Navigating Tax Season: Tips for Smooth Sailing

Tax Day is coming soon. Preparing taxes can be confusing for many people.

Some people use tax software to help them. Others seek assistance from a professional. There are also those who choose to do them on their own.

IRS data reveals that nearly two-thirds of taxpayers received refunds last year, averaging $2,903 per return. Usually, you only deal with the IRS when getting a refund or if they need more info through mail. It's worth noting that the IRS exclusively communicates through written correspondence, making unsolicited calls a hallmark of IRS scams. The probability of being audited, let alone facing criminal investigation or incarceration, is notably low for the majority of Americans.

Nevertheless, exercising caution and conducting thorough reviews of tax returns remain prudent practices. Below are some key questions to consider during this process.

Have you maximized all available contribution opportunities?

You can make contributions to IRAs and HSAs until April 15, 2024, for your 2023 taxes. If you need more time, you can file an extension by the same deadline. Residents of Maine or Massachusetts have until April 17, 2024, to file.

If you are self-employed or work as a freelancer, you can open and contribute to a SEP IRA. This is true even if you have a full-time job as an employee. In 2023, self-employed individuals can contribute to a solo 401(k) after December 31. They can make contributions up to the business tax deadline.

Have you accurately filed your state taxes? 

In 2023, remote workers may need to pay taxes in a state where they work remotely. This would be required if they work from a different state than their company's location or their own home.

Navigating state tax laws can be challenging, especially considering recent changes in legislation across many states. Variations from federal tax laws and the absence of income taxes in certain states further complicate matters. Arizona changed its income tax brackets, while Tennessee got rid of its state tax on dividend and interest income in 2021.

Understanding these complexities takes time and effort. Follow the rules for your filing location carefully, as there are no easy solutions. To obtain specific information regarding taxes in your state, you can refer to state tax websites or seek guidance from a tax advisor knowledgeable about your state's particulars.

Are you eligible for tax credits? 

Tax credits provide a direct reduction of your tax bill, effectively decreasing what you owe dollar for dollar. Consider these three credits as you prepare your taxes:

• Child Tax Credit in 2023 is $2,000 for each qualifying child under 17 in your home. To qualify, you need to meet certain requirements, like having a MAGI below $200,000 ($400,000 for couples filing jointly).

• The Earned Income Tax Credit (EITC) helps people who earn less than $63,398 or $56,838, respectively. This credit can be worth hundreds to thousands of dollars. The total amount varies based on factors like having kids and filing status (jointly or singly).

• American Opportunity Tax Credit (AOTC) gives eligible students a reduction on some education expenses for their first four years of college. To get the full $2,500 credit per student, you need to spend $4,000 on eligible expenses. Your income must be under $80,000 for single filers or $160,000 for joint filers. If you want more education credits after the AOTC, you can look into the Lifetime Learning Credit. It can give you up to $2,000 per tax return, which is 20% of the first $10,000 in education expenses. Keep in mind that you can only claim one of these education credits per student, not both.

Have you accounted for all sources of income and potential deductions? 

Before filing your return, it's prudent to conduct a final check on your financial particulars. Here are some considerations:

• Ensure you haven't overlooked any 1099 forms.

• Did you factor in taxes owed on unemployment benefits received?

• If your education expenses fluctuated throughout the year, have you reconciled these changes with any eligible withdrawals?

In 2023, the IRS expanded tax brackets, potentially leading to lower income taxes for many individuals. Additionally, the standard deduction and various savings incentives were increased.

If you're not opting for the standard deduction, contemplate potential itemized deductions. You can get deductions for state and local taxes, medical expenses, mortgage interest, charity donations, and disaster losses.

Deductions can be claimed for these categories to lower the amount of taxable income. If you anticipate these exceeding the standard deduction, consider consolidating charitable deductions to maximize your itemized deductions.

Many individuals overlook the opportunity to claim a home office deduction, particularly if they're self-employed. The Tax Cuts & Jobs Act removed this deduction for full-time employees, but freelancers like lawyers can still qualify for it.

Have you requested an extension if you're unable to file on time?

Tax Day is back to April 15, 2024. If you're not ready, follow the rules for filing an extension.

If you need more time to file, you must still pay what you owe by the original deadline. This will help you avoid extra fees. Remember to submit your payment on time to prevent any additional charges.

However, it's worth recognizing the advantages of filing as soon as you're prepared. This includes minimizing the risk of tax-related identity theft and expediting your refund. Additionally, early filing enables better financial planning for the upcoming year, from adjusting withholdings on your paycheck to strategic considerations regarding state residency.

Bottom Line

Before Tax Day, review your tax return carefully before sending it to the IRS. It's important to check for any mistakes. There are tax credits that can reduce the amount of taxes you owe.

Similarly, scrutinizing all sources of income and potential deductions can optimize your return. Follow best practices in tax preparation to feel more confident and at ease during the process. Take proactive steps for success.

Sources:
Tax Tips for 2023 returns | Saving on taxes | Fidelity

 

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

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This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.