9 Tips to Help You Prepare for Income Tax Filing Online
9 best tips to help you prepare for tax-filing season
As the end of the year approaches, it’s a good idea to start thinking about how you’ll handle your federal tax return. You can do your own income tax filing online, or you can use the services of a professional preparer. Some taxpayers are still getting familiar with the Tax Cuts and Jobs Act of 2017, (TCJA) that took effect on January 1, 2018 as well as the Inflation Reduction Act signed in 2022 that may have some impact on taxes.
The TCJA tax law capped state and local tax deductions at $10,000, doubled the standard deduction, doubled estate tax exemptions, put new limits on the deductibility of home equity debt, and changed the tax brackets. It’s a lot to keep track of, so taxpayers shouldn’t wait until the April 15 filing deadline nears to plot their best course.
The IRS anticipates opening January 23, 2023 for accepting 2022 returns for income tax filing online. Regardless of when tax season 2023 will start, it pays to make sure you’re up to date and doing all you can to reduce your tax bill, even if your financial situation is simple and straightforward.
Decide who will prepare and file your taxes
If you had major changes in your life in 2022 — maybe you got married or divorced, started your own business or had to claim unemployment benefits — your taxes will be more complicated. As a result, you might need to hire a CPA or other tax professional to prepare and file your taxes.
Just don’t wait until the calendar flips to April to make that decision because it could end up costing you.
The average fee in 2021-2022 for a professional to prepare and file an itemized Form 1040 with Schedule A, Schedule C (for sole proprietors of a business) and a state tax return was a hefty $525, according to the National Society of Accountants.
Many tax professionals will charge more as the April 15 filing deadline closes in. Or you could find yourself scrambling to find someone who’s not too busy to help you. Or, you can file your own income taxes at EZ Online Taxes.
Can’t afford a tax pro? Check out alternatives
If you’re not comfortable doing your own income tax filing online and can’t afford to go to a CPA or a tax giant such as H&R Block, there are options that won’t cost you a cent.
Free File Alliance is a coalition of eight tax software companies that partner with the IRS to help U.S. taxpayers e-file their returns. Your adjusted gross income cannot exceed $73,000 a year to qualify for the service.
The Volunteer Income Tax Assistance program (VITA) uses IRS-certified volunteers to offer free basic tax preparation and e-filing to people who earn less than $66,000 a year, people who are disabled or whose English is limited.
The IRS has an online location tool for hundreds of free tax preparation sites in the U.S.
In addition, the AARP Foundation Tax-Aide offers tax-preparation assistance to people 50 or older with low to moderate income or those who can’t afford a professional tax preparer.
Make sure beneficiary designations are up to date
Beneficiary designations won’t affect your taxes now, but they do affect the taxes of your heirs in the future.
Mike Moyer, certified financial planner and senior vice president/senior wealth strategist at PNC Wealth Management, says the end of the year is a great time to review your beneficiaries and make any changes you feel are needed.
Why is that important? Down the road, it will help minimize the taxes your beneficiaries and heirs pay on your assets after you die.
“If something unexpected happens to you, having your designations lined up and properly coordinated has a dramatic effect on the tax bills of who receives your assets,” Moyer says.
Max out retirement plan contributions
If you’ve been stingy about funding your employer-sponsored 401(k), 403(b) or other tax-deferred retirement account, do yourself a favor and increase your contributions. The money you put in these accounts reduces your taxable income for the year, which reduces your tax bill. It isn’t taxed until you withdraw it.
For 2022, 401(k) contribution limits are $20,500, plus $6,500 in catch-up contributions if you’re 50 or older.
If you have an IRA through a broker or bank, contribution limits for 2022 are $6,000 plus $1,000 in catch-up contributions.
People who can’t afford to make the maximum contributions should at least try to contribute the amount that will be matched by employer contributions. Think of the employer match as an immediate return on your money. It’s essentially free money, subject to your employer-sponsored retirement plan’s vesting schedule. And all those funds are tax-deferred and grow tax-free.
Many experts encourage people to contribute as much as possible to their health savings account (HSA), assuming they have a high-deductible health plan and are eligible. These accounts are triple tax-advantaged on the federal level, meaning you get an above-the-line deduction for contributing, and that growth in these accounts as well as withdrawals are tax-free if used for qualified health expenses. Additionally, employers often have a matching contribution for these accounts with no vesting schedule, meaning the employer contributions are always your money.
