Now is the time when we start thinking about filing our income taxes from the previous year. Even though it’s an annual event, it can cause anxiety for many. By preparing now, you can ease the process for yourself and your tax preparer.
The Internal Revenue Service tracks everyone by their Social Security number. Make sure you have your number and that of your spouses if filing jointly, plus the number(s) of your dependent(s). In addition to your W-2 or like form, you want to include information about any interest you earned from savings accounts, stocks or mutual funds as these are also taxable.
One of the largest deductions many people can claim is mortgage interest. If you have a mortgage, you should get a 1098 form from your lender specifying how much interest you paid in the last year. You will also want to remember any documentation for any additional deductions you may have, such as property taxes paid and charitable donations made within the past year. Common forms of documentation for charitable donations include a cancelled check if you gave a monetary donation or an itemized receipt if you donated clothes or other goods.
Your goal should be to break even at tax time, which means you don’t receive a big refund from the state or federal government or you don’t have to write a big check to either or both.
Every year, thousands of taxpayers will get refunds. While some consider overpaying in taxes on their paycheck a form of forced savings, you may want to consider how you could use this money throughout the year. The extra money could help you with such things as building your personal savings or emergency fund, making an extra house payment or paying off debt. To change your tax withholding, you will need to file a new W-4 form with your employer.
Many tax preparers advertise immediate money through tax refund advance services. However, these may not be the best idea for many. A fee is usually assessed in exchange for the quick cash. Tax refund advances are similar to a payday loan, and both are some of the most expensive ways to borrow money. According to the Consumer Action website, annual percentages rates can range from 50 to 500 percent on tax refund advances. A tax advance refund, or rapid refund, is a loan. If for some reason your refund is less than anticipated, you could end up paying the difference between the two and possibly additional fees or interest. Perhaps a better way to get your refund quickly is to electronically file your taxes as early as possible and have it deposited directly into your checking account. By doing so, you could have your refund as soon as 10 days later.
If you owe the IRS money this year, you may want to consider changing your withholding status with your employer so more money can be taken out throughout the year, so you’re not hit with a big payment next year. If you owe taxes but don’t have the money to pay due to unemployment or a reduction in work in the past year, you may qualify for the IRS’s Fresh Start program, which may allow you to repay your debt in installments without failure-to-pay penalties. There are income and tax limits associated with this program. For more information on it, visit http://www.irs.gov.
Source: Jennifer Hunter, Extension Specialist for Family Resource Management
To get more information on family financial topics, contact the Logan County Cooperative Extension Service.