. Our tax experts have these below tips for you to ease your tax filing process:
Pay off IRS Debt with proper planning :
If you have any pending debt with IRS, you need to settle it at the earliest. Because, for every month you don’t pay the outstanding taxes, IRS will charge you about 0.5% on the tax debt amount.
However, if you can not pay the entire outstanding tax amount at once, you can still exercise a few options. To minimize the penalties you would be charged, it is a best practice to pay the most you can when you file your tax returns. After you have paid how much ever you could have paid, you may adapt these strategies:
- Settle your remaining penalties with a credit card or by taking a personal loan. This is because the overall rate of interest would still be less than what you would be charged as penalties on outstanding taxes
- Request IRS for an installment agreement — a payment plan agreed with IRS on a monthly basis. If you are not able to settle the balance in a few months, you may also set up an IRS payment plan to decrease the financial repercussions
If you are a taxpayer residing in Texas, Oklahoma, or Louisiana, you can pay your 2020 taxes by June 15, 20221. Though taxpayers in other locations should have paid their dues by May 17, 2021, these three states were given a one-time extension due to the 2021 winter storms.
If you didn’t pay your tax dues by these above-mentioned dates, you must at least prepare a rough draft of your tax return at the earliest. By this, you will be able to ascertain how much you owe to the IRS. Even in cases, you filed for an extension until October of this year, the extension will only be applicable to the return filing and doesn’t affect the payment due date.
Track your income and expense information in detail
Now, what should you do to not be in a place where you have to pay tax penalties to the IRS? Plan well ahead. The first and most crucial step for this planning would include you collected all your income and expense information all through the year so that it is readily available when you are preparing your tax returns.
Generally, around the end of January, the preparation and forwarding of tax forms are initiated by vendors, employers, and financial institutions. To determine how much taxes you owe, it is critical that you have the correct information available to you. For achieving the same, you should maintain a file where you can track different financial transactions in these categories:
Personal data:
You gather your personal information like your legal name, the legal names of your spouse, and all your dependents. Also, have their dates of birth and Social Security numbers.
In addition, you can track your primary bank account number and its routing number. This information will be helpful if you request a direct deposit refund.
Income:
The forms commonly used in the tax return for income are W-2s from employers, 1099 forms for other income types — investments, self-employment, retirement distributions, and K-1s if you are involved in any partnerships.
You may want to keep a separate folder for your security transactions which will help you quickly assess your holding periods from buying and selling dates to make sure you are eligible for capital gains in areas applicable.
Personal expenditure or deductions:
Your vendors will commonly give you Form 5498 for IRA and health savings accounts contributions. Also, for home mortgage interest deductions, you would receive Form 1098.
To seamlessly fill in the accurate deductions, you should collect information regarding allowable tax deductions. This would usually entail business expenses, financial documents, canceled checks, credit card statements, bank statements, and check registers.
An efficient way to track deductions is to download and print your credit card transaction summaries for the previous year and review each transaction to ascertain if it is deductible. Then, repeat the same procedure for your canceled checks.
Business information:
In case you own a small business, do a freelance job, or have any other side income, you should separate your business income and expenses from your personal information. Because a few expenses are deductible for businesses but not for individual taxpayers.
Review your previous years’ tax filings
If you are like most people, the changes in your tax from one year to another would be very slight. You can go back to your previous year’s returns to figure out the areas you have overlooked in the past. These areas could be dividends or interest, capital loss carry-forward balances, and infrequent tax deductions.
Preserve your past tax returns in the form of physical or digital copies — classifying them into income and expenses of each year. Make sure you keep track of year-to-year amount changes and double-check these amounts and deductions/incomes while preparing your current tax return.
Check your math and then check it once again
This is for taxpayers who are preparing taxes themselves— Be sure to check your math and other critical tax and personal information like Social Security numbers. Any errors made in the information you submit in your tax return will cause delays in tax refunds. Generally, IRS will not initiate a refund before correcting your tax returns and determining the exact amount of tax refund you are eligible for — or how much more do you owe them.
Similarly, to claim tax deductions or credits, you need to ensure you are eligible for it ( most of the time, on a surface level, it might look like you are eligible, but the devil is the detail). To determine this accurately, you might take the help of a tax professional you will not only help you identify if you qualify for the deduction or credit but will also help you file for it.
Outsource your tax preparation and filing
If you don’t have experience in tax filing or are not confident about it, you should consider outsourcing the preparation and filing of your taxes to a tax expert. Especially if your returns are complex and entail numerous income and deductions, a professional can ease the process, save time and help you get a better tax refund. However, it would be your responsibility to provide them with complete and accurate information to facilitate diligent and quick tax preparation.
You need to particularly consider consulting an experienced tax professional or any expert tax service before filing taxes if :
- Your gross income account to greater than $ 150,000
- You deal in complex investments, which have tax preferences and are managed by private businesses or partnerships
- Your income or expenses have drastically changed in the previous year or occurrence of a life-changing event like the death of a partner or spouse, marriage, divorce, bankruptcy retirement, or a change in the number of dependents or their status
- You have closed or started a part- or full-time business bought or sold a house, rented a house or a room, or paid or received a considerable amount of fines or penalties due to a lawsuit during the previous year
- You have concerns that your tax filing might trigger IRS scrutiny and a subsequent audit
- You are not confident enough to calculate your taxes accurately and completely
Make sure to sign everything properly
It is common than you think for people to forget to sign their tax returns. Without your signature, it is implied that you are declaring that the information you provided is true and accurate, could be subjected to a penalty of perjury. Apart from signature, you need to ensure that you have entered the date on your tax return— the day you have signed it.
If you need more tips to prepare your tax filing for 2022, you can contact us, and we will be happy to help you with all your queries.