Why It’s Not Smart to Get a Big Tax Refund Each Year

Why let the government hold your money throughout the year when you can put that money to work today?

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.

Those savings can pile up, especially if you start young. If you’re planning to turn your refund into the start of a lifetime of saving, check out our list of 50 things young people can do to make sure they’re set when it’s time to retire.

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.

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How Your Tax Refund Can Help Your Score Better Credit

Use your tax refund the right way and it could help build your credit.

If you’re getting a tax refund this year, you’ve got three major options when it comes to using the money: You can save it. You can invest it. Or you can splurge. But break things down a little further, and that check (back) from Uncle Sam can help you build credit, too. For serious.

Here are six ways your tax refund could help you build — or even establish — your credit scores.

1. Pay Down Credit Card Balances

Second rule of credit scores: Keep your debt level below at least 30% (and ideally 10%) of your total available credit. Anything beyond that is bad for your credit utilization ratio. If you’re over that limit or, worse yet, bumping up against your limits, putting your tax refund toward your credit card balances can help improve your credit score. Better yet …

2. Pay Off High-Interest Credit Card Debt

Because those balances are going to spike pretty fast. Plus, you’ll be saving money in the long run. Good rule of thumb when it comes to dealing with multiple credit card balances: Make all your minimums, but put more money toward either the smallest (because motivation) or the one with the highest annual percentage rate (because, like we said, it’ll cost you less). You can see how your credit card use is affecting your credit by viewing two of your scores, updated every 14 days, on Credit.com.

3. Get a Secured Credit Card …

If you’ve got thin-to-no credit, consider using your tax refund to open a secured credit card. Secured credit cards are easier to get than other types of credit cards because they require the cardholder put down a deposit (usually $200 to $300) that serves as the credit line. (Or vice versa. That’s a little bit of a chicken-or-the-egg thing.) In any event, if you’re close to cash-strapped, you can use your tax refund to open the card. That line of credit will help you establish a payment history, the most important factor among credit scores — so long as you pay your charges off by their due date, of course.

4 … Or a Credit-Builder Loan

Credit-builder loans, available at your local bank or credit union, are essentially the installment loan version of a secured credit card. You “borrow” money (that’s where you tax refund comes in), which gets put in a savings account, then you make a series of monthly payments and get access to the money once the “loan” is paid in full. Credit-builder loans usually involve paying some interest on the money you’re borrowing/depositing, but they basically provide people who otherwise don’t have credit with the opportunity to build some.

5. Pay Off That Collections Account

OK, here’s the thing: Paying a collection account probably won’t get that item off of your credit report. Legally, it can stay there for seven years plus 180 days from the date of the delinquency that immediately preceded collection activity (more on how long other stuff stays on your credit report right here). And there’s no guarantee it’ll boost your score once it’s paid off.

Still, most credit scoring models treat paid collections differently than unpaid ones (they tend to carry less weight) and the newest scores actually ignore paid collections entirely. Plus, some collectors are changing their tune when it comes to pay for removal deals and immediately reporting the account to the credit bureaus.

Quick side note: We’re talking about legitimate collection accounts here, so if a collector comes calling, be sure to verify the account belongs to you. There are debt collection scammers out there and it’s not unheard of for a legitimate collector to get the wrong guy. Under federal law, collectors are required to send written verification of a debt to a debtor five days after first contact, so that slip of paper should give you an idea of whether you’re liable for the payment.

6. Start an Emergency Fund

Yeah, we know, money in a savings account isn’t going to do anything for your credit score … right now. But socking away some dollars for a rainy day can keep you from going to the old credit card when one comes. And that’ll keep your credit utilization on the right side of 30%. Plus, you’ll skip the interest. If you’re not carrying any debt and your credit is in OK shape, consider putting Uncle Sam’s check in a high or at least higher-yield savings account. Your credit score may thank you down the line.

Not getting a tax refund this year? No worries, we’ve got more ways you can fix your credit here.

Got more questions about building credit? Ask away in the comments section and one of our experts will try to help!

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Help! I Just Got a 1099-C — But I Filed My Taxes Already

Don't panic. Here's how to deal when a 1099-C appears in your mailbox after you've filed your return.

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.

Exceptions

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.

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Here’s When You’ll Owe Taxes on Forgiven Student Loans (& When You Won’t)

Student loan forgiveness sounds like a great option, but it could lead to an unpleasant surprise at tax time.

