Taxes. The word alone can induce feelings of fear, confusion and anxiety. When should you start filing? Do you really need to keep all those receipts? What’s the best way to get the most tax write-offs? Whether you use tax preparation software or go to a professional to get your taxes done, we’re breaking down a few tax-related mysteries that you might not know about!
1. There are deductions you probably don’t know about
To put it simply, tax deductions are expenses that can be deducted from taxable income. “A tax deduction reduces the income that an individual is taxed on and therefore decreases the amount of overall tax liability,” says Genevieve, a tax manager for a large hotel chain. What are some tax deductions you should be aware of? I broke down a few of them for you:
- Anyone who donates to their favorite charity knows how good it makes them feel. Be sure that the charity you’re donating to is eligible to receive tax-deductible contributions. Some institutions like public schools and churches are automatically qualified and eligible, but if you aren’t sure, there is a charity look-up tool you can use to double check an organization’s eligibility.
- Do you donate clothes or household items to Goodwill? The Internal Revenue Service (IRS) will reward you for your generosity. Bring your items that you’d like to donate and you’ll receive a receipt to hang onto until tax season rolls around. The IRS will ask that you calculate the fair market value of your items since that value is ultimately what determines the amount you are able to deduct. Not sure how to figure out the fair market value? Goodwill has a valuation guide that you can use!
- Owning an environmentally-friendly car not only benefits Mother Nature, but it could work in your favor when you file your taxes. Those who own an energy-efficient vehicle, like an alternative-fuel car or hybrid, may be eligible for tax breaks.
- If you’re a teacher and you buy school supplies for your class, you’re able to deduct up to $250.00 for all classroom-related expenses that weren’t reimbursed.
- Do you work from home as a freelance writer or run your own business from a home office? You can claim necessary work items like separate phone lines that you use strictly for business or computer software that you need to do your job as tax deductions. The IRS calls this a home office deduction and lists points to consider if you’re thinking about taking advantage of this when you’re filing your taxes.
2. Tax penalties and fines
Tax penalties and fines are not fun to deal with, but you can’t avoid them if you don’t know what they are in the first place! Did you know that you can be fined for not having health insurance? And that the fees go up every year? The government will calculate what you owe when you file your taxes.
“An individual can face various penalties as it relates to his or her federal income tax return, and should be aware of any potential exposure and the resources available,” says Genevieve. “Some examples include any accuracy-related penalties, as well as any late-payment penalties, but there could be other potential exposure that an individual must be mindful of.”
Related: 6 Things You Do That Are Draining Your Bank Account
3. There is a filing penalty if you’re late
It doesn’t matter whether you are owed a refund or not — the IRS will charge a flat fee if you file your return more than 60 days after the deadline. You might not have to deal with the same types of penalties that apply to taxpayers who do owe more tax on the filing deadline, but just because you’re due for a refund doesn’t make you exempt from late filing penalties. If you think you might be cutting it close, apply for an extension so that you don’t have to worry about a late fee.
“For federal income tax purposes, an individual can file a Form 4868 ‘Application for Automatic Extension of Time to File U.S. Individual Income Tax Return’ in order to receive a 6-month extension,” says Genevieve. “However, it is important to note that an individual must still pay the income tax due by the original filing date, and that this is only an extension of time to file the tax return itself.”
The deadline for filing IRS tax returns is Thursday, April 15, 2021, but if you feel like you need an extension, read up on the special rules first!
Related: Should I Start a Roth IRA? Everything You Need To Know
4. Filing quarterly vs. filing annually
A sole proprietor is someone who is self-employed, like a self-employed freelance writer or business owner. There are a lot of differences between working as a sole proprietor and working as an employee for a company. The big difference is that your taxes aren’t withheld the same way. As a full-time employee, taxes are taken out of each paycheck automatically. As a sole proprietor, taxes aren’t withheld; it’s your responsibility to pay them.
During tax season, as an employee of a company, you may see a return since taxes have been coming out of your paycheck throughout the year. As a sole proprietor, you will have to pay federal and state income taxes when it comes time to file.
As a freelancer, there is an underpayment penalty for not filing quarterly. When you calculate how much in taxes that you owe, and you haven’t had any withheld throughout the year, the IRS will issue a penalty for underpayment. To avoid this, you can make quarterly payments to the IRS directly, especially if you are self-employed and you don’t have an employer to withhold your income for you.
5. There are refund time limitations
Though an unlimited amount of time to claim your refund would be great, it’s not a reality. If you file a tax return and are owed a refund from the IRS, you generally have about three years to claim your refund. If you don’t file a tax return, you have two years to obtain your refund.
6. If you can’t pay your taxes on time, it’s not the end of the world
The IRS’s advice if you owe money on your taxes? Don’t panic. They advise you to pay as much as you can by the April 18th deadline even if you can’t pay the full amount of taxes you owe. According to IRS.gov, “Pay as much as you can by the April 15 deadline, because the IRS charges failure-to-pay penalties and interest on any unpaid balance, which increases the amount you owe.” As for the rest? You can apply for a payment plan, or apply to pay in installments online.
Tax season can be daunting, but if you have all the right information—and if you’re in-the-know when it comes to these greatest mysteries — filing doesn’t have to be a total nightmare.