Before filing taxes, it’s essential to know basic tax terms, concepts and best practices.
Understanding these key elements can reduce your tax bill — or score you the largest tax refund — and ensure that you dodge any failure-to-file or late-payment penalties and fees.
Whether it’s your first time or 20th time filing taxes, here’s what to know about doing it the right way, including answers to common tax questions.
How to file taxes. First, determine who will file your taxes. Is it you? Will you use an online tax preparation system, such as TurboTax? How about visiting a professional tax preparer?
If your financial situation is simple, filing taxes through a tax software system may be a good option. In fact, eligible taxpayers can file their taxes for free through many online tax programs. For the best method to file taxes for free, check out the software companies offering free returns through the Internal Revenue Service’s Free File system. Some tax software companies also offer their own free filing options for simple tax returns. For filers who don’t qualify, or who choose to pay for a more deluxe tax-return preparation package, expect to pay between $50 and $100 for software to file your federal and state forms. You’ll pay even more if you select add-ons, such as a review from a tax professional, or premium software packages.
For more complex tax situations — say you started freelancing this year or sold some investments — visiting a professional preparer might be wise. Experts recommend working with a certified public accountant, called a CPA, or an enrolled agent. “They have the licenses, the special training, the continuing education — these are the tax pros that are up on the laws,” says Eva Rosenberg, a Los Angeles-based enrolled agent known as the “TaxMama.”
When are taxes due? Typically, Tax Day occurs on April 15. But if that date lands on a weekend or on Emancipation Day, which is observed in the District of Columbia, Tax Day may be pushed back to April 16, April 17 or even April 18. While it’s always nice to have extra days to file your taxes, savvy filers won’t wait until the final weekend to submit tax returns. They’ll start working on their tax forms well in advance, experts say, to make sure that no paperwork or important forms are lost in the mad scramble to file on time. Filing early also reduces the time during which an identity thief can file taxes in your name — and steal your refund.
[See: Answers to 7 Burning Tax Questions.]
What if I miss the tax deadline? If you missed the tax deadline for filing taxes, don’t panic. Your next steps hinge on whether you anticipate owing taxes or getting money back through a tax refund check. “The consequences are very different if you have taxes due versus if you have a refund,” says Juan Montes, enrolled agent with TheTaxProblem.com, a firm with offices in Ceres and San Jose, California.
If you expect to get a refund, you’re still legally required to file your return and should do so as soon as possible, Montes says. But the IRS probably won’t hassle you over the money it owes you. Remember that you have three years from the tax deadline to collect the money you’re owed, but the sooner you do it, the better.
If you anticipate owing taxes, then you’re in a stickier situation. “File that return as soon as you possibly can and pay those taxes as soon as you can,” says Jackie Perlman, principal tax research analyst at The Tax Institute at H&R Block. Delaying tax payment and filing can result in two financial penalties. You’ll pay a late-filing penalty of up to 5 percent of unpaid taxes each month, up to a maximum of 25 percent. That includes a penalty for failure to pay on time of 0.5 percent of unpaid taxes. Interest will also continue to accrue on the unpaid amount and compound daily until you pay off the bill.
The quicker you can file your taxes, the better, even if you can’t pay all you owe right away, experts say. That’s because the failure-to-file penalty is pricier than the failure-to-pay penalty.
[See: 10 Low-Tax Places to Retire.]
How do I get a tax extension? If you’re worried that you’ll miss the tax deadline, a good option is filing an extension, which automatically pushes your due date back six months, typically to Oct. 15. Filing a tax extension will help you dodge failure-to-file penalties if you miss the April tax deadline.
It’s crucial to remember that filing an extension does not mean you can delay paying your taxes. “The extension is an extension to file, not an extension to pay,” Montes says. If you anticipate owing money, you should aim to pay whatever you can when filing your extension.
You can apply for an extension on your own — the form is free through the IRS’s Free File system — or even ask your tax professional to file for an extension for you. If you have a good relationship, your tax pro may do it for free. Check with your state to see whether you need to file a separate form for state taxes.
How much do I have to make to file taxes? Your requirement to file taxes depends on your tax status. For 2017 taxes, single filers under age 65 must file taxes if they earn more than $10,400. Filers under 65 who are married and filing jointly must file if they earn more than $20,800. The cutoff for heads of household younger than 65 is $13,400. If you can be claimed as a dependent, then you must file if you have earned income of more than $6,350 or unearned income of at least $1,050.
Many tax experts recommend filing a tax return whether you need to or not. If you earn below a certain threshold, you can typically file for free. Plus, filing your taxes closes the statute of limitations on a tax audit, Rosenberg says. Once you file a return, the IRS and state agencies have limited time during which they can audit you. If you don’t file a return? They have the rest of your life to hit you with an audit, Rosenberg says.
How to get help with a tax audit. Audits come in many different forms. The IRS may find a statistical anomaly in your tax return, you may have made a mistake or maybe someone tattled on you and you’re being targeted intentionally.
If you used a tax software program, such as TurboTax or H&R Block, you may be able to use its audit support feature. These companies also sell tax audit insurance, which can cost $20 or more, depending on the seller. If a professional prepared your taxes, let that person know, experts say. “That person is best suited to help you because they know what’s going on financially,” Rosenberg says. Expect to pay them for their audit services.
[See: 13 States Without Pension or Social Security Taxes.]
How long should I keep tax records? The minimum length for holding onto tax records is between three and seven years, depending on the tax forms and your tax situation. But experts recommend that you can digitize your documents and hang on to them for 15 years or more.
“Keep your tax returns forever, and it’s not that hard to do,” Rosenberg says. “They don’t take up that much space. You can keep them and scan them as PDF files.”
How should I pay my taxes? If you owe taxes, you’ll have several options for paying them. The best option is to pay them directly from your bank account. But you my use a credit card, debit card, check or apply for an installment plan or offer in compromise, in which you may settle for less than you owe. Remember that these methods may cause you to incur fees and interest charges.
What are state income taxes? Like the Feds, states levy taxes on your earnings. Each state has its own systems and laws in place for taxation, including several states that don’t tax income at all. The states that don’t tax income are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee have no income tax, but they do tax some dividend and interest income.
What tax terms should I know?
— Withholding: This term usually refers to what employers take out of employee paychecks to cover income taxes, state taxes and other obligations. You may also see parts of your pension, bonus or comissions withheld to help pay taxes.
— Tax subsidies: A subsidy is financial assistance paid by the government to help reduce your tax burden.
— Tax credit: Tax credits reduce your taxable income — and the amount you owe to the federal or state government.
— Claiming a dependent: Claiming a dependent can help you reduce your taxable income. This person is typically a qualifying child, member of the household or relative whom you support financially.
— W-4: You’ll fill out this IRS form to let your employer know how much money to withhold from your paycheck. Filling it accurately will help make sure that you don’t have a large tax bill due or refund at the end of the year.
— W-2: This form reports to the IRS your annual wages and the amount of taxes taken from your paycheck.
— Tax return: A tax return is the form you file that outlines your income, expenses, investments and other tax-related information.
— Tax refund: This is the money returned when your tax liability is less than the amount you paid.
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Here’s What to Know About Filing Taxes originally appeared on usnews.com
