If you claimed the right number of dependents and standard deductions on your 2016 federal income tax return and you still ended up owing the IRS, you’re probably looking to avoid a repeat performance next year. Luckily, there are several ways to increase your chance for a refund (or at least reduce the amount you’ll owe) and you don’t have to be a tax whiz or accountant to take advantage.
Here are 11 ways you can pay less in federal taxes for your income return next year.
1. Contribute to a 401K or IRA
Contributing to a retirement fund is an important way to ensure financial independence in your golden years, but it can also convey short-term tax benefits. In most cases, the contributions you make to your 401K and IRA plans are tax-deductible and are not included in your taxable income at the end of the year. (Note: If you didn’t contribute to an IRA in 2016, you still have time. You have until April 18 to contribute up to the maximum amount and shave off a good chunk of your tax bill. Filed your taxes already? That’s OK. You can file an amended return to reflect the contribution.)
2. Buy a Home
There’s a distinct tax benefit to home ownership. The interest you pay on your mortgage is tax-deductible, and the interest is front-loaded. For the first several years, most of your mortgage payment goes toward interest, which will drastically reduce your adjusted gross income at tax time. Want an extra boost for your taxes next year? Consider paying January 2018’s mortgage payment in December to get a tax benefit before the end of the year.
3. Donate to Charity or Volunteer
You probably know charitable donations can be itemized and deducted from your income, so you’ll want to save receipts anytime you donate cash or items to charity. You can even deduct miles you travel for volunteering or other charity work.
“Miles you travel on behalf of a charity are deductible at 14 cents per mile for 2017,” said Gail Rosen, CPA.
4. Start a Home Business
Starting a home business can provide you with a new source of income and allow you to take deductions off any income the business generates.
These deductions include business costs you incur throughout the year, a portion of your mortgage and utilities if you use a home office and the cost of goods needed to keep your business running. You can even deduct startup costs.
“Any expenses that are incurred before the first sale are ‘start-up costs,’” Rosen said. “These costs cannot be deducted until the first sale. Then they are deducted over 15 years and you can deduct the first $5,000 in the first year.”
5. Search for a New Job
If you hunt for a new job in your field this year, you can write off some qualifying expenses as you search. There are exceptions, but potential write-offs include things like clothes or travel.
“If you looked for a new job in 2017, you should be aware of the income tax deduction that may be available with respect to job-search costs,” Rosen said. “Qualifying expenses are deductible even if they do not result in a new job being offered or accepted.”
6. Open a Flexible Spending Plan
Many employers offer flexible spending plans that let you contribute toward yearly medical expenses pre-tax. These contributions typically don’t count toward your taxable income.
7. Deduct Medical or Dental Expenses
Many medical and dental expenses are tax-deductible. According to Rosen, the cost of getting to and from medical treatment is deductible at 17 cents per mile, plus the cost of tolls and parking, and dependent expenses are also deductible.
“If you cover the medical cost of dependents, these can be deducted. Additionally, if you are covering the costs of an individual who would qualify as your dependent except that they have too much gross income — for example, an elderly parent — you may be able to deduct these costs as well,” said Rosen.
8. Education-Related Expenses
Current and former students have many eligible deductions and credits related to their education expenses. Paid student loan interest and tuition and fees can be claimed as deductions. Eligible current students can also access the American Opportunity Credit, which can cover up to $2,500 annually for four years, and the Lifetime Learning Credit, which can cover up to $2,000 per tax return.
9. Install Solar Energy
Homeowners who install solar energy systems in their home can get back tax credits at up to 30% of the cost of installation. This credit will begin to decrease after 2019 so you may want to act soon if you’re planning on installing solar panels.
We’ve named several tax credits above, but there are more, including credits for adopting children, the cost of child care and low-income households. Tax credits are more valuable than deductions, as they reduce your taxable income on a dollar-for-dollar basis, so make sure you’re taking advantage of every option.
