Filing taxes is part of an annual ritual for most families. Whether you are filing for yourself or using a professional, the complicated tax code can make it difficult to determine what decisions are best regarding filing options. Understanding tax basics can help you make good decisions concerning how and when to file and ways to minimize your tax liability.
- Filing a Federal Tax Return May Not Be Required. Not everyone with earned income is required to file taxes. Filing requirements are determined by how much money was earned, your age, filing status, and the source of your income. A general rule of thumb is to add your personal exemption with the standard deduction and compare that with your wages and earnings. Interest and investment income have separate thresholds for filing. In 2015 the personal exemption is $4,000 and the standard deduction can range from $6,300 for single filers to $12,600 for married couples filing jointly. A complete list of 2015 standard deductions can be found at: http://www.irs.com/articles/2015-federal-tax-rates-personal-exemptions-and-standard-deductions.
- You May Want to File Taxes Even If It Is Not Required. Most employers withhold taxes from your paycheck unless you complete your W-4 withholding as exempt. The only way to get that money back is to file taxes. The other most common motivation to file is to take advantage of tax credits which can result in a refund even if you did not pay any taxes. The Earned Income Credit (EIC) is offered for lower and moderate income families and might be available even if you don’t have children.
- Not All Deductions Require Itemization. A schedule A is required for most tax deductions and reduce your tax liability without impacting your Adjusted Gross income or AGI. However, a number of deductions can be subtracted from income without itemizing. These deductions reduce your AGI and include expenses such as moving costs, student loan interest, and IRA contributions. Given that two thirds of families do not itemize; this is an important distinction.
- The Self-Employed Must File If Income Is Above $400. This results in even part time freelancing requiring tax filings. When income results in a tax liability of over $1,000 for the year, you could be accessed a tax penalty. For this reason, most self-employed individuals and businesses file quarterly taxes. Estimated taxes are paid each quarter easing the pain at tax time and eliminating penalties.
- Taxes Must Be Filed Even If You Can’t Pay by The Tax Deadline. Failure to file adds additional penalties and can multiple your problems with the IRS. If you are receiving a refund you can file beyond the deadline without any additional penalties. If you owe, make a payment for what you are able and still file. There are available options for payments when full payments cannot be made. Filing options are not free and penalties and interest continue to accrue during repayment.
- Due Dates Are Important. Filing one day late incurs additional fees and penalties. Interest also begins to accrue once the tax filing date passes. Extensions can be filed in place of the full tax return as long as it is filed by the deadline. This option can give you more time to gather paperwork and file an accurate return. There are no fees for the first extension, which is automatically granted.
- Filing an Extensions Is Not a Payment Extension. It is common for businesses to file tax extensions which gives them additional time to complete their taxes. Individuals can take advantage of this same offer which gives you three more months to file. Any anticipated amount due is required to be paid at the time the extension is filed. Otherwise penalties can be assessed and interest begins to accrue.
- IRA contributions May Be Made Up to The Tax Filing Day. One of the few ways to reduce tax liability after December 31 is through IRA contributions. Deposits to either a Traditional or Roth IRA can be made up until April 15, for the previous tax year. Traditional IRA contributions can reduce taxes owed. Some small business retirement accounts also allow contributions beyond December 31rst of the tax filing year. You can contribute up to 100% of earned income up to $5,500 into an IRA account for both you and your spouse. Even nonworking spouses can contribute. Those over 50 get an additional $1,000 that can be added to build retirement funds.
- The IRS Has a Lot of Power to Collect. Failure to pay an IRS debt or make payment arrangements can result in some steep consequences. The IRS has the power to seize assets, garnish wages, and even revoke your passport. They have access to future tax refunds, deposits into your bank account, and liens on your property. They do not have to take you to court in order to garnish wages or freeze your accounts. Typically, if you are working with the IRS and create payment arrangements, aggressive collection tactics are not used. However, ignoring IRS letters could have serious financial consequences.
- Tax Preparers Are Not Magicians. There is a temptation to judge a tax preparer by the size of your refund. That is not necessarily the right yardstick to use because if the IRS questions the items deducted on the return, you are the one who must answer the call. Tax preparation and tax deductions are determined by the records you have kept. The better accounting you do, typically the more you will be able to deduct. A good preparer will have a good understanding of all the rules, but will also take time to interview you, ask a ton of questions and help you determine what you can deduct, and what is not allowed.
These basic tax essentials can help you prepare for taxes this year and beyond. The IRS.gov website is a great resource for researching questions you have regarding taxes. If you want to hire a professional, get references and choose someone with whom your comfortable. The IRS takes tax debt very seriously. Following the rules that are laid out can maximize refunds, reduce tax liability, and help you navigate the complicated tax code minefield.