How Do You Get The Largest Tax Return Possible
The Ides of April mean one thing for many Americans: time to pay taxes! Tax returns must be filed by April 15—or later depending on if the 15th falls on the weekend. However, many families and individuals choose to file early, especially if they suspect that they will receive a refund. And those refund checks give a financial lift to those who may need it the most.
According to a survey by GoBankingRates, more than 25 percent of those who expect a refund noted that they would use the extra infusion of funds to help pay off debts. And nine percent of respondents believed that they would put it into savings. GoBankingRates also broke down their results by age groups and Millennials were more likely than Gen Xers to put their refund towards retirement.
So just how much money are filers receiving? The Internal Revenue Service reported in its 2017 Filing Season Statistics that the average refund for 2017 totaled $2,895. Of course, this is just the average amount; some filers may receive much more, others much less. And your individual financial and family circumstances affect the refund amount.
Many filers want to know how they can increase their refunds, and some may even have a certain refund amount in mind. But that isn’t the way the system works. The tax code is arduous and detailed, and there are many rules about deductions and credits. And, of course, your income also sets the bottom line for your tax burden. The best source to help you understand the ins and outs of your taxes is a reputable certified public account (CPA).
And before you file your taxes, here are a few things you might want to discuss with your tax professional.
Review Your Paycheck Deductions
One of the biggest factors that can affect the refund is how much you pay in throughout the year. If you are a salaried or hourly employee, your employer will deduct state and federal taxes from your wages (there are other deductions, too!). Withholding amounts may be different for employees with dependents versus an employee without dependents.
At the end of the year, those deductions are credited as your payments. But if you didn’t withhold enough, and you can only take minimal deductions on your return, you may have to write a check to the government instead of having them write one to you! If, during past tax seasons, you have owed money at the end of the tax season, then you need to sit down with a CPA and discuss if you should withhold more money for taxes during the year. You also may need to re-evaluate your withholding amounts if you get married/divorced or have a baby. If you hate writing a check at the end of the year, then talk to your accountant for guidance!
For 1099 Workers: Pay Taxes Quarterly
If you freelance and are considered an independent contractor, then taxes are NOT withheld from your wages. You are responsible for making quarterly payments for both state and federal taxes throughout the year. If you do not make payments, then you may face a large tax bill in April.
Everyone must pay taxes; this is a given. So whether you pay them throughout the year or all at once, the burden is the same. So keep track of your income judiciously and report the quarterly numbers to an accountant who can estimate your tax responsibility. Make a habit of staying on top of your tax bills so you don’t get hit—and financially hurt—by an April invoice!
Tax Credits & Deductions
Utilizing tax credits and deductions may help lower your tax burden or boost a refund. However, every filer’s situation is different, and you can’t take deductions or credits just because you want them.
There are so many tax credits: Earned Income Tax Credit (EITC), Child and Dependent Care Credit, the Child Tax Credit and on and on. Tax credits have unique qualifications and you must meet those qualifications to take the credit. It’s very important you use due diligence and follow the rules; taking a credit when you don’t qualify may be a form of fraud. You could get audited…or worse. According to the IRS, “between 21 percent to 26 percent of EITC claims are paid in error.” Your tax professional is the best person to advise you about the credits for which you may qualify.
But what about all those deductions? What’s the difference between itemizing and taking the standard deduction? Deductions are a bit tricky, too. Many filers use the standard deduction, but some individuals itemize, as they may have their own business. Talk to your tax preparer about your options; they can best advise you. However, if you can itemize your deductions, you should keep documentation of every single deduction. This means keeping all receipts, financial documents, medical bills and any other forms related to those deductions. Because if you get audited, you will need to prove those deductions…so keep those receipts!
Why You Need a Good Preparer…and How to Avoid the Bad Ones
Cornell Law School’s Legal Information Institute published the Internal Revenue Code online; the code is detailed and complicated and reviewing it may help filers understand just why they need a reputable tax pro on their side. But how do you find a reputable tax preparer? The IRS lets you search for preparers via the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.
Some filers may find that a preparer promises a refund without even reviewing any of their documents. If you meet with a preparer who makes grand promises about that amazing refund check, walk away immediately. While many filers will receive a refund, a refund is NEVER a given. According to the IRS, individuals should “avoid preparers who base fees on a percentage of their client’s refund or boast bigger refunds than their competition.”
Scams that Could Affect Your Finances
Tax season is the time when you prep your return, but it’s also the prime time to prepare for tax scams. Every year, there are scammers who try to dupe innocent people out of a LOT of money. One of the most popular scams—and one that the IRS warns of—involves a phone call from the IRS.
The call typically features a robotic message stating that the individual has an outstanding debt to the Internal Revenue Service. Scammers threaten that if the money isn’t paid in full then the police will come and take the individual to jail. And the police? They’re coming any minute!
Don’t fall for this scam! If you do owe back taxes, talk to your tax preparer or the IRS. If you owe money, they will find you…and they will make contact but it isn’t going to be via a robotic voice! If you are one of the many people who receive this message, don’t fall for the scam. The IRS provides a full list of tax scams and schemes so consumers can be on guard and aware!
So When Should You File?
If you’re ready to file in January, should you? This depends on your individual circumstances. If you are confident that you will receive a refund, filing early might help you get that refund sooner. But if you file before the April deadline, it doesn’t really matter when you file.
Filing late, though, means a penalty. And the later you file, the more money you may have to pay. So make it a habit to get all those documents in order and on the desk of your tax preparer in advance. And consider e-filing!
Identity Theft
Identity theft has been all too common during tax season. Some individuals discover that their filing is rejected because someone already filed a return under their social security number. This is frustrating and scary, but a tax preparer can advise you on next steps. Typically, a form is sent to the IRS noting identity theft and the return must be filed via mail. Unfortunately, refunds can be delayed because of the identity theft. Some individuals are victimized over several years, but all identity theft victims should reach out to their banks and contact the credit reporting bureaus. You also may need to review your credit report to see if any accounts have been established in your name.
Tax season can be stressful for filers, but if you’re anticipating a refund then taxes may mean a financial boost. While the average refund is a little under $3,000, the amount of your refund can vary. But if you failed to withhold enough from your paycheck or if you didn’t pay taxes throughout the year as a contractor, then you may end up writing a check instead of receiving a refund.
While everyone wants a fat refund, you must play by the rules. You can only take credits you qualify for and exemptions that you’re legally allowed to take. If your tax preparer is promising you LOTS of money for that return, run the other way! A reputable tax preparer will help you understand what credits you qualify for and will explain why you can or cannot take a deduction or credit. Research your CPA or preparer and find one you trust and who is trustworthy. Be accurate, be honest and always review the return before it’s filed.