11. Get a Pro to Do Your Taxes
No matter how much research you do, a professional may be able to identify tax deductions and credits that hadn’t occurred to you. Paying a reputable professional you trust can help you stay organized and minimize your tax liability. Here’s a handy guide to finding the right tax professional for your needs.
If you’re single and under the age of 65, you have to file taxes if you make more than $10,350 a year. If you’re married, filing jointly and your household income is more than $20,700, you also have to file a return.
If you make less than those annual amounts and are a dependent on your parents’ taxes, you do not need to file an individual return.
If you’re still not sure if you have to file a return, the IRS recently launched the “Do I Need to File a Return?” tool. It’s a questionnaire that takes about 10 minutes to complete. Once you’re done, the IRS will give you a recommendation on filing a return.
Important Tax Deadlines for 2017
You were probably always taught that the tax filing deadline is April 15. Though that’s normally true, this year is an exception. In 2017, you have three extra days to complete your taxes because tax deadline is April 18.
This year, April 15 is a Saturday, and the IRS doesn’t allow the tax deadline to fall on a weekend. The following Monday is Emancipation Day, a legal holiday in the District of Columbia. The IRS closes their offices that day, so the whole nation gets an extra day.
How to Request a Tax Extension
When learning how to do taxes, remember that if you’re going through a hardship or will be unable to file your return by April 18, you can get an extension. By filing a tax extension request, you can get up to six extra months to complete your return.
An extension can give you a reprieve in filing your return, but if you owe any money to the IRS it’s still due by April 18. If you miss that deadline, you could owe late fees and penalties. (Unpaid taxes can also damage your credit report.)
Documents You Need to File Your Taxes
When you’re preparing to do your taxes, collect the necessary documents ahead of time. It’s common for forms to trickle in slowly, so keeping a folder specifically for tax documents can help you track everything you need.
Here are some common documents that you may need to file your taxes:
W-2: A W-2 is a form your part-time or full-time employer sends you. It shows how much money you made in the past year and how much you paid toward taxes, Social Security and Medicare.
1099: If you earned more than $600 by freelancing or working a side-gig such as driving for Uber, your client will send you a 1099 form. The form shows how much you made last year, but unlike W-2s, no money was taken out for taxes.
Other income records: If you worked a side hustle but made less than $600 for a client, you won’t get a 1099 but you still have to report that income. Keeping a spreadsheet of your earnings or having a separate business bank account can help simplify tax time.
1098: If you made interest payments on your student loans, your lender will send you a 1098 form saying how much interest you paid last year.
1095-A: If you got health insurance through Healthcare.gov, the government will send you a 1095-A form. This says you had qualifying coverage for the year.
Interest earned: If you earned interest from any savings accounts over the year, your bank will send you a form. This will show how much interest you gained.
Bank account routing number: To get your tax refund as quickly as possible, it’s a good idea to sign up for direct deposit when you file your return. To do so, you’ll need your bank account number and your routing number.
Expenses and receipts: If you landed a new job, moved to advance your career or attended business conferences, you can deduct associated costs. Make sure you keep receipts to use when you do your taxes.
How to File Taxes: Which Method?
While you can certainly do your taxes the old-fashioned way, using the paper forms can lead to errors. There are many options that can help you file your taxes more accurately:
Tax software: You can file your taxes electronically using available programs such as TurboTax or Credit Karma’s free filing tool. Some options are free but others have a fee, so choose a program based on your preference. If you make less than $64,000, you can use the IRS’ free filing tool.
VITA sites: If you need more hands-on aid and make under $54,000, you can get free in-person help. Try using an IRS-trained volunteer at a Volunteer Income Tax Assistance (VITA) site.
Hire a tax professional: When doing your own taxes is too confusing or complicated, hire a tax professional. They can handle your taxes for you and ensure you get the maximum refund available.
When choosing which option is best for you, consider how complex your taxes are. If you’re employed and have a side-hustle, but don’t have a business partnership or many investments, using software may be more than enough.
But if you run your own business, own a rental property or have investments, your taxes may be complex enough to warrant professional assistance.