If you’re facing a hefty student loan balance, then you may have already considered pursuing student loan forgiveness to avoid repaying your loans.

But you might not know: Student loan forgiveness is often taxable.

These taxes can create huge hidden costs when the forgiven amount gets added to your tax bill.

Here’s what you should know about student loan forgiveness and taxes before you’re surprised with a tax bill.

You Could Be Hit With a Tax Bill

For many borrowers, income-driven repayment plans, such as Pay As You Earn, coupled with student loan forgiveness, can be financial saviors. These repayment plans cap your student loan payments each month at 10% to 15% of your income.

After some period—usually 20 to 25 years—of steady repayment, your remaining balance is forgiven.

However, there is an important factor to consider: Under current IRS rules, any loans forgiven under these programs are considered taxable income.

This means you could face a hefty tax bill when your loans are forgiven.

Let’s say that after making payments under an income-driven repayment plan for 25 years, you’re left with $40,000 in debt, which is forgiven. That $40,000 becomes taxable income.

In this case, your lender would send both you and the IRS a 1099-C form with the amount of debt forgiven—the same amount you’ll use when completing the necessary tax forms.

So while you might no longer have to pay back $40,000 in student loans, you’ll instead owe a big tax bill. That $40,000 in loan forgiveness could mean a $10,000-plus federal tax bill, which doesn’t include potential state income taxes.

If you can’t pay the tax bill, you could be forced to set up a payment plan with the IRS to resolve your tax debt. If you don’t take any action, you could face a penalty and have to pay interest on this debt.

And you thought your student lender was tough — imagine dealing with the IRS.

Possible Changes to the Current Tax Law

Lawmakers have discussed changing tax laws to get rid of the prospect of paying massive tax bills on student loans. Last year, U.S. Reps. Mark Pocan and Frederica Wilson introduced the Relief for Underwater Student Borrowers Act.

This act would exempt student loan borrowers in good standing with their repayment from being taxed on their forgiven loans.

Currently, only borrowers who qualify for forgiveness as a result of their jobs (e.g. teacher loan forgiveness or public service student loan forgiveness) are exempt from being taxed.

Pocan said the bill is important because it “closes a major gap in our tax code which penalizes some borrowers who have been granted debt relief after at least 20 years of consistent repayment towards their student loan debt.”

However, the bill has made little headway in Congress. Meanwhile, the student loan crisis continues to affect borrowers.

In the absence of a legislative fix, some borrowers can claim insolvency to avoid paying taxes on forgiveness. However, this likely only applies to a portion of borrowers who receive student loan forgiveness.

The laws may yet change as more people start to have their loans forgiven.

In the meantime, it’s crucial to understand the current tax law so that you can avoid unpleasant surprises in the future.

It’s also a good idea to see how your student loan is affecting your credit score. If you’re paying them back on time, it’s a way to boost your scores while you’re young. You can check two of your scores free, updated every 14 days, on Credit.com.

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Got a Multi-Thousand Dollar Tax Bill? Here’s How to Pay It Off

You do have options if you can't cover what you owe good old Uncle Sam.

This year I owe quite a bit of money in taxes.

This amount (let’s call it “in the many thousands”) doesn’t come as a complete and total surprise since I made more cash last year than I did the year before, but it’s a large amount all the same. As a freelancer I’ve learned to sock away 30% to 40% of each paycheck into a savings account labeled “for taxes,” so I’ll be OK to pay it. But, since a recent survey by the Federal Reserve found 31% of people couldn’t even pay for a $400 emergency expense and 28% said they would need to borrow that money from friends or family, some other people might not be so lucky when Uncle Sam comes calling.

Luckily there are a few things you can do if you’re saddled with a tax bill you just can’t pay. Here’s how to tackle that debt to Uncle Sam.

1. Start at the Source

If you can’t pay your tax bill in full come April, fear not — you won’t be thrown in jail. The IRS offers a few ways to potentially alleviate the sticker shock. You could apply for an online payment agreement that allows you to pay your tax liability over time, or you could work with the IRS to settle for less than the full amount owed. That’s called an Offer in Compromise, and you can learn more about it — and if you qualify — here.

2. Ask to Have Your Penalties Reduced

Under certain circumstances — as in you or your spouse dealt with a serious illness last year or had an unusual tax event — the IRS has been known to work with taxpayers to waive certain penalties. Try writing a letter to explain the situation in detail, and be sure to specifically ask for an abatement. It’s worth a try.

