Tax Season Insights

Tax season has officially started, and the deadline for filing your return with the IRS is April 15th. If you want to sidestep the last-minute panic, it’s wise to start getting your paperwork in order sooner rather than later.

“You don’t have to wait until the last minute, but there’s no need to rush either,” suggests Tom Oseven, who works in tax content and government relations at the National Association of Tax Professionals.

To help streamline your tax filing, gather all necessary documents, enroll in direct deposit, and keep a copy of your return. This year has brought some changes thanks to new legislation that could impact your return, including a couple of noteworthy deductions.

Miguel Burgos, a CPA and TurboTax expert, highlights some of the new deductions available: tax-free tips, tax-free overtime, deductions for auto loan interest, and additional deductions for those aged 65 or older by December 31.

Last year’s average refund was around $3,167, but experts foresee a potential increase of up to $1,000 this year due to the changes in tax law. In total, over 165 million individual income tax returns were processed last year, with a significant 94% filed electronically.

If the process feels overwhelming, don’t worry—there are lots of free resources available to assist you.

Document Preparation

The specific documents you need can vary depending on your situation, but here’s a general checklist:

• Social Security number
• W-2 form if you’re employed
• 1099-G if you’re unemployed
• 1099 form if you’re self-employed
• Savings and investment records
• Deductions for education, medical expenses, charitable donations, etc.
• Tax credits like the child tax credit and retirement savings contribution credit

For a more comprehensive list, visiting the IRS website can help. Oseven encourages you to gather all these documents beforehand and even keep last year’s records. It’s also beneficial to set up a Personal Identification Number to protect your information with the IRS.

Changes to Be Aware Of

— The standard deduction is now $15,750 for single filers and rises to $31,500 for married couples filing jointly. Heads of household can claim $23,625.

— The state and local tax (SALT) deduction cap has increased from $10,000 to $40,000, a significant change that could benefit those in high-tax states like California and New York, according to Keith Hall, a CPA.

If you haven’t itemized your SALT deductions before, this might be the year to consider it. Ask yourself if you’ve paid any state or property taxes, involved mortgage interest, or made charitable donations.

— Regarding tips, the idea of “no tax on tips” is misleading; only certain tips qualify based on income limits. Eligible tips must be voluntary, and the annual deduction limit is $2,500. For those earning over $150,000—or $300,000 for joint filers—this deduction can phase out.

— Additional deductions will go through Schedule 1-A, which will cover the updated SALT credits, qualified tips, auto loans, and senior credits.

Available Resources

This year, the IRS Direct File system will not be available. However, for individuals earning $89,000 or less, IRS Free File provides options through various partners like TaxAct and FreeTaxUSA.

Beyond platforms like TurboTax and H&R Block, you can also engage certified professionals. The IRS maintains a directory of these offer services nationwide.

VITA (Volunteer Income Tax Assistance) and TCE (Tax Counseling for the Elderly) are two free programs that provide support to those under certain earning thresholds or age requirements. You can find information about these programs on the IRS website.

Common Mistakes to Avoid

Many worry about errors that could lead to IRS trouble. Here’s how to navigate some of the frequent pitfalls:

• Verify the name on your Social Security card. If your name changed due to marriage and hasn’t been updated with Social Security, it could lead to issues.
• Check for online tax statements. If you’ve opted for paperless communications, important documents may need to be retrieved from online accounts.
• Ensure you report all income from jobs, as missing records can lead to audits.

Child Tax Credit Overview

The child tax credit stands at $2,200 per child, but only $1,700 is refundable through the Additional Child Tax Credit. You’ll need to earn at least $2,500 annually to qualify for this refund.

If your income is $200,000 or less (or $400,000 for joint filers), you could get the full credit for each qualifying child. Those with higher incomes might still claim a partial credit.

Opt-Out of Paper Checks

Starting last September, the IRS has been phasing out paper tax refund checks. To avoid delays, signing up for direct deposit is a better option.

Protect Yourself from Tax Fraud

Tax season often brings many scams, with fraudsters using various communication methods. Remember, the IRS will not contact you via calls or texts. Be cautious, especially if the refund a tax professional estimates seems unusually high.

If you’re uncertain about your tax filings, it’s beneficial to ask questions and seek clarity on each entry in your return.

Keep Your Tax Records

Maintaining copies of past tax returns can be prudent, particularly in the event of an audit. It’s generally recommended to keep these documents for five to seven years.