Know Your Deductions and Credits
In the early stages of your career, you are unlikely to have enough deductions to make it worthwhile to itemize. Instead, you can claim the standard deduction of $6,300 and reduce how much of your income is taxable.
But you may be eligible for certain credits or deductions, even if you don’t itemize. Credits reduce what you owe in taxes, while tax deductions lower your taxable income. Both are valuable items to consider when doing your taxes and can help you get your maximum refund.
American Opportunity Tax Credit (AOTC): The AOTC is worth up to $2,500 per year and includes money paid for tuition and other related expenses.
Charitable Donation Deduction: If you donated money or items to a nonprofit organization, you may be able to deduct the value on your taxes.
Earned Income Tax Credit (EITC): The EITC is a valuable credit that 20% of eligible people miss out on because they don’t claim it on their taxes. The average EITC recipient gets an average of $2,482 by claiming the credit — you could be eligible if are a low-income earner.
Home Office Deduction: If you work from home or run a business from where you live, you may be able to deduct up to $1,500 on your taxes.
Lifetime Learning Credit: With the Lifetime Learning Credit, you can deduct up to $2,000 in qualifying education expenses.
Student Loan Interest Deduction: If you made payments on your student loans, you can deduct up to $2,500 that you paid towards interest on your taxes.
Tuition Fee Deduction: With the tuition fee deduction, you can deduct up to $4,000 in college tuition and other fees.
When it comes to filing your taxes, you must file both a federal and state return. If you lived in multiple states last year, you need to file a return for each state you resided in.
The only time you do not need to file a state return is if you live in a state that does not charge income tax. There are seven states that fit in this category:
You can submit your federal and state returns using tax software or you can mail in the tax forms. Depending on where you live, where you need to send the forms may change, so check the IRS website before putting them in the mail.
How to Track Your Tax Refund
If you’re eligible for a tax refund, you can track your return’s status and find out when to expect your money by using the IRS’ “Where’s My Refund?” tool. If you opt for direct deposit, you can expect your refund in as little as 10 days after filing.
How Can I Pay My Taxes If I Owe the IRS Money?
If instead of a refund, you owe money to the IRS, you have different payment options. If you use software to prepare your taxes, you can usually pay the money owed electronically through the program.
If you did your taxes on your own or didn’t pay electronically, you can use the IRS payment tool. Just make a payment through your checking account on the IRS website.
If you owe more than you can pay upfront, you can contact the IRS to set up a payment agreement and make monthly installments.
Learning How to Do Your Own Taxes
Figuring out how to file taxes for the first time can be confusing, overwhelming and stressful. Managing the process on your own can be difficult.
Using this guide — and the help of tax software or a professional — can help streamline the process and ensure you handle your taxes correctly.
We get it. Doing your taxes is no fun, especially if you know you’re going to owe money. But as with any project on which you procrastinate, leaving everything to the last minute can lead to errors, both large and small, and some of those errors could cost you serious money.
If you’ve gone and done it, though, and are still looking at that pile of tax forms over there in the corner, we’ve compiled a list of six quick-and-dirty tips that could keep you from making some obvious, and not-so-obvious, mistakes when you finally sit down and tackle the task. They could also help you maximize your tax refund.
1. You Forgot to Sign It
You might wonder how anyone could forget to sign their tax form, but this simple process is one of the most common tax mistakes, according to the IRS. Just like forgetting to sign a check or a contract, it means your return isn’t valid. Usually, there isn’t a penalty or interest associated with this error (since you’ve already included a check or electronic payment if you owed), so the IRS will just send a notice asking for a valid signature, but it will delay the processing of your return. If you’re getting a refund, that too will be delayed.
So check, double-check — heck, triple-check — that you signed or completed the e-signature process before filing your return. Also, check out these last-minute filing tips from the IRS.
2. You Miscarried the 9
Math errors are also a very common mistake made by folks in a hurry. Fortunately for most people, the IRS corrects any miscalculations, so there’s no need for filing an amended return. But these mistakes can mean the difference between you thinking you’re getting a refund and the reality that you actually owe taxes, so be sure to check your calculations carefully.
