When you finish a stay at a hotel, do you get halfway to the elevator and double back for one last sweep of the room, looking under the bed for lost socks? Even if you are the most conscientious and organized tax filer, your annual return could use the same kind of second look before you send it off to the Internal Revenue Service.
People tend to think they are doing their taxes wrong, no matter if they use tax software, hire a professional, or do it themselves. “There can be a lot of uncertainty in the process, and uncertainty can skew our decision-making or even lead to anxiety,” says Etinosa Agbonlahor, director of behavioral research at Fidelity. “People also tend to overestimate the likelihood of unlikely events, such as getting audited, jailed, or fined over taxes. This is called the availability bias.”SourceMoneyGuru-https://www.mgkx.com/4034.html
The reality is that IRS statistics show that nearly two-thirds of taxpayers got a refund last year, rather than owing, with the average refund running $3,309.* Most never hear from the IRS again, or at most get a letter asking to furnish additional information. Note, if the IRS wants something from you, they will write, not call, which is the hallmark of many IRS scams. The risk of getting audited is generally very low for most Americans, and even lower to get criminally investigated or eventually go to jail.SourceMoneyGuru-https://www.mgkx.com/4034.html
Nevertheless, it’s still wise to be careful and always double-check your return. Here are some questions to consider.SourceMoneyGuru-https://www.mgkx.com/4034.html
1. Have you made all the contributions that you can?
You can make contributions to traditional IRAs, Roth IRAs, and health savings accounts (HSAs) up until the federal tax-ﬁling deadline, Monday, April 18, 2023, for most 2022 returns. And if you are self-employed or freelance, you can open and contribute to a Simpliﬁed Employee Pension plan—more commonly known as a SEP IRA—even if you also have a full-time job as an employee. Good to know: Beginning in tax year 2023, a self-employed, or solo, 401(k) also may be funded past December 31, until the business tax-filing deadline.SourceMoneyGuru-https://www.mgkx.com/4034.html
One strategy many people use is to fund these accounts with a lump sum at this time of year with their expected tax refund. It's important to remember that putting the money in the account is just the first step.SourceMoneyGuru-https://www.mgkx.com/4034.html
"Unless you are set up to auto-invest all new contributions, which is a good step, you will want to determine how you want that money invested rather than just leave it in cash, as you are likely not earning a very high rate of return on savings right now," says Ann Dowd, CFP®, a vice president at Fidelity.SourceMoneyGuru-https://www.mgkx.com/4034.html
2. Did you file your state taxes correctly?
Many people who continued to work from home during 2022 may have worked from a different state for a significant amount of time. That can impact your state taxes.SourceMoneyGuru-https://www.mgkx.com/4034.html
State taxes are notoriously difficult to understand, which is further complicated by the fact that many states changed their laws recently. Many states have differences with federal law and some states don't have income taxes at all. Arizona, for instance, recently increased their income tax brackets, while Tennessee eliminated its state dividend and interest income tax in 2021. There are no shortcuts to finding out this information, unfortunately, so you just have to pay attention to the rules where you file.SourceMoneyGuru-https://www.mgkx.com/4034.html
"State taxes play a critical role in your overall financial plans, so it can help you to be educated on the impact state tax laws can have," says David Peterson, head of Wealth Planning at Fidelity.SourceMoneyGuru-https://www.mgkx.com/4034.html
You can consult state tax websites for specific information about taxes where you live or talk to a tax advisor who knows about the specifics in your state.SourceMoneyGuru-https://www.mgkx.com/4034.html
3. Do you qualify for tax credits?
A tax credit can reduce your tax bill by reducing what you owe dollar for dollar. Here are 3 credits that could help as you prepare your taxes.SourceMoneyGuru-https://www.mgkx.com/4034.html
- The Child Tax Credit for 2022 is $2,000 for each qualifying childOpens in a new window in your household, generally under the age of 17 by the end of the year. You must meet other eligibility factors, including having modified adjusted gross income (AGI) not more than $200,000 ($400,000 if you’re filing a joint return).
- Earned Income Tax Credit. If you have earned incomeOpens in a new window less than $59,187 you may qualify for a tax credit ranging from several hundred to several thousand dollars, depending on whether you have dependent children and are filing a single return or filing a joint return.
- The American Opportunity Tax Credit (AOTC) provides a dollar-for-dollar credit on a portion of qualified education expensesOpens in a new window paid for an eligible student for the first 4 years of higher education. The full $2,500-per-student credit requires $4,000 in qualified spending, and is available to people whose AGI is less than $80,000 for single filers and less than $160,000 for joint filers. Those looking for education credits outside of the AOTC could consider the Lifetime Learning Credit. If you meet eligibility requirements, the credit can be worth up to $2,000 per return, or 20% of the first $10,000 of qualified education expenses. Remember, you can claim only one of the education credits per student, not both.
4. Have you accounted for all your income and deductions?
It's always good to do a last-minute check on the details before you ﬁle your tax return. Here are just a few: Are you missing any 1099 forms? Did you account for any taxes due on unemployment payments received? If education costs changed over the course of the year, did you reconcile the changes with any qualified withdrawals?SourceMoneyGuru-https://www.mgkx.com/4034.html
The IRS widened tax brackets in 2022, which could result in potentially lower income taxes for many. It also increased the standard deduction and various savings incentives. If you’re not taking the standard deduction, consider your possible itemized deductions. The major ones included state and local taxes, medical and dental expenses, home mortgage interest, charitable donations, and deductions for casualty and theft losses from a federally declared disaster. If you think these may exceed the standard deduction, you may want to consider bunching enough charitable deductions to capture a larger write-off by itemizing deductions.SourceMoneyGuru-https://www.mgkx.com/4034.html
Another item many people may miss is claiming a home oﬃce deduction if they are self-employed. While the Tax Cuts & Jobs Act eliminated this deduction for full-time employees, those who count as freelance or sole proprietors, like many lawyers, can still claim it. "It's probably something worth revisiting. People like lawyers may not have qualiﬁed for a home oﬃce before because they had a primary oﬃce available, but many people may still be working from home most of the time," says Christopher Williams, Principal at EY Private Client Services.SourceMoneyGuru-https://www.mgkx.com/4034.html
5. Have you filed for an extension if you aren’t going to file in time?
Tax Day is back to the usual mid-April cutoff (although the date is slightly further out this year, April 18, 2023, for most 2022 returns), but if you're not ready to ﬁle by that deadline, it's important to remember to follow the rules when ﬁling an extension. The key one: You still need to pay what you owe by the tax ﬁling deadline or you could face penalties and fees.SourceMoneyGuru-https://www.mgkx.com/4034.html
But also remember that there are key benefits to filing as soon as you are ready, namely reducing your exposure to tax-related identity theft and getting your refund earlier. There's no reason to let the government hold onto that money for you. Another benefit: Once you figure out your 2022 taxes, you can plan your finances better for 2023.SourceMoneyGuru-https://www.mgkx.com/4034.html
Those changes can be as simple as updating the tax withholding on your paycheck to long-range planning about your state residency. "You can use your tax return as a guide and make adjustments," says EY's Williams.SourceMoneyGuru-https://www.mgkx.com/4034.html SourceMoneyGuru-https://www.mgkx.com/4034.html