You probably are thinking that everyone should know what goes into filing taxes since it’s a legal obligation. Even if you are not earning, you are expected to file your returns. However, so much has changed in the recent past that you may feel like you know nothing about this compulsory activity. Think about your family’s favorite dish. Though you prepare the dish each time you have a family gathering, you have to take out the recipe before you can start. This is to ensure that nothing goes bad at all. Well, this is similar to filing taxes. Each year, you have to ensure that your mind is refreshed with the right tax filing recipe. Talking of refreshing your mind, here are 10 things you need to know before filing taxes:
- Beating Tax Day is Paramount
Each year, there is a due date for filing taxes. This year, Tax Day is on 15th April. You are required to beat the deadline if you are looking to avoid hefty penalties. But still, missing the deadline isn’t the end of you. You can still file the returns after Tax Day. The idea is to do it sooner so as to lower the heftiness of the penalty. This is because you are likely to pay a small penalty if you are late by weeks if compared to months.
- E-Tax Filing is Simple
The internet has made the process of filing tax returns much easier than it has ever been. There’s no need for so much paperwork. Generally, e-tax comes with so many advantages. One, it’s free just like manual filing. Simply, you only need to connect to the internet to file your returns. Two, it’s quite simple. You don’t need to hire a tax preparer to help you with the filing. Three, it saves time. There’s no need to sacrifice a full day to go to see the taxman since the filing is done from home.
- Credits and Deductions Lower Your Tax Bill
These two terms are critical when it comes to determining your tax bill. However, they are very different from each other. While a deduction is meant to decrease taxable income, a credit is meant to lower accumulative tax liability. So, if you earn $100,000 and have deductions worth $10,000, you’ll only be taxed $90,000. However, if you have credits worth $10,000 then this tantamount to $10,000 in saving.
- Filing Accuracy is Key
Whether you decide to file tax online or do it the manual way, you should do it with accuracy in mind. So often, filing accuracy is the difference between overpaying taxes and saving. To enjoy the latter, you have to get it right in the reporting. However, you have to remember that the IRS reports show a 1% error rate on e-filing and a 20% filing error rate on manual returns. So, you are likely to be more accurate if you do it online.
- Payment Estimates Are Necessary If Self-Employed
If you are a sole proprietor, an independent consultant or a freelancer, you are still required to file your returns just like individuals on the government’s payroll. But since you don’t have a fixed earning, you are expected to make estimates for payments that you’ll be contributing to the IRS. You don’t have to make the estimates on a monthly basis but you can do it quarterly. Of course, you have to track all your earnings so as to make accurate estimates.
- Your Magic Number is AGI
The adjusted gross income (AGI) is a very important number when it comes to filing taxes. It’s what determines how much you owe the IRS. It dictates the number of deductions and credits that you qualify for. Generally, it’s after subtracting deductions, credits, and exemptions (if any) that you arrive at this magic number. Therefore, if you are not good with numbers, it’s advisable to seek help from a tax specialist or accountant that you can trust. This will eliminate surprises.
- You Need to File Returns Even If You Can’t Pay
Even though failing to pay taxes is a felony, failing to file may be more serious. Actually, the penalty for failing to file tax returns is 5% your unpaid tax bill while that of failing to pay is 0.5%. So, to ensure that you don’t get into deep trouble with the IRS, it’s better that you file your returns even when you know you are not in a position to pay the outstanding tax bill. Besides, experts argue that you can always ask for a payment plan to settle the unpaid tax. To do this, you have to first file your returns.
- Personal Exemptions No Longer Lower Your Tax Bill
Before 2018, you were allowed to claim tax exemptions for your spouse, kids, other dependents, and for yourself. However, the exemptions were scrapped off in 2018 through to 2015. Thus, you no longer have to leverage such favors and you can’t use them as the basis of lowering your tax bill. However, it’s also important to know that not all income sources are taxed. For example, proceeds from inherited finances, life insurance, and financial gifts (not exceeding $15,000) are not taxable. So, they qualify as exemptions.
- It Takes 3 Years to Forfeit Credit Refunds
So many people fail to file their tax returns simply because the government owes them financial credits. While you may not face a penalty for failing to file returns when you are owed money by the government, it may cost you in the long run if you continue procrastinating it. In fact, you will forfeit your credit after 3 years. This means that you can’t claim the refund if the grace period has expired. So, the secret is making sure that you keep tabs on the date if you are running under the grace of credit refunds. Nonetheless, the best thing is not to take chances and file your returns promptly.
- You Can Be Allowed Paperwork Extension, But Not Payment Extension
Contrary to what many people think, the IRS is human. They’ll give you a paperwork extension if you request for it. However, you have to beet the payment deadline. If you don’t beat it, then you must face the penalties that come with late payments. The penalties can be so severe in a way that you even lose your passport in addition to losing money.
Clearly, you need this type of refresher recipe before you can file your tax returns. The more you are updated with the right information, the more you are likely to do things according to the book. If you are feeling overwhelmed by your current tax situation, contact the experts at Tax Crisis Institute. We are here to help!