One way to help you avoid math errors is to file electronically so the calculations are done for you. Bye-bye, No. 2 pencil! So long, calculator!
3. You Didn’t Account for All Your Income
Did you have a side hustle early last year? A freelance design gig for a friend’s business? If so, you’re going to need to account for it, regardless of whether you received a W-2 or 1099 from whomever paid you. That’s because, while there’s an IRS threshold for filing these documents by employers, there’s no similar threshold for claiming the income. Income is income is income. If you made money and don’t report it — and the IRS catches it — it’s going to cost you penalties and interest at best, and open you to a possible audit at worst.
4. You Forgot Deductions or Tax Credit
It’s easy to forget these things when you’re in a hurry, but they can end up saving you some serious money and are well worth the extra time to figure out if you qualify. So if you’re just claiming the standard deductions because you’re under the gun, you might want to take a deep breath and check out TurboTax’s list of 10 commonly overlooked tax deductions that can keep you from overpaying the tax man.
5. You Filed for an Extension but Didn’t Understand the Rules
Filing for an extension is a great idea if you’re down to the wire and don’t really understand your tax situation. But remember that an extension gives you an extra six months to file your paperwork, but not an extra six months to pay any taxes due. So, if you’re confused, tax pros recommend doing a quick calculation of your taxes, filing for your extension and making any required payment of taxes you think you owe. This will help you avoid penalties and interest once you get your final calculations together.
6. You Didn’t Bother to Request an Extension
You gave up. You shoved, slammed and jammed your return through and now it’s full of mistakes that are going to cost you money by way of penalties or because you’ve left money on the table. It’s a much better idea to file the extension, then get the help you need from a tax professional to ensure you’re not overpaying your taxes.
Whatever you do, make sure you file your taxes. Unpaid taxes can have serious consequences on your personal finances, including your credit scores if they go unpaid long enough. You can see how any outstanding taxes you might have are affecting your credit by getting your two free credit scores, updated every 14 days, here at Credit.com.
You’re motivated by a deadline, you’re busy, you’re still getting organized — whatever the reason, you haven’t filed your taxes yet. That’s not a huge deal (there’s a deadline for a reason), but still, waiting until the last minute to file your taxes means you might be rushed. And that means there’s a higher likelihood of making mistakes or overlooking something important.
To help you avoid making a mess of an already unpleasant task, we put together a list of things you should keep in mind as you get ready to face the job you’ve been putting off for months.
1. The Sooner You File …
… The sooner you can get a refund. The IRS says it issues nine out of 10 refunds in less than 21 days.
2. Waiting to File Puts You at Risk
Taxpayer identity theft is no joke. It generally involves someone using your Social Security number to get a fraudulent refund — preventing you from getting yours in a timely manner.
3. If You’re a Tax Fraud Victim, You Need to Prepare a Paper Return
“First, I would definitely contact the IRS, and you should also contact the credit bureaus, and then you would just have to paper file your return if they already e-filed using your Social Security number,” said Lisa Greene-Lewis, a certified public accountant and tax expert with TurboTax.
4. The Deadline to File …
… Is April 18. No, that’s not a typo. April 15 falls on a Sunday this year, and April 16 is a holiday in the District of Columbia. So Tuesday, April 18 it is.
5. It’s a Hard Deadline
Your paper return must be postmarked by April 18. An e-file must be submitted before midnight on April 18. Otherwise, the IRS could slap you with fees.
6. But You Can Get an Extension
You can file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, which gives you an additional six months to file.
7. The Extension Is for Paperwork, Not Payment
If you think you’ll owe taxes, you must make your best guess using previous years’ information and an online estimate calculator.
8. Unpaid Taxes Carry Fees …
Interest on unpaid taxes compounds daily from the due date of the return to the date they’re paid in full. The failure-to-pay fee is one-half of 1% of your unpaid balance for each month, or part of a month, up to 25%, until the debt is paid in full.
