Last-Minute Tax Advice
The clock is ticking for people to file their taxes! Local financial professional Barry Bigelow from Great Waters Financial has tips for last minute filers.
One of the biggest changes that people who are used to claiming the Child Tax Credit may notice is that their credit has decreased this year. In 2021, the American Rescue Plan expanded the Child Tax Credit to give monthly payments to families to help reduce child poverty. While families were receiving monthly payments, the IRS was giving you your credit ahead of time. Now, families can’t count on the full credit this year, and they may have to owe. Those filing last minute may not be prepared to pay in.
There are a few common mistakes late-filers can make when finishing up their taxes. One is that they may overlook details. When you’re racing to file your taxes, the opportunity for human error increases. The IRS says some of the most common mistakes are wrong or missing numbers like your Social Security number. Look over your return if you paper file because any mistake can trigger a manual review, which will slow things down even more. The IRS sent 9 million “math error” notices in 2021, delaying people’s refunds. Also, double-check your bank account and routing number if you’re using direct deposit. A wrong number could cause you to lose your refund entirely. There is no IRS procedure for replacing lost electronically transferred funds.
Another mistake filers make is missing their deductions. Filers don’t want to miss any opportunities to claim tax deductions. Depending on your filing status, you may be able to deduct some of your home office expenses. If you were self-employed in 2021, there are a couple of options for deductions. First, there’s the “actual expense” method, where you save your receipts and can deduct office supplies, postage, computers, printers, etc. This tax break covers expenses for the business use of your home, including mortgage interest, rent, insurance, utilities, repairs, and depreciation. Then there is the “simplified” method, where you deduct $5 for every square foot of space in your home used for a qualified business purpose.
Taxpayers can set themselves up for success in future tax seasons in a few ways. The first is to consider your home. As we all know, the housing market has been red hot. Many people are listing their homes hoping to capitalize on the seller’s market. But it’s important to note that if you are listing your house less than two years after you purchased it, you will have to pay ordinary income tax on the sale of your home. Instead of moving, maybe consider investing in your home. Installing energy-efficient equipment may qualify you for a credit, and renovations for medical purposes may qualify as tax-deductible.
Tax payers can also adjust their withholding. If you can’t believe you had to pay in, make the changes and pay in more year-round by adjusting your withholding. The same goes for people getting a large refund. You may want to reduce your withholding. Take the time to think strategically now about your tax situation. Ideally, you want to have just enough withheld so your refund is as close to 0 as possible. You can file all withholding adjustments with a W-4 form through your employer.
The last way that taxpayers can set themselves up for success is to diversify your assets. It’s important to diversify your savings! Tax-deferred accounts like your 401(k) and traditional IRA offer tax advantages now. Tax-free savings options offer tax advantages later. An account like a Roth IRA will give you tax diversification; your money is taxed upfront, but you can withdraw it tax-free in retirement. You may want to consider converting money from a traditional IRA or a previous employer’s 401(k) into a Roth IRA. We are in a historically low tax environment, meaning now might be a good time to consider moving money into a Roth.
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