3. Consider a Loan

If you’re in good financial standing otherwise, a personal loan through your bank with a decent interest rate could help you pay off a large tax bill in due time. If you don’t have good credit but you’d still like to consider this option, there are ways to go about getting a personal with bad credit. You can try talking to the bank or credit union with which you already do business. You can also see if there’s anything you can do to improve your credit ahead of filling out applications. Some ways to do so include paying down high credit card balances, disputing errors on your credit report and shoring up any late payments. If you’re not sure where your credit falls, you can view two of your scores for free, updated every 14 days, on Credit.com.

4. Take Out a HELOC

A HELOC — or home equity line of credit — often offers interest rates that are lower than credit cards or potentially even personal loans, plus your interest could be tax-deductible. The downside is that defaulting on this type of payment could mean losing your home — not something you want to take lightly. Be sure you know what you’re getting into before taking this course of action — learn more about it here.

5. Put It on Your Credit Card

While it should only come as a last resort, paying your bill on a credit card allows you to pay your debt on time (at least as far as the government is concerned), while taking some time to pay it off in full on your credit card. If this is the way you’ll be paying your taxes, it’s worth researching the best 0% annual percentage rate (APR) credit cards on the market right now so you can take your time paying off the bill without paying interest while doing so. (Quick explainer: 0% APR credit cards let you avoid paying interest on a balance for a set period of time, usually between 12 and 18 months. After that, the leftover balance will be subject to the card’s go-to purchase APR.)

The IRS outlines on its website how you can go about paying taxes with a credit card or debit card, but keep in mind that there will be an additional fee — which could be quite substantial, depending on how much you owe — to do so.

Remember, back taxes can cause all types of financial problems — including damage to your credit scores — so it’s important to be proactive about paying Uncle Sam. However, whatever option you decide to take, be sure to research all the options before jumping in to really understand which one is best for your financial situation.

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Can I Deduct Work Clothes on My Tax Returns?

It's the answer you get to a lot of tax questions: It depends.

Q. I’m thinking of taking a new job and I would have to wear suits every day. I own one suit. Can I deduct the costs as necessary and unreimbursed? 
— Working Joe

A. Congratulations on the job.

Your question is a good one, but it’s not as simple as you’re hoping.

The IRS under certain circumstances allows employees to deduct unreimbursed business expenses, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

“These expenses are subject to a 2% limitation,” Kiely said. “This means if your unreimbursed employee business expenses are greater than 2% of your adjusted gross income, you can deduct the amount that exceeds 2%.”

According to IRS Publication 529, “Miscellaneous Deductions,” you might be able to deduct the following expenses:

1. Business bad debt of an employee.
2. Business liability insurance premiums.
3. Damages paid to a former employer for breach of an employment contract.
4. Depreciation on a computer your employer requires you to use in your work.
5. Dues to a chamber of commerce if membership helps you do your job.
6. Dues to professional societies.
7. Educator expenses.
8. Home office or part of your home used regularly and exclusively in your work.
9. Job search expenses in your present occupation.
10. Laboratory breakage fees.
11. Legal fees related to your job.
12. Licenses and regulatory fees.
13. Malpractice insurance premiums.
14. Medical examinations required by an employer.
15. Occupational taxes.
16. Passport for a business trip.
17. Repayment of an income aid payment received under an employer’s plan.
18. Research expenses of a college professor.
19. Rural mail carriers’ vehicle expenses.
20. Subscriptions to professional journals and trade magazines related to your work.
21. Tools and supplies used in your work.
22. Travel, transportation, meals, entertainment, gifts and local lodging related to your work.
23. Union dues and expenses.
24. Work clothes and uniforms if required and not suitable for everyday use.
25. Work-related education.

No. 24 on the list is the one we’re talking about.

You can deduct the cost and upkeep of work clothes if you must wear them as a condition of your employment and if the clothes aren’t suitable for everyday wear.

“The second requirement is the stickler of why most workers can’t deduct their work clothes,” Kiely said.
Workers who may be able to deduct the cost and upkeep of work clothes include delivery workers, firefighters, health care workers, law enforcement officers, letter carriers, professional athletes and transportation workers.

Musicians and entertainers can deduct the cost of theatrical clothing and accessories that aren’t suitable for everyday wear, Kiely said.

