Countdown to Tax Day: WalletHub’s 2020 Tax Tips
With Tax Day fast approaching, the nearly 1 in 3 Americans who wait until April to file their returns have a lot of catching up to do. And that’s a recipe for costly mistakes. Taxes are complex under normal circumstances, and things only get tougher when you add a time crunch to the mix. With that in mind, WalletHub compiled a list of last-minute tax tips and reminders to make paying Uncle Sam as painless as possible.
These tips are the product of WalletHub’s industry research as well as interviews with numerous experts in relevant fields, such as individual taxation, tax law and consumer psychology. Take this advice to heart, and tax season will be a breeze. You can (ac)count on it!
Don’t Forget To…
Watch out for Scammers: Tax season has been known to attract a host of shady characters, ranging from crooked tax preparers to identity thieves.
“The number one cause of tax fraud is identity theft,” said Lee G. Knight, an accounting professor at Wake Forest University. “Once identity theft is reported to the IRS, the victim may get his or her refund but not before going through a lengthy process that requires the victim to file multiple affidavits and gives the IRS time to investigate the fraud.
”Fortunately, there are many strategies you can employ to protect yourself from scammers during tax season. They include signing up for free 24/7 credit monitoring to ensure your personal information isn’t misused and making it a policy not to give financial information to anyone who contacts you, rather than the other way around. Check out WalletHub’s Tips for Avoiding Tax Fraud to learn more.
Have All Requisite Paperwork: Organization is vital to a well-prepared tax return. So your first step in the preparation process should be to gather all the paperwork and information you need — for the correct year. The most important of these documents are your Social Security card, income statements (e.g., W-2/1099 form), prior year’s tax return (for comparison), health-coverage statement and bank-account information.
It’s especially important for independent contractors to make sure they receive all 1099s from their clients, as they can be sure the IRS will. Keep in mind that businesses are not required to send a 1099 if the contractor earned less than $600 during the year, but that income should still be reported on the contractor’s tax return.
"Many people forget or neglect to report all of the income reflected on tax reporting forms they receive," said Linda Galler, a professor of tax law at Hofstra University. "Sometimes, this is inadvertent, but more often taxpayers mistakenly assume that they need not report small amounts. IRS computers will generate bills, which, if not promptly paid, could escalate into quite a nuisance.
"If you moved recently, make sure to check for any missing forms or important IRS correspondence at your old address.
Seek Free Advice: Having someone to bounce questions off of or an extra pair of eyes to check your work can help you avoid crucial mistakes. It can also work wonders for your stress levels. Just make sure to properly vet anyone you decide to work with.
The IRS’s Volunteer Income Tax Assistance program is one particularly reliable source for tax help, and there are locations throughout the U.S. “Many tax and accounting professionals, law students and business school students are trained and volunteer at these sites,” said Andrew Pike, a law professor at American University.
Use Reliable Tax Software: The right tax-prep program can make the process painless, doing pretty much everything for you based on your answers to some simple questions. Just make sure to compare options and read customer reviews before deciding which software to use. In particular, pay attention to each option’s security standards and data-breach history.
You can find a list of IRS-approved tax software here.
Contribute to an IRA and/or HSA: Contributions from an Individual Retirement Account (IRA) are both tax-deferred and tax-deductible, even if you don’t itemize. Most people can contribute up to $6,000 per year, while the limit is $7,000 for folks who are 50 or older. You also have until April 15 to make a contribution that counts toward your 2019 taxes.
If you’re covered by a high-deductible health plan – characterized by a minimum deductible of $1,350 for individuals and $2,700 for families – you can also deduct contributions from a Health Savings Account (HSA) without itemizing. The contribution limits for 2019 are $3,500 for individuals and $7,000 for families.
