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10 Things Everyone Must Know About Taxes

Filing taxes can feel daunting, regardless of your income bracket, filing status or familiarity with current rules and regulations.

Fortunately, getting important documents prepped and learning basic concepts, including how taxes are assessed and collected, can help make the process easier to navigate. After all, even if taxes aren’t your favorite subject, failing to understand the tax code can mean missing out on beneficial breaks and deductio ns or getting slapped with late-payment charges.

Stay prepared ahead of tax season by learning these 10 crucial principles and best practices.

[Read: Everything You Need to Know About the New Tax Form.]

Failing to file will cost you more than failing to pay your taxes. “You need to file your return on time,” explains Bill Smith, managing director of financial consulting firm CBIZ MHM’s National Tax Office.

People may be hesitant to file if they can’t pay their bill, but you can always request a payment plan. What’s more, the penalty for failing to file is significantly more than the penalty for failing to pay. The failure-to-file penalty is equal to 5 percent of the unpaid tax and can be assessed for up to five months. Conversely, the failure-to-pay penalty is 0.5 percent of the tax due and is assessed monthly.

Refunds are forfeited after three years. Some people don’t bother filing their federal return because they are short on time and know the government owes them money. While there is no failure-to-file penalty on returns that are due a refund, procrastinating can still cost you. If you wait too long, you won’t be able to claim the refund at all. “Once you get three years out, you’re not entitled to it anymore,” Smith says.

Recent tax changes aren’t permanent. The Tax Cuts and Jobs Act was passed with much fanfare last year and makes significant changes to the tax code starting with the 2018 tax year. It creates new tax brackets and increases the child tax credit and standard deductions, while eliminating personal exemptions.

Don’t get too attached to these changes, though. “In 2026, the law sunsets, and we go back to the old regime we had before,” says Pierre Vogelbacher, wealth strategy market manager at financial firm PNC Wealth Management. That is, unless Congress votes to extend the law before then.

You may not need to itemize your deductions. Taxpayers of all filing statuses will see their standard deductions nearly double when they file returns next year, thanks to the Tax Cuts and Jobs Act. The law increases the standard deduction for married couples filing jointly from $12,700 to $24,000. For single taxpayers, the deduction will increase from $6,350 to $12,000. Heads of households will see their deduction increase from $9,350 in 2017 to $18,000 in 2018.

“That’s going to knock a whole lot of people out of itemizing deductions,” Smith says. There will be no need to track medical bills or tally receipts from unreimbursed business expenses since the likelihood of exceeding the standard deduction will be low for many families.

Itemized deductions aren’t the only way to get a tax break on charitable gifts. One perk of charitable giving has been the ability to write off eligible donations on itemized deductions. With the increased standard deduction, that may no longer be possible for many taxpayers.

People can still get a tax break for charitable contributions through. One way is for retirees to direct a portion of their required minimum distribution, known as an RMD, to a nonprofit organization. When seniors turn age 70 ½, they are required to take an RMD from traditional IRA and 401(k) accounts, even if they don’t need the money. This money is taxable and the added income may push a retiree into a higher tax bracket.

To avoid this problem, “You can give a portion of your required minimum distribution to charity and then you aren’t taxed on that amount,” Vogelbacher says. The money must go directly from your retirement account to the charity for this strategy to work.

Donating stock is another way to minimize taxes with a gift to charity. The giver avoids capital gains tax on the appreciated value of the stock while a tax-exempt nonprofit can sell equities without having to foot a tax bill.

Not all your income is taxable. Eric Bronnenkant, CPA and Head of Tax at online advisory firm Betterment, says people should know not all the money they receive throughout the year is taxable. Financial gifts of up to $15,000, life insurance proceeds and inherited money are all examples of money not subject to federal income tax.

[See: 9 Red Flags That Could Trigger a Tax Audit.]

There are plenty of ways to reduce your taxable income this year. Save your money strategically, and you may be able to avoid paying taxes on a significant portion of your income.

“There are a variety of tax-advantaged accounts for a number of purposes,” Bronnenkant says. Retirement accounts may be best known, and employees can deduct up to $18,500 deposited in a traditional 401(k) account in 2018. Those age 50 and older can deduct an additional $6,000 in catch-up contributions. Those without an employer-sponsored retirement plan can deduct $5,500 in contributions made to a traditional IRA, with an additional $1,000 in catch-up contributions allowed for those age 50 and older.

Taxpayers who have a qualified high-deductible health insurance plan can open a health savings account and receive a deduction for money deposited there. Those with an individual health plan are eligible to make up to $3,450 in deductible donations in 2018 while people with a family health plan can deduct up to $6,900 placed in an HSA this year.

Another way to reduce taxes is with a 529 college savings plan. While contributions aren’t eligible for a federal tax deduction, they may be deductible on some state tax forms.

Taxes should be part of every retirement planning discussion. Part of planning for retirement should be planning for taxes. Some money, such as funds from traditional retirement accounts, is taxable in retirement. However, cash from Roth accounts can be withdrawn tax-free. Meanwhile, Social Security benefits can be partially taxed once an individual reaches $25,000 in combined income or a couple has $32,000 in combined income.

“Look at the different buckets you have and decide where you’re going to take your assets,” Vogelbacher says. Retirees want to plan their withdrawals carefully to avoid inadvertently pushing themselves into a higher tax bracket.

Tax professionals can help navigate complex situations. Don’t leave money on the table. Make sure you’ve claimed all possible deductions by using a CPA or professional tax preparer. This may be especially important for those with investments or business owners.

For instance, Bronnenkant points to a new qualified business income deduction. Not all business owners will be eligible, but as a 20 percent deduction, it’s worth taking the time to know for sure. “It’s important to go through the process and see if you qualify,” Bronnenkant says.

Filing your own returns isn’t hard. While tax professionals have their place, Smith says average taxpayers should have no problem filing their return on their own. “There’s a lot more fear of filing taxes than is really warranted,” he says.

[See: Answers to 7 Burning Tax Questions.]

Online tax preparation software makes it simple to enter data from W-2 forms and answer basic tax questions. And some providers also offer free filing services to those with annual incomes below $66,000 thanks to the IRS Free File program.

More from U.S. News

8 Ways You Can Prepare Now for Next Year’s Taxes

10 Smart Ways to Spend Your Tax Refund

10 Tax Breaks for People Over 50

10 Things Everyone Must Know About Taxes originally appeared on usnews.com



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