Interestingly, he said, work clothing consisting of white cap, white shirt or white jacket, white bib overalls and standard work shoes, which a painter is required by his union to wear on the job, isn’t distinctive in character or in the nature of a uniform. Similarly, the costs of buying and maintaining blue work clothes worn by a welder at the request of a foreman aren’t deductible.

Kiely said you can deduct the cost of protective clothing required in your work, such as safety shoes or boots, safety glasses, hard hats, and work gloves. Examples of workers who may be required to wear safety items include carpenters, cement workers, chemical workers, electricians, fishing boat crew members, machinists, oil field workers, pipe fitters, steamfitters and truck drivers.

“Unfortunately for you, suits, white shirts and ties are for many ordinary street clothes and are suitable for everyday care,” Kiely said. “You can wear business attire to weddings, funerals or church on Sundays.”

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4 Serious Reasons Why You Shouldn’t Lie on Your Taxes

Thinking of lying on your tax return? Here's why that's a very bad idea.

The average tax refund is more than $3,000. When you hear that number and do your taxes, only to find out that your refund is much less — or worse, that you owe money — it can be tempting to fudge the numbers and increase your refund.

But misrepresenting your income on your return counts as tax fraud, and has serious consequences. Below, find out what happens if you lie on your taxes and what IRS penalties you could face.

1. You Can Get Audited

Because the IRS gets all of the 1099s and W-2s you receive, they know if you do not report all of your income. Even if you accept unreported payments in cash or check, your financial activity can reveal red flags about what income you do not report, potentially triggering an audit.

An IRS audit is an extensive review of your taxes and financial records to ensure you reported everything accurately. Though most people have a less than 1% chance of being audited, it’s not worth the risk.

Undergoing an audit is a time-intensive and costly process that involves providing years of documentation and even in-person interviews. If the IRS audits you, you can (and probably should) hire a professional to represent you and your interests. While that’s a smart idea, it can be a pricey, unexpected cost.

While the IRS may have only flagged one return for audit, they can review any return from the past six years. If they find more issues, they can add penalties and fines for every year they find problems. If you made tax mistakes for the past several years, you could end up owing thousands for taxes you misrepresented.

2. Tax Fraud Carries Heavy Penalties and Fees

If the IRS does select you for audit and they find errors, the penalties and fines can be steep.

According to Joshua Zimmelman, president of Westwood Tax and Consulting, fudging your taxes to reduce your tax bill or boost your refund can cost you more in the long run.

“If you don’t pay your tax liability by the due date, the IRS will charge you a late payment penalty. Even if you file on time, you may still be charged a late payment penalty if you under report your income and the IRS finds out,” Zimmelman said.

And the penalty is just the start. The IRS can also charge you interest on the underpayment as well. “If you’re found guilty of tax evasion or tax fraud, you might end up having to pay serious fines,” said Zimmelman.

While tax evasion or tax fraud is normally imagined as something that affects high earners and big executives, even those with lower incomes need to be careful. When describing the penalties for tax fraud, the IRS does not differentiate between income amounts or how much you underpaid your taxes. If you falsify any information on a return, they can fine you up to $250,000.

3. Criminal Charges Are Possible

Besides potentially owing thousands in IRS penalties, fees, and interest, you could also face criminal charges.

“Tax fraud is a felony and punishable by up to five years in prison,” said Zimmelman. “Failing to report foreign bank and financial accounts might result in up to 10 years in prison.”

Criminal investigations and charges start when an IRS auditor detects possible fraud during their audit of your returns. Courts convict approximately 3,000 people every year of tax fraud, signaling how serious the IRS takes lying on your taxes.

The odds of the IRS charging you for fraud is relatively small — if you’re investigated, the chances are less than 20 percent that you’ll face a criminal charge — but the potential consequences are severe. It’s not worth the risk to get a little extra money in your refund.

4. You May Miss Out on a Mortgage or Loan

Finally, not reporting all of your income can have serious ramifications when it comes to buying a car or a home.

“If you under-report your income, it might hurt you when you try to buy a house or apply for a personal loan,” said Zimmelman. “You might not get it if it looks like you cannot afford to pay it back, so lying on your taxes may hurt in that respect.”

When mortgage companies and banks review your application, they request copies of your tax returns to check your total income. If you lied about your income to lower your tax liability, your full income won’t be on the return. That means you may be denied for the loan you need, hurting your financial future.

Accurately Report Your Taxes

No one likes owing money at tax time or missing out on a big refund. But tax fraud is a serious criminal action, and glossing over your income or boosting your deductions counts as lying to the IRS.

