E-File Is Still the Best Option for Filing Taxes
It’s that time again!
It is inevitable; we must file our tax returns. But it need not be a taxing experience! By getting organized ahead of time, filing taxes can be done efficiently and accurately. Try to gather all of your documentation so you can start in finish in one sitting. It could take 3-4 hours, so get comfortable. The first steps are easy: Who, What, When and How.
Who will be counted on your tax return as a dependent? Make sure that you have their social security numbers or tax identification numbers.
W-2s or earning statements for each person need to be collected. These are to be made available by employers no later than January 31. Find out if your employer will be mailing the W-2 or if you should look it up online. Collect all other earnings statements as well, 1099 forms show earned income from interest, investments and independent contractor work.
The sooner you file, the sooner you know how much you owe, or how big your refund will be. It is best to start soon in preparing your taxes so you can plan ahead. In Addition, filing a few weeks into February is good as some of the kinks in the system have been worked out. But do not wait too long.
If you had an issue with identity theft this year, filing late might allow thieves to get your refund by fraudulently using your SSN. Remember, if you did have an identity theft issue, make sure that you are checking your credit reports, available for free each year from three different sources: www.annualcreditreport.com
Many taxpayers are eligible to file online, go to www.irs.gov. For tax filers with an income less than $58,000 (2013 figure) there is also an option to access free tax preparation software. Refunds filed online and opting for a direct deposit of the refund are processed in about ten days.
Never get a refund anticipation loan. If you file online and have the refund deposited directly into a bank account, you will receive it within 10 days.
Free Fillable forms are an option for people who are comfortable filling out tax forms and schedules without software help. Fillable forms can be printed out and submitted by mail, or they can be filed electronically.
If you are not sure how to file your taxes or you do not have Internet access, you can go to your local State Employee Credit Union, and ask if they are providing assistance. VITA assistance is a program that is specifically geared to helping people to determine their EITC eligibility.
Those are the EASY questions, no what about deductions?
A tax deduction is subtracted from the amount of income that is taxed, that is, your tax liability. After income is determined, tax filers must consider if they wish to take the standard deduction or itemize deductible items. Itemized deductions include medical and dental expenses, taxes, charitable contributions, home mortgage interest, casualty losses, and miscellaneous; some of these are even allowed if one takes the standard deduction. So, some calculations might be in order to determine if it is better to take the standard deduction or to itemize. For a married couple filing jointly, the standard deduction is $12,200. Many of the computer-based tax filing programs will help you determine what is best for you, and they will do the math!
Once this determination is made, tax credits can be figured. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes; they are incentives for people to make good decisions in how they manage their tax liability. Tax credits include child and dependent care, educational credits, residential energy credits, and retirement savings contribution credit; these are non-refundable credits. Non-refundable credits cannot exceed your tax liability.
Refundable tax credits include Earned Income Credit, which is probably the least used credit available. Couples earning less than $47,000 should review their eligibility for this credit that is based on the number of children in your home. You must have earned income to be eligible for this credit!
What do I do with my Tax Refund?
First, avoid the urge to get a cash advance on your refund! The amount of money charged to receive an early refund far exceeds the benefit! Complete and correct returns filed online are often directly deposited into bank accounts within ten days.
When you receive your refund, payoff debt that you have, avoid the temptation to buy something new. A credit card debt of $3000 at 12% interest will take more than 17 months to pay off when making payments of $200 each month. By putting just $500 of a tax refund towards that debt, the remaining $2500 could be paid off in just 14 months. This is the easiest way to pay that debt down. If you have a bit more self-control, keep your refund in a bank account and earn interest on it. Then, each month add just $50 to the monthly payment, increasing it to $250; in just 13 months the debt will be paid off.
If you have no debt, invest in your future. Why not open a Roth IRA account? If you start an account with a modest $400, then add a bit each month; you could have a nest egg at retirement. For example, if a 29 year old starts an IRA with just $400, earning 8% interest, then adds $50 each month, by age 65 there will be $127,629 to enjoy. Increase that monthly amount to $100 and you will have $248, 872!
With a little planning, you are sure to find a good use for your tax refund, rather than just buying something new. Why not invest in your future financial security by paying down debt and investing in your retirement.