9. … & Even Affect Your Credit Score
If your unpaid-tax problem gets bad enough, the government may make a claim to your property until the debt is repaid. That’s called a tax lien, and it will show up on your credit report. (You can see how a tax lien and other factors affect your credit by reviewing two of your your free credit scores on Credit.com, updated every two weeks.)
10. Make Sure You Have All Your Forms
“Keep a list of all of your jobs during the tax year,” said Abby Eisenkraft, an enrolled agent and CEO of Choice Tax Solutions. “Some taxpayers receive numerous W-2s (think actors, temps, etc.). Freelancers — you may receive numerous Form 1099-Misc; be sure you received them all.”
11. But Report All Your Income, Even If You Didn’t Get a Form
“Some employers are sloppy and may not issue them to you by Jan. 31 of the following year. Regardless, you must report all of your income,” Eisenkraft said. You can ask an employer for a copy of a missing W-2 or ask the IRS for transcripts of forms you think you didn’t get. Of course, this takes time, so you may need to file an extension.
12. *ahem* ALL of Your Income
“The easiest way to get an IRS notice is to omit reporting all of your income,” Eisenkraft said. “Also, remember that jury duty and prize money (lottery, etc.) are also taxable.”
13. Plan to Wait in Line
At the post office, at your local tax preparer’s office — anywhere that does anything having to do with taxes.
14. Take Advantage of Technology
There are several ways you can file your taxes for free without having to do them the old-fashioned way. Tax software can be a huge help when you’re facing a time crunch.
15. Affordability Is No Excuse
“Many people put off filing their taxes because they can’t pay the full amount,” said Samuel Brotman, a tax attorney and owner of Brotman Law in San Diego. “You’ll cause far more headaches if you don’t even attempt to play ball with the IRS, though.” See: aforementioned fees.
16. Make an Effort to Pay
“It’s in your best interest to file and pay as much as possible by the April 18 deadline,” Brotman said. “If you’re just not ready or able to file by the deadline, make sure you file for an extension. The IRS will automatically grant a six-month extension, giving you additional time to get your taxes in order.” Thinking about paying your taxes with a credit card? Read this first.
17. Or Get a Payment Plan
Keep in mind you must file your tax return before applying for a payment agreement, so get cracking if you think you’ll need one.
18. The Chances of an Audit Are Low
Of all the individual income tax returns filed in 2014, the IRS audited 0.8% and 1.3% of corporate returns. (You can read more about how to avoid an audit here.)
19. But You Still Need to Be Careful
Just because it’s unlikely you’ll get audited doesn’t mean you shouldn’t prepare your taxes as if you will. Not only could you get in trouble for a sloppy return, you could miss out on savings through deductions or credits you didn’t look into.
20. Watch Out for Scammers
Whenever people need help, there are other people out there waiting to take advantage of them. If you’re asking someone to prepare your taxes, make sure they’re qualified to do the job and that they have a good reputation. This guide can help you determine whether or not you need a pro to do your taxes.
21. Ask for Help
If you can’t afford or don’t want to pay for a professional, that doesn’t mean you’re totally on your own. “Go to trusted friends or family with last-minute questions on anything that might be confusing. With a little elbow grease, technology and friendly advice, you can get your maximum refund back — painlessly,” said Micah Charyn, a financial adviser with FTB Advisors in Nashville, Tennessee.
22. You’re Responsible for What You File
Keep in mind that, ultimately, you’re responsible for what’s in your tax return, even if you used software or an accountant to help you. Don’t zone out just because someone else is doing the heavy lifting.
23. ‘Do You Spell That With a C or a K?’
Of course, you know how to spell your name, but don’t leave anything to chance. This is especially important if you changed your name recently. Your tax return must have your legal name on it.
24. While You’re At it, Double-Check Your Address
This is an easy one to mess up if you’ve moved. “Your state may ask you where you lived by the close of the tax year you are filing, but you must file with your current address,” Eisenkraft said.
25. Your Social Security Number
“When you are tired or distracted, it’s so easy to transpose numbers,” Eisenkraft said. “And with so many numbers jumping out at you on the tax return, it’s easy to miss. The IRS will reject your tax return if the Social Security number is incorrect.”