Saving yourself a little money at filing time can end up costing you thousands of dollars with auditing, penalties, and fines. Save yourself the trouble and report your information accurately.

For more information on filing your taxes, avoid these six common mistakes millennials make on their taxes.

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10 Bizarre Claims People Make to Avoid Paying Taxes

how to avoid paying taxes

Resistance to taxes is baked into Americans’ DNA. After all, it was cries of “taxation without representation” that spurred the American Revolution. Tax protests have continued on and off ever since, from the Whiskey Rebellion to Vietnam War-era tax resisters to the “sovereign citizen” movement.

People object to paying taxes for all kinds of reasons, from opposition to certain policies to not recognizing the government’s authority to collect taxes in the first place, but the IRS isn’t having it. No matter what you read on the internet or your weird Uncle Bob says, you can’t get out of paying taxes without suffering consequences.

“The IRS and the courts hear many outlandish arguments from people trying to avoid their legal filing and tax obligations,” IRS Commissioner John Koskinen said in a statement. “Taxpayers should avoid unscrupulous promoters of false tax-avoidance arguments because taxpayers end up paying what they owe plus potential penalties and interest mandated by law.”

Now, that doesn’t mean there aren’t things you can do to legally avoid taxes. Taking all your deductions or moving money into tax-sheltered accounts like a 401K are perfectly acceptable ways to lower your tax bill. It’s when you get into weirder tax avoidance strategies that you run into problems. (Note: Not paying your taxes can have serious implications for your credit. Check out our quick guide for keeping your taxes from messing with your credit. While you’re at it, you can also get your two free credit scores, updated every 14 days.)

Trying to claim that filing a tax return is optional, that you aren’t really a citizen of the U.S., or that only certain types of income are taxable will backfire. When you submit a frivolous return or slam the IRS with other off-the-wall requests the result may be a fine of $5,000 to $25,000. Plus, you could also be prosecuted for tax evasion, a felony punishable by prison time and penalties of up to $250,000.

The IRS spends a lot of time and energy debunking various convoluted anti-tax arguments, and it’s collected dozens of them in a document titled “The Truth About Frivolous Tax Arguments.”

Below, we’ve highlighted 10 of the more bizarre reasons why people say they shouldn’t have to pay taxes.

1. Filing a Return & Paying Taxes Is Voluntary

The first and perhaps most direct argument against the U.S. tax system is the idea that filing a return and paying taxes is voluntary. Primary points include court cases like Flora v. United States, in which the term “voluntary” is used to describe how the tax system is based on “voluntary assessment and payment, not upon distraint.”

But when the IRS says filing a return or paying taxes is “voluntary” what it really means is that a taxpayer has the right to determine his or her tax liability by completing the appropriate forms, as opposed to having the government complete the forms and determine the bill. It doesn’t mean you have the option to opt out of the system entirely.

2. The Money They Earned Isn’t Really Income

According to this anti-tax argument, the money you receive for working isn’t technically income. Rather, you’re engaged in an equal exchange of your labor for fair market wages, and thus there’s no “gain” to be taxed. In this view, the government only has the right to tax gains or profit, not wages.

In reality, the IRS is allowed to tax virtually all your income, whether it’s dividend income from stocks or wages you receive from your employer. Exceptions include gifts and inheritances (though large estates may have to pay an estate tax), child support, life insurance benefits, and welfare payments.

3. Taxes Are Against Their Religion

You may not believe in paying taxes, but the IRS isn’t buying it. Though churches and other religious institutions are exempt from taxes, the same does not apply to individual taxpayers.

Allowing people to opt out of taxes on religious grounds would cripple the tax system. In the United States v. Lee, the U.S. Supreme Court ruled that “[t]he tax system could not function if denominations were allowed to challenge the tax system because tax payments were spent in a manner that violates their religious belief.”

4. Paying Taxes Violates the Fifth Amendment

Some argue that including financial information on a return may bring unlawful or illegal activity to light, thereby forcing a taxpayer to forego their Fifth Amendment protections.

The IRS calls this a “blanket assertion” of constitutional privilege. The agency asserts that there are no constitutional grounds for the refusal to file a tax return based on the Fifth Amendment. In cases like the United States v. Sullivan and the United States v. Neff, the courts back the IRS’s position.