Use Your Losses to Your Advantage: If you itemize deductions, don’t forget to include the following (all of which are deductible to varying degrees):
- Realized capital losses (e.g., stocks you sold for less than the price you paid)
- Gambling losses to the extent of your winnings (e.g., if you have $3,000 in winning bets and $4,000 in losing bets, you can only deduct a maximum of $3,000)
- Mortgage/home-equity loan interest
- Student-loan interest
- Interest paid on business loans and lines of credit during the year
“One of the most common reasons why people overpay on their investment-related taxes is by failing to maximize the use of any capital losses they may have,” said Orly Mazur, an assistant professor of law at Southern Methodist University. That’s why it’s generally wise to take losses in order to offset your tax basis on capital gains, and vice versa.
“People also overpay on their investment-related taxes by unintentionally purchasing stock, selling it, and then re-purchasing it 30 days after the sale,” Mazur said. “This causes the ‘wash sale’ rules to apply, which generally deny the taxpayer from claiming the loss.”
- Declare Foreign Accounts: People who have more than $10,000 in a foreign financial account (e.g., bank account or mutual fund), or who are signatories on such accounts, are required to file a Foreign Bank Account Report with the Treasury Department by April 15, 2020. And there are stiff penalties for failing to do so.
- Watch out for Scammers: Tax season has been known to attract a host of shady characters, ranging from crooked tax preparers to identity thieves.
File a Gift Tax Return: You must file this type of return by April 15 “if you made gifts in excess of the annual exclusion amount,” which is currently $15,000 per recipient, said Kerry A. Ryan, an associate professor of taxation at Saint Louis University. “There is no extension to take advantage of the annual exclusion.
”Gifts are generally defined as goods, services or money given to an individual without compensation. More information can be found on the IRS website.
Assume You’ll Be Audited: It’s never wise to cut corners, but doing so is especially problematic when it comes to your federal income tax return. Doing so will increase the chances of both an expensive mistake and IRS inspectors showing up at your doorstep. And there are a variety of possible punishments for tax evasion, from bank levies and tax liens to jail time.
"Returns are generally selected for audit if there is something out of the ordinary on the return," Galler said. "If there are numerous math errors on the return, if the return is missing forms and schedules, or if the deductions that are taken on the return fall outside of statistically normal ranges, the IRS is likely to look more closely.
"This just goes to show that being thorough and preparing for the worst can eliminate serious headaches down the line. It also underscores the importance of keeping well-organized records. The IRS now has up to six years to audit a return in many cases, so you’d be wise to keep all underlying documentation for at least that long.
Time Management Tips
Make a Plan: The whirlwind that is last-minute tax filing can easily cause a bit of paralysis by analysis. People have so much to do in so little time that they often become overwhelmed and waste time worrying instead of doing. And the problem tends to worsen the closer we get to Tax Day.
That’s why it’s so important to make a list of what needs to be done and which documents you need to collect. Estimating how long it will take to complete each task will help, too, enabling you to schedule everything that needs to be done before your return is due.
Don’t Sacrifice Itemized Deductions For Time’s Sake: If you’re feeling rushed, you might be tempted to just opt for the standard deduction instead of seeing what itemization would get you. But guessing that the easy road is the cheapest isn’t a good strategy.
You need to make an educated decision about which option best suits your particular situation by comparing your total deduction amount in each case. And in doing so, don’t forget that the standard deduction and itemization are mutually exclusive.
“Many individuals do not realize that certain items touted as deductions, such as charitable contributions, are in fact only deductible if the taxpayer is eligible to itemize on their return,” said Maureen Bruns, an assistance professor of accounting at the University of Cincinnati.
Keep Track of What Throws You Off: The anguish we suffer during tax season often fades from memory over the course of the year. And since you don’t want to find yourself in the same predicament year after year, you’d be wise to make a list of what gives you trouble during the tax-prep process and how you can improve in each area.
For example, this might include saving links to relevant forms and educational info on the IRS website, along with notes explaining confusing requirements. Or if you’re a procrastinator, you may want to add a reminder to your calendar in the hopes of starting earlier next year.