26. Your Dependents’ Social Security Numbers
You must have the right Social Security numbers to get associated credits.
27. & Your Bank Account Info
You want that refund ASAP, right? “One mistake that we’ve seen before is listing the wrong bank details on your taxes,” said Jayson Mullin, the owner and founder of Top Tax Defenders, a tax resolution company in Houston. “This means your return won’t end up in your account. If you notice you’ve made this mistake, you’ll have to notify the IRS and wait an additional six weeks for a check to arrive in the mail.” The same goes for making a payment: You want that go to through.
28. Make Sure You Can Legally Claim Dependents
“There are relationship tests, gross income tests, residency tests, etc. Make sure the person you are trying to claim as your dependent passes all of the IRS tests,” Eisenkraft said. “And if your child is in school and working, remind him or her NOT to claim his own exemption.”
29. There Are Lots of Deductions You Could Potentially Take …
“I call this ‘looking for change in the sofa cushions,’” said Dominique Molina, a CPA in San Diego. “Go back through your bank and credit card statements and scan through, looking for expenses you haven’t been reimbursed for. These can be deducted on Schedule A under Unreimbursed Employee Expenses.”
31. Student Loan Interest
You can get the forms you need from your student loan servicer. They’re usually right there in your online account.
32. Medical Expenses
“You can deduct out-of-pocket medical expenses if you itemize (file Schedule A),” Eisenkraft said. “You cannot deduct any expenses that are reimbursed by insurance. If your medical premiums are deducted pre-tax at work, you cannot deduct them on your tax return. No double-dipping! Be sure to keep all of your receipts.”
33. & Job Search Expenses
You can deduct expenses associated with your job hunt, provided you’re looking for a new job in your current field.
So many people forget to do this, but it’s important. You can count charitable gifts made until April 18 of this year.
36. Or Do a Last-Minute Spring Cleaning
Say you didn’t get around to much charitable giving last year or you didn’t keep records — you could always procrastinate a little more by cleaning the house and donating things you don’t need. Don’t forget a receipt. (But then you really need to get on that tax thing.)
37. Don’t Skip the City Tax
Local and other state taxes, which you can check for at the bottom of W-2 forms, refer to a wage or income tax and may not be automatically deducted from your paycheck if you’re self employed. If you haven’t paid them, be prepared to cut a check. Here’s a handy guide to understanding your paycheck.
38. Contribute to Your IRA
Want a last-minute way to reduce your tax bill? Unlike most other tax-saving strategies, which have to be in place by Dec. 31, you can contribute to your IRA up until tax filing day if you haven’t already contributed your maximum for 2016. As TurboTax notes, for example, you can contribute $5,500, the maximum amount for 2016, and save as much as $1,925 in taxes if you’re in the 35% tax bracket.
39. Don’t Overlook Credits, Either
The IRS estimates that four out of five taxpayers are eligible for the earned income tax credit but don’t take it. A tax pro or software can help you determine if you qualify.
40. Keep In Mind Things Change From Year to Year
Just because you got deductions last year or didn’t qualify for credits last year doesn’t mean the same is true for this tax year. Take time to think about what changed.
Even if you made less than the income threshold that applies to you, don’t ignore tax season completely. “If they had federal taxes taken out of their paycheck or qualify for the earned income tax credit, they may have a refund coming,” Greene-Lewis said of taxpayers.
43. Get a Past Year’s Refund You Forgot to Claim
You have three years to claim a refund.
44. Think About the Best Way to Use Your Refund
Need some motivation to get your taxes done? The average tax refund for tax year 2015 was $3,120. You can finally buy that thing you’ve wanted to splurge on, pay down debt, or even use the cash influx to help yourself build credit.
IRS audits generally go back three years but can potentially reach back six. Keep a copy of your return in a safe place. You may also want to hold onto W-2s if you’re planning on applying for a mortgage any time soon.