5. Paying Taxes Is a Form of Slavery

The U.S. has prohibited involuntary servitude (except as punishment for a crime) since 1865, when the 13th Amendment was ratified. Since then, some anti-tax protestors have tried to equate paying taxes to slavery, arguing that having to send some of their money to the IRS is a constitutional violation. Even prominent politicians have evoked this absurd anti-tax argument. “If we tax you at 50% you are half slave, half free,” Rand Paul said in 2015. But the IRS and the courts have declared the “taxes equals slavery” claim bogus.

On the flip side, arguments that African-Americans and Native Americans can claim a tax credit as reparations for slavery and other forms of oppression are invalid. While there have been serious arguments that the U.S. should pay reparations to the descendants of former slaves, the government has not taken any such action.

6. The 16th Amendment Doesn’t Count

The 16th Amendment to the Constitution is short and to the point: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

Yet some tax protestors argue the 16th Amendment is invalid because it was not properly ratified or that Ohio was not properly a state at the time it voted for the amendment. (Ohio has been a state since 1803; the amendment was ratified in 1913.) “Proponents mistakenly believe that courts have refused to address this issue,” the IRS noted. “There were enough states ratifying the Sixteenth Amendment even without Ohio to complete the number needed for ratification. Furthermore, after the Sixteenth Amendment was ratified, the Supreme Court upheld the constitutionality of the income tax laws.”

7. Their State Isn’t Part of the United States

Among the goofier anti-tax arguments is the assertion that only people who live in the District of Columbia, in federal territories, or on Indian reservations or military bases have to pay federal income tax. Everyone else is supposedly a citizen of a “sovereign” state, not the U.S., which means they’re exempt from federal income tax. Not so, says the IRS.

“The Internal Revenue Code imposes a federal income tax upon all United States citizens and residents, not just those who reside in the District of Columbia, federal territories, and federal enclaves,” the IRS explained.

8. The IRS Is Secretly a Private Corporation

Some conspiracy theorists are convinced the IRS isn’t actually part of the federal government at all. Supposedly, it’s a private corporation masquerading as a government agency, and it actually has no authority to enforce the tax code. In the 2002 case Edwards v. Commissioner, the court dismissed the claim as “tax protestor gibberish.”

9. They’ve Rejected Their Citizenship

You can’t reject your U.S. citizenship or claim to be a “free born citizen” of a particular state in order to get out of paying taxes. “Claims that individuals are not citizens of the United States but are solely citizens of a sovereign state and not subject to federal taxation have been uniformly rejected by the courts,” according to the IRS.

Even if you were to formally renounce your U.S. citizenship (which involves appearing in person at a U.S. embassy or consulate in another country), you still may not be able to escape your tax bill. “Persons who wish to renounce U.S. citizenship should be aware of the fact that renunciation of U.S. citizenship may have no effect on their U.S. tax or military service obligations,” the State Department explained.

10. They Aren’t Technically a Person

In various court cases, this argument has been declared “meritless” and “frivolous and requir[ing] no discussion.” Here’s a tip: If the government is willing to consider a corporation a person, they’re definitely going to consider a person a person.

Erika Rawes contributed to this article.

This article originally appeared on The Cheat Sheet.

Image: AndreyPopov

The post 10 Bizarre Claims People Make to Avoid Paying Taxes appeared first on Credit.com.

Tax Tips for Recent College Graduates

When life changes, so do your taxes, and graduating from college brings several life changes that can affect your tax return. You may go from being claimed as a dependent by your parents to filing on your own for the first time. You may move out of state, collect a paycheck for the first time, and start paying off student loans. All of these events present opportunities to save — and costly pitfalls to avoid. To help you keep more of what you earn in this next phase of life, check out these tax tips for recent college graduates.

Figure out if your parents can still claim you as a dependent

If you just graduated, you may still be eligible to be claimed as a dependent on your parents’ tax return. Dependency rules are complex, but essentially, for your parents to claim you as a dependent:

  • you must be under age 24 at the end of the year,
  • you must be a full-time student (enrolled for the number of credit hours the school considers full time) for at least five months of the year,
  • you must have lived with your parents for more than half the year (you are deemed to live with your parents while you are temporarily living away from home for education), and
  • your parent must have provided more than half of your financial support for the year.

If you meet all of these tests, your parents can still claim you as a dependent and take advantage of the dependency exemptions and education credits.

Even if your parents claim you as a dependent, you may still be required to file your own return if you had more than $2,600 of unearned income (interest, dividends, and capital gains) or more than $7,850 of earned income (wages or self-employment income).

