Remaining Vigilant During Tax Season
Consider This: There is still some confusion among consumers with the new federal tax laws.
A recent NerdWallet study found that almost half—48 percent—of Americans don’t know to what tax bracket they belong. In fact, the study found that about 1 in 14 Americans don’t understand how tax brackets work.
There’s no doubt taxes can be convoluted. But failure to understand certain tax nuances can be costly. The Nerd Wallet study found many Americans are leaving money on the table because they don’t know they can take certain deductions. For example, 90 percent think it’s illegal to take a home office deduction when the office in question is used for activities other than work.
In fact, the study found only 16 percent of Americans who file income taxes take advantage of five common and legal tax-saving strategies, including delaying income to the next year, contributing to a traditional IRA after Dec. 31 but before the tax deadline, and paying property taxes early.
But the new tax laws may result in another mistake that may trip up a larger segment of the population than usual. The 2018 tax year will be the first in which consumers may notice discrepancies in their employer withholdings, an area which should be evaluated annually.
According to a Government Accountability Office report, about 73 percent of taxpayers’ employers are over withholding from their paychecks as a result of the law changes. These taxpayers may receive larger refunds from the IRS come April their paychecks throughout the year will be missing money that could have gone toward bills and everyday expenses. Conversely, the GAO reported that 21 percent (or 30 million Americans) are being under withheld by their employers. They could be stuck with an unexpected bill.
The following are some tips for tax success:
Start getting organized now. It might be tempting to wait until the tax deadline looms to start thinking about filing. But it’s better to start early so as to be able to file wisely. As soon as you receive your W-2 from your employer, make sure the information matches your pay stubs. Then gather relevant documents, including last year’s return; any relevant property data or real estate documentation; proof of charitable donations; and receipts for medical, business, or education expenses.
Adjust your exemptions and withholdings. Check your current W-4 form to make sure you’re claiming all the allowances that make sense for you. Also, make sure your employer isn’t over withholding or under withholding money from your paycheck. Your goal should be to owe no money and receive no money from the IRS.
Understand what money is taxed and what isn’t. Specific accounts in the U.S. are exempt from taxation. For instance, growth and earnings in a Roth IRA aren’t taxed. Neither is money in a flexible spending account, which can be used to pay for medical or childcare expenses, or income from a 529 education plan, which can be used to save for higher education.
Understand what you can deduct from taxes. Most taxpayers understand that charitable donations can be deducted from taxes. But the average consumer overlooks other possible deductions. For instance, parents may deduct the cost of babysitting if they volunteer at a charitable organization. Don’t be afraid to ask questions that could lead to the right deductions.
Always file taxes no matter what. In the eyes of the IRS, late is better than never. Even if you’re having a difficult time and know you’ll miss the deadline, be sure to file, eventually. There’s no penalty for missing the April 15 deadline if you are owed a refund; you’ll just get your cash later. However, if you’re more than three years late, you’ll lose any tax refunds you were entitled to in those three years.
Get help. Free tax return preparation programs are available to people with limited incomes (generally making less than $54,000 a year), people with disabilities, the elderly, and taxpayers who speak limited English. Some financial institutions, such as credit unions, often have programs to help taxpayers.