47. You Can Make Amends
If you made a mistake in your rush to file, you can amend your tax return. You won’t need to do this for math errors (the IRS can fix those), but you’ll have to file a Form 1040X if your filing status, number of dependents or total income is wrong or if you forgot to claim a certain exemption or deduction.
48. Make a To-Do List
Write down everything that gave you trouble this year or deductions you weren’t sure you could get because you didn’t document them. Maybe you won’t make the same mistake next year.
49. Get a File Folder
For storing all those receipts and documents you forgot to organize this time around.
50. & Set a Calendar Reminder
So you don’t end up in this situation again next year.
If you’re expecting a big tax refund this year, you’ve probably already decided what you’re going to do with that money. Whether it’s a vacation, a new jet ski or a nice boost to your retirement savings, you’re probably pretty excited about the extra cash. But here’s the deal: Getting a big tax refund each year isn’t necessarily a good thing. It means you haven’t been putting that money to work for you all year long.
“If you are receiving a refund this year, it means that you overpaid your taxes during the course of the year. Instead of giving the government your hard-earned money, think about all of the great things you could have done with that money,” says Ron Weber, a senior marketing manager with Quicken Inc. “You could have paid off credit accounts, invested it in your future, and/or spent it as you earned it. Money is always better in your pocket than in someone else’s — even if that someone else is the government.”
Here’s how you can make sure you boost your bottom line this year by not overpaying your taxes and also not getting a refund.
Review Your Withholdings
Sit down and review your paycheck withholdings and see if you can break even when it comes to the taxes you pay. You’re looking for your Goldilocks zone. Not too little, not too much, but just right.
“If you are unsure what to do, experiment until you get it right,” Weber advises. “Most people are unaware that you can change your number of payroll exemptions as many times as you wish.”
You can also try using a tool to help you find your Goldilocks zone. The Internal Revenue Service has a withholdings calculator that can help you see how much difference a change in your withholdings will make. Certainly, you don’t want to owe taxes next year if you can avoid it, but getting your tax refund as close to zero as possible means you can invest or spend the additional income on a regular basis instead of letting the Treasury Department store it for you.
As you review your withholdings, you’ll want to be sure you …
Don’t Forget Your House …
If you own your own home, you probably know you can claim mortgage interest and property tax deductions, so take into account how much that will reduce your tax burden.
… Or Your Investments
If you own investment property, you’ll also want to consider any expenses you can deduct that might affect your taxes for next year.
… Or Big Life Events
“There are certain life events that you want to keep in mind when changing your exemptions such as marriage, having children or any situation where you decrease the number of dependents, such as divorce,” Weber says. “Also, keep in mind that while you are able to change the number of withholdings as often as you wish, your employer doesn’t have to apply it until the first payroll ending 30 days after you submit the change, effectively limiting the number of times you actually can change. Other than these considerations, the ultimate goal each year is to get your refund close to zero. Make it a game and see how close you can come.”
But You’re Terrible at Saving Money, You Say?
Of course, if saving isn’t your forte and you’re going to just end up spending whatever additional income you get throughout the year, letting Uncle Sam hold it for you might not be such a bad idea if you plan to put your refund directly into a retirement account like an IRA. The IRS will even help you keep your promise to invest the money by direct depositing all or part of your refund into savings, an IRA or even toward buying savings bonds.
If that’s your situation, you can read our guide on how to maximize your tax refund. But investing that money into a 401K throughout the year could be a better alternative, especially if your employer provides matching funds.
Also remember that keeping your credit in good standing helps you save money throughout the year, on everything from loan and credit card interest rates to mortgages. A good way to check on how your credit is faring is by getting credit your two free credit scores, updated every 14 days, on Credit.com.
You finally did it. You filed your taxes and now need only await your return, to be spent on a new TV or stocked away in an IRA or whatever you want — it’s your money again, and not Uncle Sam’s.
Unfortunately, it’s possible for this state of reverie to be interrupted by something called the 1099-C — a form taxpayers receive when a creditor cancels a debt worth more than $600.