Get reimbursed for moving expenses if you moved in order to take a new job

If you moved for a new job after graduation, you might be able to deduct any unreimbursed moving expenses, as long as the new job is at least 50 miles away from your old home. Those expenses include costs to pack and ship your belongings and lodging expenses along the way, but not meals. You can also take a deduction for 17 cents per mile driven for 2017 (down from 19 cents per mile in 2016).

If you moved out of state, you might have to file two state returns if you had taxable income in both states. Many students have a part-time job while in school and take a full-time job in another state after graduation. Rules vary drastically by state. In some states, you will have to claim 100% of your income on your resident state return, then receive a credit for any taxes paid to another state. In this case, you may be better off working with a professional who can help guide you through filing in both states.

Make sure you’re withholding the right amount from your paycheck

When you start your new job, the human resources department will ask you to complete a Form W-4 to indicate how much of your paycheck you’d like your employer to take out for taxes. Working through the questions on the form is simple enough, but it doesn’t take into account how much of the year you’ll be working.

Most new graduates end up having too much federal tax withheld in their first year, effectively giving the government an interest-free loan, says Bradley Greenberg, a CPA and partner at Kessler Orlean Silver & Co. in Deerfield, Ill.

That’s because graduates rarely start new jobs right at the start of a new year. You may graduate in May and start working in June, or graduate in December but not find a job until February. Yet you are taxed as if you have been earning that pay for the entire year.

“The withholding tables are designed with the assumption that one makes the same amount of money for each pay period of the year, regardless of how many pay periods were worked,” Greenberg says. “For example, a June graduate starting a job on July 1 for $50,000 will have the same taxes withheld per pay period as a colleague with the same salary, marital status, and number of exemptions, but who worked the entire year.”

Greenberg recommends two courses of action for new graduates:

  1. Set up your withholding in your first year of employment so less tax is withheld. Then make sure you adjust it on the following January 1, so you don’t have too little tax withheld in your first full year of employment, or
  2. View this as a savings plan and file your taxes as early as possible next year to get your refund from the IRS.

Take advantage of student tax credits

If your parents can no longer claim you as a dependent, you may be eligible to claim valuable tax credits for any tuition you paid during the year. There are two tax credits for higher education costs: the Lifetime Learning Credit and the American Opportunity Credit.

For 2016, there is also the tuition and fees deduction (Congress failed to renew this deduction, which expired on December 31, 2016, so it is not available for 2017). The rules and income limits for each credit and the deduction vary, but the IRS offers an interactive tool on their website to help you determine which tax break applies to you.

If you used student loans to pay for your education, you can take a deduction for up to $2,500 of interest paid on a qualified student loan. If your parents made loan payments on your behalf, you are in luck. Typically, you can only deduct interest if you actually paid the debt, but when parents pay back student loans, the IRS treats it as if the money was given to the child, who then repaid the debt.

Don’t ignore your 401(k) or health savings account at work

New college graduates may be financially strapped and hesitant to divert part of their paycheck into a retirement plan or health savings account, but opting out means missing out on substantial tax-saving and wealth-building opportunities.

If your employer offers a matching 401(k) contribution, as soon as you’re eligible you should contribute at least enough to get the employer match. Otherwise, you’re missing out on free money. If you select a traditional 401(k), you can save on next year’s taxes. That’s because any contributions you make will be tax free, and they will reduce the amount of your income subject to federal income tax as well as Social Security and Medicare (FICA) taxes.

For better or for worse, many employers now offer high-deductible health insurance plans. These plans often come with health savings accounts (HSAs). Any money you set aside in an HSA can be used for any qualifying medical expense, from co-pays to prescriptions. The best part is that money you put into your HSA is not taxed, so you can potentially save a lot by using your HSA for medical expenses rather than paying out of pocket.

HSA funds stay in the account until you use them and are portable, meaning you can take it with you even if you leave your job. If you have big medical bills down the road, the funds can come in handy. If not, think of them as another tax-advantaged way to save for retirement.

Bring in a professional if you think you need help

If this is your first time filing on your own, you may be wondering whether you should do it yourself or pay someone to prepare your return for you. If you have a simple return with just a Form W-2 and perhaps some interest income, you could save money by buying some tax software and doing it yourself. MagnifyMoney’s guide to the best tax software is a great place to start.

But if you have dependents, investments, or a small business, you may be better off going to a reputable accountant.

