With filing season behind us, taxpayers can all breathe a massive sigh of relief, right? Not so fast. Each year, taxpayers miss out on lucrative deductions, pay massive penalties, and deal with scary IRS consequences that could have been easily avoided. The filing period for the 2016 tax year may be over, but the consequences of faulty filings could affect your financial health for years to come.
As tax professionals, the team at Community Tax knows all too well the ramifications of improperly filed taxes. We’ve seen firsthand how failure to file and incorrect claims can affect a taxpayer’s financial health and future. Fortunately, we’ve helped these clients find their way back to secure finances through professional guidance and money-saving tax tips. With the right tax advice and attention to detail, we provide our clients peace of mind and ensure they make the most out of their hard earned money.
It’s never too early to start gearing up for tax season, and if you want to make the most out of your income and get all that you can back from the government agency, be sure to keep these essential tax tips in mind:
1. Reassess Your Filing Status
Most married couples choose to file jointly, but a joint return won’t always give you the best return on your tax refund. Consider filing under the designation married-filing-separately. It may require more time and effort, but in the right situation and circumstances, could mean huge tax savings.
You’ll need to calculate your taxes both ways to determine whether married filing jointly or married filing separately will get you a better return, but generally, tax software will do the hard work for you and determine the best filing status for your situation.
The IRS determines deduction qualification through a percentage of your adjusted gross income (AGI). Adjusted gross income is the income you’ve earned before taxes are applied to it, with specific subtractions deducted from it. If you file separately, you and your spouse will each have a lower AGI, which can reduce the taxes you owe or maximize your return. While there are benefits, there are also drawbacks. You’ll lose out on certain credits that are only available to couples filing jointly.
Filing jointly and separately aren’t the only filing status designations you can choose from. If you care for dependents, whether they’re your children or elderly parents, you may be qualified to file as the head of household. This can mean a huge reduction in your tax bill and result in big savings.
2. E-Filing Trumps Mailing In
Put down that pencil and grab your keyboard because e-filing your taxes provides numerous benefits. E-filing helps you go paperless, saving trees and benefiting the environment; however, the rewards don’t end there. E-filing saves time and money for both you and the Internal Revenue Service. If you decide to use tax software, the forms you need are built into it. Even better news? If the IRS owes you a refund, you’ll get it faster.
E-filing can provide important peace of mind. After you file online, you’ll get immediate acknowledgement of receipt from the IRS. Should you choose to mail in your returns, you’ll need to worry about whether it’s gotten to its intended destination, and wait a longer period of time for the IRS to process it.
Note: There are some circumstances in which you are required to file a paper return, so do your homework beforehand and understand the requirements for your specific filing circumstances.
3. Be Sure to Itemize Your Deductions
When it comes time to file, you have a decision to make about itemizing your deductions. Your two choices are as follows:
- Take the Standard Deduction: If your taxes are simple and straightforward, the government agency isn’t likely to take you through a complex filing process to qualify for the deductions you’re owed. Instead, you can simply choose to use the standard deduction. This reduces the amount of income you’re actually taxed on. The standard deduction can be worth anywhere from $5,800 to $11,600. Most taxpayers choose this option.
- Itemize Your Deductions: If you choose to itemize your deductions, you’ll be tasked with listing out each deduction you qualify for. This can be a complex process, but itemizing your deductions can prove to be a lucrative move. If the sum of all of your deductions is greater than the standard deduction, you’ll get more back by itemizing your deductions. Expenditures that taxpayers can often itemize include charitable donations and significant medical expenses.
- Taking the time to itemize on your tax filing could save you hundreds to thousands of dollars, but it’s not right in every situation. If you’re unsure whether or not you should just take the standard deduction or itemize your deductions while filing, consider hiring the help of a professional tax preparer to save you money and time.
4. Always File a Return
Although the IRS provides a wide window of time in which taxpayers can file, a large number of people don’t file a tax return at all. In most cases, taxpayers choose to forgo filing because they don’t have enough money to cover the taxes owed. Avoiding the IRS altogether isn’t the way to go. Even if you won’t be able to pay your tax debt, always file a return. The penalties for failing to file can be severe. If you choose to avoid your tax filing responsibility, you’ll be charged increasing penalty fees. The failure to file penalty is normally 5 percent of the unpaid taxes for every month that your tax return is late, adding up to a maximum of 25 percent.
Running out of time? You can get extra time to file. Even if you miss that April deadline, you can request a six-month extension of time in which to file your return. You can apply for this extension regardless of your income or anticipated tax debt.