Shield yourself from tax scams and fraud
As tax season approaches, many people start getting phone calls, emails and text messages from entities claiming to be the IRS. These are scams. The most important thing right now is to not respond to telephone calls or emails from folks who pretend to be the IRS or the U.S. Treasury. Those organizations are never going to call you on the phone. U.S. mail is the only way the IRS will correspond with you, unless you go into litigation.
Don’t fall into the trap of “shopping a refund” to find a preparer who promises to get you a bigger refund. The tax preparer who makes promises like that could be unscrupulous and lead you into deep trouble. On the same note, reputable tax preparers should not base their fee on a percentage of your refund.
The concept of getting a bigger refund is contrary to how the tax laws work, noting that taxpayers sign their returns under penalties of perjury and are responsible for any bad information, whether it’s a mistake or fraud.
You have to be very careful about your paid preparer. Make sure they are experienced, reputable, and well-credentialed, and that they sign your return. There have been cases where the preparer made some fraudulent entries and didn’t sign the return. The taxpayer is ultimately liable for everything in the return.
The IRS website has a list of registered tax preparers who have completed their annual education requirements. This list can help you avoid those preparers who may lack the competency and training to prepare returns.
Direct deposit is another safeguard. Set up direct deposit with your bank if you expect a refund; if you owe money, be sure to send it through IRS Direct Pay.
Consider ‘bunching’ deductions
The standard deductions are nearly double what they used to be, making it hard to itemize. The 2022 deductions for those under 65 years of age are: $12,950 for individuals, $19,400 for heads of household and $25,950 for married couples filing jointly. Taxpayers who don’t have enough deductions to surpass those thresholds take their standard deduction. This type of return is very simple if you plan to file your own income taxes.
We recommend “bunching” deductions to exceed the thresholds, if possible. Bunching is when you time expenses by pushing deductible expenses into the same calendar year you’re doing income tax filing online. This can be achieved by moving forward certain deductions this year, such as charity donations, or prepaying January’s mortgage payment.
Doubling the charitable contributions in one year plus other itemized deductions may allow a person to be over the standard deduction and itemize every other year.
Aside from charitable giving, consumers can accelerate tax deductions, such as a property tax bill due early next year or a big medical bill. These can be beneficial when itemized using the “bunching” method.
Take your required minimum distributions, or RMDs
If you are 72 years old and have enjoyed watching your 401(k) or IRA grow tax-free without touching it, the IRS wants its share. You must take your required minimum distribution (RMD) by Dec. 31, or you will be penalized 50 percent of the RMD amount.
The whole idea behind an RMD is the IRS has allowed these investments to increase in value tax-deferred, so when they come out, they make sure that the IRS is getting the tax revenue it’s owed.
The amount of your RMDs is based on your age and the year-end values of your retirement accounts. We recommend account holders work with a professional to ensure they are taking the correct distribution amount. Failure to take the required distribution is subject to a 50% penalty of that amount.
Think long-term: Convert an IRA to a Roth
A Roth IRA has two big tax advantages over a traditional IRA: Withdrawals are not considered income for federal (and usually state) income tax purposes, and you do not have to take RMDs from them every year starting at age 72.
You have the ability to leave the funds in the account earning interest as long as you like, with no requirement to take the income even when not needed. With an IRA, at the age of 72, you must start taking the RMD and you must make a tax payment on that income. You do not have the ability to forgo RMDs and allow the funds to grow tax-free.
Just know that when you convert an IRA to a Roth IRA, it is considered taxable income, which will raise your tax bill for that year. Generally speaking, it’s best to convert to a Roth IRA in a low-income year.
Don’t ignore the IRS
Taxpayers who don’t file returns and owe taxes, or who file but don’t pay taxes on time are risking serious penalties. The IRS can seize assets if necessary.
If the IRS has been sending you letters because it found an error on your return or claims you owe back taxes, respond in writing — and don’t delay.
If you don’t respond to IRS correspondence, you lose. It’s as simple as that. The IRS has strong lien and levy powers. You don’t want to be surprised if your wages are garnished or there is a lien on your house. You really need to respond to notices in a timely manner.
Make copies of your correspondence and use only the U.S. Postal Service, whose postmark is your proof of timeliness. We recommend certified mail.
Don’t assume that a letter from the IRS is the end of the matter. Many people think that it’s conclusory, but they always give you time to respond to demonstrate that you get the deduction or whatever. If you respond to them, they really do want to work with you. If you do not respond, they’ll assess the deficiency and start the collection action. Whatever you do, do not ignore them; they will not go away.
So, don’t delay, get your records together and start your income tax filing online at everyone’s favorite online site, EZ Online Taxes. The best part, it will only cost you a flat $25, no matter how complicated your return is.
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