Tax season is well underway across the U.S., and with only a few weeks to go until the April 18 deadline, a few of us might already be scrambling to file a return. Whether you've already crossed it off your to-do list or are waiting until the last minute, here are a few tips you should know about your tax returns this year:
File for free
Taxes can be complicated, but that doesn't mean everyone has to shell out even more money just to file. As the IRS website explained, it's always free to file your taxes using the standard forms provided. Each of these forms contains detailed information to guide you through the process. But if your situation is more complex, there are also several free software tools available. These services are verified by the IRS as safe and effective for getting the right answer and even sending the information to the agency directly, no postage necessary.
Free file software provided by the IRS is available for anyone with a taxable income of less than $64,000 last year, or less than $128,000 for couples filing jointly. If your income is over that amount, you may have to pay for some of these services, but the IRS E-File tool will still allow you to send a completed return and designate a bank account for a direct deposit.
After submitting your return, use the ""Where's My Refund?" tool to track the status of any money that may be coming your way.
Not only is the tax system complex, it's also generally loathed by just about everyone. This creates the perfect storm for a host of pervasive myths and untruths about taxation in the U.S.
- Audits: It's never acceptable to lie or cheat on taxes. However, there is no one rule to determine who gets audited by the IRS. As Turbotax explained, many people assume claiming deductions for a home office or making more than a certain amount of income is a recipe for an instant audit. In reality, it's far more complicated and random. The IRS will check your work against expected values, making it hard to get away with serious tax fraud. Of course, that doesn't mean anyone should try to.
- Accountants: Some people assume that if they hire an accountant to compile and file their return, they assume no personal liability for any errors. This is also not true - after all, you need to sign the return yourself. If you contact an accountant or service, make sure they are registered with the IRS as a professional tax preparer.
- Refund delays: Kelly Phillipps-Erb of Forbes noted that many assume the worst if their refund takes a long time to arrive. Refunds can be delayed for any number of reasons, from an error to simple system overload. Anyone filing online can expect their refund to arrive within three weeks or less.
How to spend the refund
In 2016, the average taxpayer received a refund totaling almost $2,900. That kind of money represents a sizeable chunk of change for most, but it's important to resist the urge to spend it all at once. There's no such thing as a free lunch, and as The New York Times explained, tax refunds are no exception. Although it may seem like a nice gift from Uncle Sam, tax refunds are actually equal to the amount of taxes you overpaid in the previous year. This is essentially the same as extending an interest-free loan to the government, a much less appealing perspective.
That's why financial professionals urge taxpayers to save their refunds as much as possible. Some priorities that should take precedence over a giant TV or vacation include:
- Emergency savings: A recent poll from Pew Charitable Trusts found that 41 percent of American households would struggle to cover an unexpected $2,000 expense, like an emergency medical bill or home damage from severe weather. If you don't already have at least a few months of essential living expenses saved up in a standard savings account, a tax refund is a great chance to get started.
- Pay down debt: Unlike most mortgages and some student loans, which typically boast interest rates of less than 5 percent, many other forms of debt are very expensive. Credit cards and personal loans could come with interest rates higher than 20 percent. With each bill, this debt only piles up. Using a tax refund to pay off a chunk of that debt could save thousands in the long run.
- Invest: If all other savings goals have been met, consider giving investing a shot. Start contributing to your workplace retirement plan, if available, or look into low-cost mutual funds on your own.
For more help with tax advice or refunds, talk to the pros at your local Landmark Bank.
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