However, it’s important to note that this extension for filing doesn’t extend to a payment extension. Late-payment penalties start immediately after the tax deadline, even if you don’t have to file until September or October due to your filing extension. The lay payment penalty is 0.5 percent every month, which can add up quickly. If you anticipate owing taxes this year, be sure to make estimated payments during the interim months before you actually file. This will help you avoid incurring additional charge and save you money in the long run.
5. Take Advantage of Little Known Deductions and Credits
Each year, taxpayers miss out on lucrative deductions and credits simply because they didn’t know they existed. In some cases, taxpayers may know the deductions and credits are available, but mistakenly believe they don’t qualify.
Keep the following little known deductions and credits in mind for your next filing period:
- Teacher Savings: Teachers are the unsung heroes of our education system. The majority of educators often dip into their own wallets to purchase classroom supplies, with no reimbursement offered by employers. Fortunately, the IRS appreciates the monetary efforts teachers put into educating young minds. The IRS allows any K-12 educator to deduct up to $250 for classroom materials. If you’re a teacher, be sure to keep the receipts on those crayons and notepads—they could save you a bundle on your taxes.
- Child Care: If you paid someone to provide care for your child or dependent in the last year, you could qualify for the Child and Dependent Care Credit. To qualify, your child must be age 12 or younger during the time of care. If you have dependents who are physically or mentally incapable of self-care, they may qualify as well. This care must have been provided while you were working or looking for employment.
- Job Hunting: Did you spend a great deal of time and money looking for a new job in the last year? The expenses incurred during your job hunt may be tax deductible. So long as your new job is in the same field, you’ve itemized your deductions, and your job hunt expenses were over 2 percent of your gross income, any expenses over that threshold are deductible.
6. Maximize Your Retirement Plan Contributions
Whether you have an IRA or an employer provided 401(k), make sure you’re contributing the maximum amount possible. This is especially important if your employer matches your contributions. If you have an IRA, traditional or Roth, making contributions can provide several benefits. In the case of a traditional individual retirement account, you receive a tax deduction for the year the contribution is made. While a Roth doesn’t offer this type of deduction benefit, it also offers tax-deferred gains.
The Retirement Savings Contributions Credit, also known as the Saver’s Credit, is available to any taxpayer who is over 18, not a full-time student and not claimed as a dependent on another taxpayer’s return. The amount of the credit can be 10%, 20%, or 50% of your retirement plan or IRA contributions, up to a maximum of $2,000 if filing single. The percentage awarded depends on your adjusted gross income.
7. Understanding Your Health Coverage
It’s important that you know what needs to be reported to the IRS on your health insurance. Under the Individual Mandate, or Individual Shared Responsibility Provision, everyone who can afford health insurance coverage must purchase a policy, or pay a tax penalty for failing to do so. What does this mean for you? Your family must have minimum essential coverage, or you must show proof that you qualify for a health coverage exemption. If not, you’ll have to make an individual shared responsibility payment for any months in which you didn’t have either coverage or an exemption.
In most cases, all you need to do is check the box that shows you had health care coverage for the entire tax year. If, however, you received financial assistance through the federal government for health coverage, it won’t be considered as part of your income.
When considering your health care coverage as it pertains to your tax filings, keep these important forms in mind:
- If you’re claiming the Premium Tax Credit, you’ll need to use Form 8962.
- If you enrolled through health coverage through the Health Insurance Marketplace, you should receive Form 1095-A.
- If you’re claiming a health coverage exemption, you’ll need to use Form 8965.
With these tax tips, you can make the most of your health coverage when it comes time to file your taxes.
8. Maximize Your ion Tax Savings
If you, your spouse, or your dependents had higher education expenses in the last year, you may be able to cash in on some serious tax savings. There are two main types of education tax credits:
- The American Opportunity Credit: This credit can save you up to $2,500 in taxes for the higher education expenses of every eligible student in your family. In order to be eligible, the student in question must be in pursuit of a degree at an accredited school, as designated by the Federal Student Aid program. This credit is only applicable for students who are enrolled for at least half-time status for an academic period, and must be in their first four years of attendance. The student must also not have a felony drug conviction in their past.
- This credit can be used for costs incurred for tuition, course fees and books, supplies, and any necessary equipment required for the institution. If the credit amount exceeds the amount of tax you owe, you can receive up to $1,000 of the credit through a tax refund.
