Tax filing tips 2014: Suggestions for young professionals
Katie Leone Scripps Digital
10:54 AM, Jan 6, 2014
The federal government may be a bit behind on taxes this year, but it doesn't mean everyone has to be.
The first day the Internal Revenue Service will begin processing individual tax returns is Jan. 31 — later than normal this year due to the government shutdown in fall 2013. This means many people who might be used to getting a tax return in early February will have to wait until the middle or end of February, and plan accordingly.
According to the IRS, the average wait time for a tax return is 21 days. But the sooner a tax return is filed, the sooner a refund will be issued. Waiting until closer to April 15 (the individual tax return filing deadline) can result in a delay in getting a refund, as the IRS is inundated with returns to process.
Although more people expect a refund than a tax bill, what's interesting this year, according to finance coach and founder of
FinancesWithFunk.com, Trisha Funk, is that for 2013 the average person expecting a return is down about 5 percent to about the same expecting to actually owe money this year that never have had to.
It's usually near a 60/40 split, but this year it's estimated that the split will be more like 55/45.
The majority of people can still expect a refund, but it's fewer than it has been in the past.
"That could be a sign that the economy has been improving but it's definitely a shift to keep in mind and pay attention to," Funk said.
Funk breaks down the filing process and how to maximize the amount of your tax return.
One of the best ways to increase your return is to take advantage of tax deductions. For the purposes of this article, the focus will be on deductions for those who are single and do not have children (because deductions are few and far between for this demographic).
Deductions this demographic may qualify for include:
Earned income tax credit: Of deductions that even singles with no children can take advantage of or those who have children, the earned income tax credit is probably one of the biggest ones. If you are at least 25 and have a child or even if you don't you still may be able to qualify.
1. Ensure proper income reporting. (That means making sure that your 1099s or W-2s actually match up with what you are reporting on your tax return.)
2. For those who are married who should be filing as married, filing separate rather than single or head of household?
3. Be sure you are claiming a qualified child and be sure that child can't be claimed on anyone else's taxes. (The courts may have granted rights to one parent to claim that child on their taxes and even when there is no formal agreement in place it has to be decided on ahead of time or it will send errors on both parties' taxes.
4. Reporting the wrong income and reporting the wrong social security numbers are some of the biggest errors that cause people to lose out on the earned income tax credit.
American opportunity tax credit: This credit benefits higher education costs for those with income of $80,000 or less if single or $164,000 if married filing joint. This credit is for students for the first four years of their education and students only have to be enrolled in half time credit. (That's something to consider if you are going to school part time and taking one extra credit or so could put you at that ½ time status it would be worth seeing if you can fit it into your schedule.)
Lifetime learning credit: This isn't just secluded to those first four years and doesn't have to be a degree-specific goal in mind. You can actually qualify for the credit based on simply being interested in learning a new skill or developing new opportunity.
Saver's credit: This credit is hardly ever used. Aside from awesome tax implications of putting some of your income into retirement savings and the possibility of getting employer match contributions, if you contribute to your retirement account you could get tax credits. Income limits are $29,500 for singles, $44,250 for a head of household filing or $59,000 for married filing jointly. That means you should contribute to your 401(k), even if it's a small amount.
How do you find out which deductions you may be eligible for?
Funk: One of the best resources you can possibly use is the IRS website itself.
www.IRS.gov is going to give you all the different tax credits and those specific limitations and exclusions that make sure that you are within your legal rights to claim that tax credit.
How many people do not take advantage of tax deductions?
Funk: The majority of people don't take deductions. Seventy percent of filers use 1040EZ or 1040A for their tax returns and taking the standard deduction.
I think so many people just assume they won't qualify for them. The tax code is complicated, and we naturally avoid things we don't really understand. Also, many have no idea that these deductions actually even exist, so I don't think for some it may be a blatant disregard. Some procrastinate on their filing so they don't have the time to do the research or preplanning to be able to take those deductions.
What can be done throughout a year to qualify for tax deductions?
Funk: One of the most important things that people can do throughout the year is to have a plan and a tracking system that works.
I have a really simple strategy that works wonders and my clients use it all the time. Create a tax deduction calendar either on your Google calendar or on Outlook calendar, even a little paper pocket calendar, whatever you happen to use. Every time you go to the doctor, just jot your copay into the calendar (along with your mileage driven there). Miles driven for charity? Write them in your calendar. College expenses? Whatever. And if you're totally nerdy like me you can color code your entries based on what type of a deduction it is. At the end of the year just print off your month and add it all up.
Grab a simple accordion folder to keep your receipts or be sure you have a file on your computer that you can swipe all of that documentation into. In case of an audit you want to be able to back up your medical claims.
What is the best way to file taxes? Should I use free or paid online versions of e-filing software?
Funk: Absolutely the easiest way to file taxes is to e-file.
The difference between the paid or free versions really depends on the resource you are using. There are a number of free versions that are actually going to upgrade you to other things if you want them to check for other credits you might be missing. If you have really done your homework yourself and are comfortable with what you are doing, a free version may be fine. Otherwise you really need to choose a program that is going to walk you through an initial interview to find out if there are things you may qualify for.
None of these really can compare with a live Certified Public Accountant. People have this perception that having an actual CPA do your taxes costs tons of money but the reality is that the few hundred dollars you invest in them could reward you quite a bit more. They also are going to be able to give you information on areas that you were close to qualifying for or things you could do different in the future in order to take advantage of exemptions and deductions out there.
When is e-filing not allowed?
Funk: E-filing is not going to be allowed if: you're married but filing a separate return and live in a community property state; you are claiming a child who has already been claimed by someone else or you have a multiple support agreement. In any of these situations your return is going to be rejected.
The benefits to e-filing:
Funk: Your work file is processed quicker. Every paper file that the IRS gets they have to hand type it into their system. Which means you get your return quicker especially if you do automatic deposit.
The other benefits of e-filing is that if you have made an error you get a notification within 24 hours that your return has been rejected so you can correct it right away and resubmit.
Do your homework and make sure you have all the information correct, e-file your return, and have your refund direct deposited into your checking or savings account.
What document should I have on hand when ready to file?
• Vehicle license taxes from your registration bill
• Any state taxes you paid
• Property taxes paid if you own property
• Any charitable contributions that you have made throughout the year
• Some states still have a renter's credit, so you need a total of the rental payments for the year
• Any receipts or mileage related to a side business venture (even if you don't feel like you really made any money or you know you spent more on it than you made)
• 1099s (including those from any savings or investment accounts)
• Any mortgage interest that you paid
• Any medical bills or expenses you paid including and especially those that insurance doesn't cover
• Any educational expenses
What if I throw out my mail?
Funk: Well first, stop doing that. I don't care if you open it or not but quit throwing it away. Your best resource is to log on to your accounts and start looking. Go online to your bill pay and search by the specific charity, doctor's office, or wherever and set your date range Jan. 1 – Dec. 31 if your bank or credit card company will let you. Then you can get a consolidated amount for the year. And almost 100 percent of mortgage companies, banks, investment companies and others will let you print your 1099s or other tax documentation online.
What else should I be taking advantage of or consider?
• High deductible insurance with an HSA account
• Utilize flex spending accounts if available through your employer
• Commuters Tax Credit if you use public transit regularly
• Contribute to your IRA or 401k
• Strategize your deductions (Make 2014 the year you get all your medical issues taken care of, get the new glasses, have the dental procedure done you've been putting off, so you can qualify for the deduction. An every other year approach is smart if you come in just under most of the time. )
• If you have made a big purchase in the last year, such as a vehicle or boat, you may be able to get credit for the sales tax paid