So if, for example, you have a student loan forgiven and the forgiven amount is more than $600, that counts as additional taxable income and you should expect a 1099-C in the mail. Or, if you renegotiate with a credit card company to pay less than you owe, and the difference is more than $600, expect a 1099-C. The form itself will give the specific reason in Box 6 via a code that you can look up on the IRS website.
No matter the exact reason, just know that, while it’s great to get rid of debt, it can still have consequences come tax time. Canceling a debt may also affect your credit score. Keep up with yours using Credit.com’s free credit report summary, which provides your two free credit scores, updated every two weeks.
Once you know why the 1099-C is in your mailbox, what do you do with it? The 1099-C might seem like just another form to plug into your tax software or give to your accountant. The problem is, the time the 1099-C arrives can vary, and the form may arrive after you’ve already filed your taxes, said Lisa Greene-Lewis, a CPA and tax expert for TurboTax.
Regardless of when the 1099-C arrives, if the debt was canceled in 2016, you have to include it with that year’s return, Greene-Lewis said. Here’s what you can do if you’ve already filed.
Amending Your Return
In some cases, you may not have to do anything. Your creditor should have filled out a 1099-C and sent it to the IRS when they forgave the debt.
The IRS may do an adjustment on your return automatically and send a notice asking if you agree. If not, you’ll have to amend your return, Greene-Lewis said.
Tax software like TurboTax can guide you through the process; otherwise, you’d file a form called a 1040X and include the information in the 1099-C.
You don’t have to report forgiven debt as income in a few cases. If a debt was discharged because of bankruptcy, you don’t have to pay tax on it. Same if you’re considered insolvent, Greene-Lewis said.
Also, if you had debt on a mortgage discharged in 2016, you don’t have to include it in your taxable income, thanks to the Mortgage Debt Relief Act’s extension through last year, Greene-Lewis said.
Will This Hurt My Return?
It depends on how much debt was discharged. If it was enough to bump you up to a higher tax bracket, then yes, a 1099-C could shrink your return, Greene-Lewis said.
In addition, you’ll likely pay a penalty if you file the amendment after April 15, even if the 1099-C showed up after the deadline.
It’s rare, but Greene-Lewis said she’s heard of 1099-C forms showing up after the filing deadline. You can include an explanation as to why you’re filing late on the amendment, but it’s not always enough to avoid the wrath of the Internal Revenue Service.
You didn’t get your tax documents in order yet. You’re still waiting for a lost W-2. You just flat-out haven’t felt like tackling your taxes. Whatever the reason you don’t have your tax return completed yet, there’s no need to stress about it. Filing for a tax extension is a quick and painless experience that will give you an extra six months to file.
There are several important things you’ll want to keep in mind, though, if you’re filing a tax extension.
1. A filing extension is not a payment extension.
If you think you’re going to owe the IRS additional taxes this year, you’ll need to estimate on your extension (Tax Form 4868, which you can free file) what you’re going to owe and go ahead and pay that amount by this year’s deadline of April 18.
If you’ve been putting off filing because you know you owe and just can’t afford to pay your taxes due, you should immediately contact the IRS to ask for an installment agreement, so you can pay what you owe in smaller amounts over time.
When you enter into the payment plan, the fees and interest will be assessed to the end of your agreement, so if you plan to pay off the debt before the end of your agreement, contact the IRS to adjust your installment amount.
Also, failing to file your extension by April 18 results in a late-filing penalty, which is why it’s important to file on time.
3. Don’t bury your head in the sand.
The worst thing you can do when dealing with unaffordable taxes is ignore them. If you owe tax debt, the IRS can take serious enforced collection action, such as taking money from your bank accounts, wages, or other income. In general, they have many more options available to collect your tax debt than do other companies you may owe money to.
Under the federal Fair Credit Reporting Act, tax liens can be reported longer than any other type of negative information — seven years from the date they are paid. However, under the IRS Fresh Start initiative, you may be able to get a tax lien withdrawn and removed from your credit reports once you pay it, or enter into an installment agreement, which we’ll discuss in a moment. That’s all the more reason to find a way to work with the IRS rather than avoid paying.