Tis the dreaded season of taxes. Hopefully many of you have already filed your taxes for 2016, but I have a feeling some, if not most of you, have not. Since my husband and I are both practicing CPAs, I wanted to share a few tax tips for the average person. Before getting into the tips below, please keep in mind that everyone’s tax situation is different. Some of you may have a fairly straight forward tax return, while others may have a very complex tax return this year. If you have had several events that have effected your tax returns or you have complicated investments, please consult with a tax preparer or CPA before filing. With that out of the way, let’s get into a few quick tips you should consider before you file.
Save a Few Hundred Bucks
How? Muster up the courage to file your own taxes this year. Many people who have straightforward tax returns are afraid to file their own taxes because they think they will mess something up. The average person will pay a professional approximately $250 to file a tax return using the itemized method and approximately $175 for the standard deduction method. To be honest, many of you could do either method on your own in the convenience of your own home. There are several different tax software options available that will guide you through the process of completing your taxes. A few examples of popular software is TurboTax, H&R Block, TaxAct and TaxSlayer (My husband and I, personally, use TurboTax, but we have heard great things from others who use the other software options). Additionally, if you made less than $64,000 in 2016, you can file your taxes for free using the IRS Free form.
One question that people typically ask is, how do I know if my taxes are going to be easy or complex? If you are a single filer, with your primary investments being savings accounts and your employer’s retirement plan, then you would be considered easy. Further, if you are married with children, living in your primary residence with straight forward investments, you would most likely still be considered easy. The tax software that is available today walks you through these types of situations and prompts you with questions to answer to help you through your taxes. If you own a business, have multiple streams of income, inherit large sums of money or have investments outside of the United States, your tax return is likely more complicated. For those of you with a more complicated tax return, I would consider consulting a CPA or tax professional. While the software noted above can handle these types of situations, it is often best to consult with a professional once your tax returns become complex.
Organization is Key
Let’s assume you took the leap of faith and are preparing your own returns this year. The first tip is to make sure you are organized. Before you start your return on any software, make sure you have all of the appropriate documentation. If you were employed during the year, your employer should have provided a tax form to you stating the income you received in the current year. Most salaried employees will receive a W-2, but that is not the only form. Many people have a side job where they are trying to earn some extra cash (think Uber, waiting tables, etc.). Those side gigs should also provide you with a tax form that is needed in your tax returns (Form 1099-MISC is a common one). Further, if you have money in a savings account or investment account, the firm or institution where that money is held is required to send you a tax form (the most common ones are 1099-INT for interest, 1099-DIV for dividends, and 1099-B for stock transaction proceeds). Making sure you have proof of all your income is crucial, as the IRS will cross check your return to the forms filed by your employers to make sure the income you recorded on your return matches their records.
Do Your Homework
Before starting your taxes, invest some time upfront to learn the deductions and tax breaks that may be available to you. There are hundreds of tax deductions and credits available and while the software noted above will make sure you consider most of these, I still recommend doing your own research to make sure you have all your bases covered. This link from the IRS, here, will give you a starting point for your research. Again, this isn’t required to complete your taxes, but it is highly recommended. Plus no one ever got hurt learning a thing or two!
Refund vs Payment
Other common question we get: why do I owe, or why is my refund so small? Before I get into why someone may owe on their taxes, getting a small refund is actually not a bad thing. A smaller refund just means that you loaned the government a smaller amount than others. When you receive a refund from doing your taxes, effectively what is happening is you are receiving money back from the government that you loaned them throughout the year. This income is withheld by your employer and provided to the government each time you receive a paycheck. Some people prefer to receive larger refunds once they file, while others like to loan the government as little as possible and try to break even when they file their return. You can impact this by choosing more or less personal allowances to withhold (the more allowances, the less taxes taken out of you paychecks and, therefore, the more likely your tax refund will be smaller).
If you owed this year this means that you didn’t withhold enough taxes from your income or capital gains. As I noted above, your employer will likely withhold some of your taxes from each paycheck and provide them to the IRS. However, some of the side gigs, like Uber and waiting tables, may not withhold any of your income for taxes. If they don’t withhold any of that income for tax purposes, then you will likely owe taxes on that amount when you file your return, especially if that amount of income is significant. Further, if you held investments in a taxable account versus an IRA (link to IRA article) in the current year which you sold at a gain, that gain is taxable by the IRS and, as many investment companies do not withhold the taxes from capital gains, that transaction may also be a reason you owe taxes in the current year. If you do end up owing in the current year, double check your returns and make sure all the information is filled in correctly. Many of the software above offer free help via online chat and they may be able to help you double check your return. If do owe, there are a number of ways that a payment can be made to the IRS. You can use your credit card or debit card or have the funds pulled directly from your bank account. If you can’t make the full payment at one time, you can also make payments in installments. Refer to the IRS Payments site for further information on the types of payments accepted and the payment options available to you. These options may vary from state to state, as well.
Prepare for Next Year
Once you have completed your 2016 return, start preparing for next year. Stay organized from the start. If you are buying or selling an investment, starting a side job, getting married, having a kid or doing anything that may have a financial impact, pause for a second and consider the tax implications. If you owed this year or if you want to decrease the amount of taxes being taken out of each paycheck, take steps early to change that so that you can get closer to your goal in the coming year.
Have you filed your taxes yet? Are you self-preparing or using a professional?