“The best advice is to think of your tax preparation efforts as an ongoing, year-round effort,” said Wilton Hyman, a law professor at New England School of Law.
Adopt a Filing System: There is a direct connection between organizational skills and tax-season stress. Keeping track of pay stubs, receipts, and any other information you’ll need when April rolls around makes tax prep much more efficient. It also stands to lower your blood pressure a bit as well as improve your overall WalletFitness.
Everyone has different organizational styles and preferences. But as long as you put a clear method in place and force yourself to stick to it throughout the year, you’ll be in good shape.
What to Do if You Can’t Pay
Not paying your taxes is not an option. As Benjamin Franklin once famously said, “In this world nothing can be said to be certain, except death and taxes.”
There are, however, a number of ways that people who owe Uncle Sam can minimize unnecessary complications as well as buy themselves time to pay. You can check them out in our article about What to Do If You Can’t Pay Your Taxes.
Making the Most of Your Refund
- Relax: “If you know that you will get a refund as usual every year, relax,” said Ahmed M. Ebrahim, an associate professor of accounting at Fairfield University. Tax day is not a real deadline for you in that case. You have three years to file before the statute of limitations runs out on your refund.
- Avoid Tax Refund Prepaid Cards: This isn’t really a tip for how to use this year’s tax refund but rather how to receive it. Many tax preparers and some states offer to disburse tax refunds via prepaid card, but prepaid cards often charge a variety of small fees that can eat away at your money over time. If possible, direct deposit to a bank account is the way to go.
Pay Off Debt: While no one wants to live with the increased cost and stress of unnecessary debt, far too many of us are dangerously overleveraged.
“If you have more credit card debt than one month’s gross income, you are over-leveraged,” said Barbara Neuby, a professor of political science at Kennesaw State University. “One should never use credit cards to live on a day-to-day basis. If one is doing so, then one is in a crisis.
”The most strategic way to pay off debts is to pay only the minimum amount required on all but the balance with the highest interest rate, which will get the lion’s share of your debt-repayment budget. Once your most expensive debt is gone, repeat the process until you’re debt-free. Credit card companies are currently offering 0% introductory interest rates for as long as 21 months, which means the right balance transfer credit card could become quite the asset in your pursuit of debt freedom.
Invest It: Whether it’s making an IRA contribution, adding to a 529 College Savings Plan to or further diversifying your stock portfolio, there are plenty of sound investments to be made these days.
“For those with a long-term investment outlook, a diversified portfolio of equity and debt securities with little turnover is likely to be a wise choice,” said Ron Christner, an associate professor of finance at Loyola University. “Nobody can time the market.
”You can also invest in yourself through continuing-education classes, perhaps even one on money management. You can see how big of a need this is by taking our WalletLiteracy Quiz
Reevaluate Withholdings: Getting a refund isn’t always a good thing. It can actually be a sign that you’re overpaying taxes during the year and thus giving the government an interest-free loan. That can cost you potential investment returns in the meantime.
With that being said, the manner in which you approach this reality ultimately depends on how careful you want to be in your dealings with the IRS. “Personally, as a risk-averse accountant, I instruct my employer to withhold a little more in taxes during the year than I expect to owe so that I have a ‘cushion’ when I file my return,” said Kirsten A. Cook, an assistant professor of accounting at Texas Tech University.
Ask the Experts
The tips above are peppered with expert insights, but if you’re interested in additional guidance from tax professors and professionals, we’ve got that, too. We posed the following questions to a panel of leading tax experts, and you can check out their bios and responses below
- Do you have any tips for people scrambling to finish their taxes at the last minute? Does one have to pay for reliable tax help, especially at the last minute?
- What are the biggest clerical mistakes that people make with regard to their taxes?
- Do you have any organization tips/strategies that people can try out next year?
- Should people really be happy about receiving a refund, considering that it means they overpaid in the first place?
- What’s the best way to avoid an audit?
- How should people prepare for the tax-policy changes for next year's filings?
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