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How to file tax returns to maximize your refund
As of February 2018, the IRS received over 42.5 million individual income tax returns for the 2017 calendar year. Of those, roughly 40 million of those were filed electronically and 21.5 million were self-prepared. Additionally, people visited IRS.gov 142 million times to figure out how to file. That’s a lot of visits and a lot questions about how to file correctly!
The articles in this section offer the latest advice and trends in tax filing, so you can stay up-to-date on the best, most hassle-free ways to file. Below the articles we also provide tips to make filing your tax returns easier. If you have problems with tax debt that you need to solve, please visit Debt.com’s Solution Center.
Individual income tax returns are always due on the 15th of April each year. If the 15th falls on a weekend, they are due that Monday. They don’t need to be received by the IRS that day – only post marked. That means you can mail your return on the 15th and not incur any late fees or penalties.
Tax identity theft is where someone files a tax return in your name and then intercepts your refund. It can happen when someone gets their hands on your Social Security number. If it occurs, the IRS will contact you by letter (they always contact you by letter) to let you know a return was already filed in your name.
Filing as early as possible is the easiest way to prevent tax ID theft, because you get the jump on the identity thieves. You get your return before they can.
People think a tax return extension will stop penalties on tax returns, but they don’t. A tax extension will stop penalties on filing the form, but not on the debt incurred. So, if you end up owing money and file an extension, the bill will be higher by the time October 15 rolls around when the penalty expires.
Let’s say you owe $1,000 on your tax returns. You file an extension on time on April 15, so you have until October 15 to pay it. By October, you’ll owe about $60 more than you owed in April.
This penalty doesn’t apply to refunds. If the IRS owes you, then your refund will not be less in October. However, that’s more months that the IRS keeps your money interest-free!
Although filing a tax extension won’t eliminate penalties, keeping things up-to-date can reduce them. Even if you’re unable to pay taxes, you should file anyway. Filing your return even if you can’t pay reduces the penalties. For instance, the maximum total penalty for failing to file is 47.5%. But if you file, the penalty reduces to a maximum of 25%.
If you can’t pay a tax debt, file anyway then apply for Currently Not Collectible (CNC) status. This tells the IRS that you are currently unable to pay your tax bill due to financial hardship. The IRS may review your finances (debt, assets, budget) to make sure you’re on the up and up. Penalties still apply even if you file CNC – they’ll still accrue on the debt you owe. However, collection actions like wage garnishment or liens won’t occur.
Some people think that IRS audits only happen when you have enough money for it to matter. That’s not true. A 2010 study found that one-third of the taxpayers audited that year claimed the earned income tax credit. That was only available to individuals who made less than $35,535 that year or $40,545 for married spouses filing jointly.
Basically, the IRS conducts an audit anytime they see a discrepancy in what you make versus what you filed. Service staff that underclaims tips, consultants or freelancers who overclaim office related expenses – these types of situations can lead to auditing even if you’re in the lowest tax bracket.
Always make sure to file honestly on your tax return. Claim the deductions and credits you legitimately earned, but don’t try to stretch the bounds or you could get audited.
People sometimes think of a tax refund as a windfall of money. Like the government is giving you a reward. That’s not what your refund is.
A tax return is an annual statement of income that allows the IRS to establish your tax liability for the year. A refund happens because the government took too much money out of your paychecks that year. Basically, you overpaid the IRS throughout the past year, so they give you your money back.
The problem with that is you could have used that money in more productive ways. Even just saving it in a basic savings account allows it to earn some interest. The government keeps your money interest-free, so it’s kind of in limbo until they give it back.
This means that if you consistently receive a large tax refund, you need to adjust your tax withholding. If you decrease your withholding, you increase the money in your paychecks. You don’t get as big of a refund, but you really shouldn’t get a huge refund anyways. It’s essentially a waste of time. Just be careful not to decrease your withholding too much, or you can cause tax debt.
In most cases, the IRS recommends that taxpayers should always keep their tax returns for three years. That usually means three years from the date you filed the original return. So, if you filed your 2014 tax returns on April 15, 2015 then you can shred them this year after April 15. This year, you’d keep the tax returns from 2015, 2016 and your new return from this year for 2017.
The exceptions to this rule happens if you owe tax debt or had an issue with filing. If you owe the IRS money, you should keep the returns for that year for two years from the date you paid. That’s usually later than the standard three-year timespan. That time extends if you claim a loss from something like a bad debt deduction. In this case, keep the return for seven years in case the IRS has questions later.
A bad debt deduction is a deduction you claim when you discharge a debt through settlement or bankruptcy. The amount of debt you don’t pay in the settlement is considered taxable income by the IRS. But you can claim a deduction if you can show financial hardship during the time of the settlement. If you do this, then keep your tax returns for six years.