- The Lifetime Learning Credit: This credit can save you up to $2,000 in taxes. It’s available to a taxpayer that attended at least one course during the year at an eligible institution. You need not be in pursuit of a degree or certification, and you can receive the credit regardless of year of study. This credit can be used to cover costs incurred for tuition and fees, or books and supplies requiring purchasing. Postgraduate students most often benefit from this credit.
Quick tax advice: You may also choose to pursue a deduction instead of a tax credit. The IRS allows deductions for certain tuition and fee payments. However, you cannot claim both a tax credit and deduction in the same year for the same student.
9. Don’t Ignore the IRS
Our most important tax tip? Never ignore the IRS. Even if you can’t pay your tax debt, don’t pretend the problem doesn’t exist. When you receive a Notice of Deficiency for delinquent taxes or any other type of letter from the IRS, act quickly and secure IRS help to insure you don’t incur severe penalties and interest.
If you’ve received an IRS notice, don’t panic, and don’t throw the offending letter in a drawer to fester. You’re not the first person to receive these letters, and you won’t be the last. The IRS sends over one million notices to taxpayers each year, and millions of Americans are in debt. If you need to settle a tax debt, be proactive. The best tax advice you can receive? Get in contact with the IRS as soon as you learn you won’t be able to pay your tax debt. The sooner you act, the more leniency you’ll receive.
Consider the consequences of ignoring the IRS if you need more incentive to file. Don’t wait for that notice of deficiency to turn into a Notice of Levy that turns into a wage garnishment. The IRS is more than willing to work with taxpayers that show initiative. If you contact the government agency and begin working towards a solution immediately, they’re more likely to be lenient and forgo more severe consequences. Should you continue to ignore the numerous notices in your mailbox, you could face wage garnishment, see your possessions seized, and in severe cases, find yourself in jail.
If your debt is overwhelming, there are a few routes you can take to alleviate your tax responsibility and avoid harsh consequences.
- Offer in Compromise: When you qualify for an offer in compromise, the IRS is agreeing to settle your debt for a lesser amount than you actually owe. Generally, these are hard to procure, but if you can convince the government agency that paying your tax debt in full would cause undue hardship, they may be willing to consider your offer. Once the IRS has settled on a number, you are only responsible for that amount from that moment on—so long as you keep up with your tax payments and don’t fail to file again.
- Currently Not Collectible: The IRS will only declare a debt Currently Not Collectible, but it’s an important status to keep in mind. If approved, the government agency will pause your debt, acknowledging that you’re facing extenuating life circumstances that make it virtually impossible for you to afford to pay your tax debt. Once this status is declared, the IRS can no longer enforce collections, pausing any wage garnishments or property levies. Keep in mind that this always pauses the IRS Statute of Limitations, which refers to the 10-year period during which the IRS can still collect your tax debt.
- Installment Agreements: If you don’t have the money to pay your tax debt in full currently but could reasonably pay it off in the future, the IRS will likely work out an installment agreement. These agreements let you make monthly payments for a lesser amount until your debt is fully paid off. This can help you reduce penalties and interest paid. In order to qualify, you must have filed all required tax returns, owe less than $50,000, and never miss a payment. An IRS online payment agreement can reduce the overall amount you owe, especially when it comes to fees and penalties.
These are just a few of the IRS debt forgiveness options available. Speak with a professional tax resolution specialist at Community Tax to examine your options for tax settlement services.
10. Sometimes You Should Call In a Professional
If you’ve found yourself in hot water with the IRS, or you’re concerned about making a costly mistake while filing your taxes, it may be time to call in the help of professional tax resolution services. Our team of tax resolution specialists are skilled in installment agreements, offers in compromise, wage garnishment release, stopping tax levies, and tax filing concerns. We can provide you with tax saving tips that pads your tax return. We’ve aided thousands of clients in numerous tax negotiation processes. We personalize our services to cater to your tax relief needs, whatever they may be. We can help you determine eligibility for certain filing practices,
Investing in tax resolution services means saving yourself the frustration of complex filing processes, and ensures accurate and complete returns. Whether you’re looking for payroll tax debt relief services for your small business or need personal tax filing help, you’ll find the tax advice you need. Our tax relief and accounting services include:
- IRS Debt Settlement
- Offer in Compromise
- Stopping Wage Garnishment
- Filing Tax Extensions
- Tax Penalty Abatement
- Prevention of Levy and Seizure
- Customized Tax Solutions
Filing your taxes shouldn’t feel like torture, and handling problems with back taxes shouldn’t feel impossible. If you’re looking to make the most out of your tax return and fulfill all of your taxpayer obligations, keep these tips in mind for future tax seasons and let Community Tax serve as your number one source for tax resolution services.