Doing your taxes is never fun, but for recent college graduates, they may not be as big a headache as you might have heard. Keep in mind that tax laws often change, and everyone’s situation is a little different. But taking the time to know which tax breaks apply to you can make your post-college life significantly easier.

The post Tax Tips for Recent College Graduates appeared first on MagnifyMoney.

How Unemployment Can Really Drive Up Your Tax Bill

Avoid these mistakes when receiving unemployment benefits.

Back in September of 2015, I lost my job and decided to take unemployment benefits for the first time in my life while I looked for a new one. Even the significantly reduced income that the unemployment benefits provided was a needed cushion since we’d closed on a new home the same week I lost my job. I’d crunched the numbers, and taking the benefits was going to be a better alternative than using money from our emergency fund (which was tied to the markets and had fallen significantly just the month before).

What I didn’t account for was taxes, so when I received that 1099-G form from the unemployment commission last spring, I was confused. I owed income tax on the benefits I’d received, which were already just 25% of what my income had been? Seriously? It felt unfair that my employers had been paying into unemployment insurance all these years so I’d have the benefit if I ever needed it, and now the government was going to take a good-sized chunk of that money I needed to keep our family afloat.

After a couple of hours of grumping, I bucked up, talked to our accountant and moved on. Of course it was my fault that I didn’t ask the right questions and do the necessary research to see what the tax consequences of receiving unemployment benefits would be. I was more mad at myself than anything, but the reality was that, instead of getting a refund, I was going to be paying Uncle Sam a couple thousand dollars.

Here’s how you can avoid having to do the same:

1. Get Those Taxes Withheld

If you’re currently unemployed, are receiving benefits and aren’t having taxes withheld, request that they do so now. Yes, your benefit amount will decrease, but it’s easier to cut back a little each week now than it is to come up with a larger lump sum when your taxes come due.

2. Review Your Filing Options

If you received unemployment benefits in 2016 and didn’t have taxes withheld, you’re going to have to pay them. Fortunately, there are some ways to mitigate just how much.

“You do have to claim your unemployment income, but remember your new lower income may make you eligible for tax benefits you couldn’t qualify for before,” said Lisa Greene-Lewis, a CPA and tax expert with TurboTax. “You also may be eligible for tax deductions and credits which can lower your tax liability.”

For example, you could qualify for the Earned Income Tax Credit, which is worth up to $6,269 for a family with three or more children. There’s also the Child Tax Credit of $1,000 for each dependent under 17 years old, and Education Tax Credits like the Lifetime Learning Credit, which can be up to $2,000. (You can find a quick guide to common tax exemptions and deductions here.)

“Credits are great because they lower your tax liability dollar for dollar,” Greene-Lewis said. “Also don’t forget what the IRS calls above-the-line deductions like deductible expenses for educator expenses paid up to $250, student loan interest up to $2,500, moving expenses for a job, and deductible IRA contributions, which can lower your taxable income.

“If you make below the IRS income filing threshold of $10,350 single ($20,700 married filing jointly), you also may not be required to file your taxes, however, you should if you had federal taxes deducted in your paycheck,” she said.

It could be worth your time and effort to get some guidance from a tax professional if you’re feeling uncertain about how all these credits work. If you can’t afford to pay a professional and you made less than $54,000 last year, there are free tax preparation services provided by the IRS. You may have to stand in line for a bit, but it could end up saving you significantly on your taxes.

3. Don’t Avoid Filing or Paying Your Taxes

Getting into trouble with the IRS is the last thing you want to deal with coming off of a stint of unemployment, so if you’ve reviewed all of the above options and find you’re still going to have a hefty tax bill due that you simply can’t afford, don’t panic, and definitely don’t put off dealing with the situation.

First, if you’re once again employed and can qualify for a credit card with a 0% introductory offer for purchases, you could pay your tax bill using that card and pay it off over time without any interest or penalties. It’s a good idea to check your credit scores before applying to ensure you qualify. You can get your two free credit scores, updated every 14 days, here on Credit.com.

If that’s not an option for you, you could consider using a credit card you already have, especially if it has a low APR, but you’ll end up paying significant interest, which will end up just costing you more money and probably isn’t a great idea. Instead, your best bet is likely talking to the IRS and asking for an installment agreement. That, Greene-Lewis said, allows you to pay your tax liability over a six-year period if necessary.

Think you’re going to owe Uncle Sam this year? You can find 7 ways to potentially cut your tax bill here.

Image: PK-Photos

 

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