Curious why your friends aren't answering their phone? Haven't seen your neighbor for the past 24 hours? Notice a few new gray hairs? Blame it on tax season!
We've officially hit crunch time, with your 2013 federal income tax filing due in just two days. Many people dread tax time simply because rehashing your previous year through receipts and W-2s is enough to give anyone a maddening headache. Of course, the flipside is that a vast majority of tax filers are going to get money back, so for many the trials and tribulations of tax time are well worth it.
As you might imagine, having to deal with tax code that could fill up 58 novels can make completing your taxes a bit complicated. One solution is that you have a small army of accountants and tax professionals ready to handle your taxes on a one-on-one basis throughout the country. Of course, many of these tax professionals are already booked solid for the next two-and-a-half days and their fees can sometimes be pretty high. In other words, many consumers are going turn to Plan B: do-it-yourself tax-prepping software.
The good news with DIY tax-prepping software is that it's much cheaper than a personal accountant, it allows you to work at your own pace, and it has built in guides to help walk you through your individual tax situation.
However, tax questions are still likely to arise. I've been doing my taxes via TurboTax for a decade now, and I consider myself well versed in personal finance and tax code -- yet I still run into questions each and every year. I've always wondered what sort of questions tax-prep professionals deal with year in and year out, and thanks to an interview conducted last month I now have the answer.
Based on an interview with a TurboTax expert conducted by US Money, here are the five most common questions that tax filers asked of tax professionals this season.
1. What documents do I need to do my taxes?
It's perhaps the most basic question of all, but its importance cannot be understated as you could miss a huge deduction or fail to report income to the IRS if you don't gather all appropriate documentation.
To begin with, you'll need any forms that describe your income for the previous year. This means gathering up all of your W-2 and 1099 forms if you had multiple jobs or were self-employed, as well as rounding up any statement that describe capital gains, investment gains, dividends, or interest earned.
On the other hand, you'll want to make sure you don't forget to gather all of your deduction and credit documentation as this could help net you a refund or lower your taxes owed. These documents can include charitable donation receipts, interest paid on education loans, qualified contributions made to a retirement account, receipts for job search expenses, and mortgage interest/property tax statements for properties owned.
Once you have these documents in hand, you're likely ready to start your taxes for 2013.
2. I didn't make much money last year. Do I still need to file my taxes?
Theoretically, if your income or that of your household falls below the income thresholds which are adjusted by the IRS on annual basis and vary based on filing status then you aren't required to file a tax return – but that doesn't mean it's a good idea not to. In fact, even if you don't owe money not doing your taxes could end up with you leaving hundreds or even thousands of dollars on the table. As the IRS notes on its website, citizens who choose not to file are potentially leaving one big deduction and six huge tax credits on the table. These include:
- Federal income tax withheld
- Making Work Pay Credit
- Earned Income Tax Credit
- Additional Child Tax Credit
- American Opportunity Credit
- First-Time Homebuyer Credit
- Health Coverage Tax Credit
Simply put, if you don't file a return you forgo any chance of claiming these credits and getting money back. As US Money notes, the average unclaimed refund is more than $600! If you're curious whether or not you have to file you can use the IRS' Interactive Tax Assistant to find out.
3. Whom can I claim as a dependent?
Before I looked at these questions, had I been a betting man, my money would have been on "whom can I claim as a dependent?" This is a common question, because the tax code covering dependents isn't as cut-and-dried as you might expect. Obviously, if you have children you can claim them as your dependent as long as they meet the criteria for a qualified child.
However, many tax filers often forget that qualified relatives such as elderly parents whom you are paying to care of, a boyfriend or girlfriend that you take care of financially, or friends who you support financially, may qualify as a dependent. Each dependent can lead to a $3,900 deduction, which can add up quickly. For a full list of the tests your qualifying child or qualifying relatives will need to pass in order to claim you a deduction you can review the IRS' website here.
4. What tax deductions/credits are available for parents?
If you have children one of the best gifts that keeps on giving, aside from their affection, are the deductions and credits around tax time! Qualified children can offer a tax deduction of $3,900 and parents may qualify for a number of additional tax credits. The IRS lists seven additional credits and deductions for parents on their website, including:
- Child Tax Credit
- Child and Dependent Care Credit
- Earned Income Tax Credit
- Adoption Credit
- Higher education credits
- Student loan interest
- Self-employed health insurance deduction
The Earned Income Tax Credit, for example, could be worth as much as a $6,044 dollar-for-dollar credit for a low- to middle-income worker with three or more children.
5. What tax benefits are available for college students?
According to the National Center for Education Statistics, there are almost 17.5 million people currently in two- or four-year college institutions. That's a potentially enormous opportunity for college students and the parents of qualifying students to accumulate huge deductions.
The IRS lists a bevy of potential credits and deductions at the disposal of college students and their parents. Included is the American Opportunity Tax Credit, which is available to individuals with a modified adjusted gross income below $80,000 or below $160,000 for married couples and can total up to $2,500 annually. The Lifetime Learning Credit can also be used for qualified educational expenses and can total up to $2,000 per year. Keep in mind, though, that you can't claim both the American Opportunity Credit and Lifetime Learning Credit -- it's either one or the other if you qualify.
In addition to these credits, students and parents may be able to deduct qualified tuition costs, fees, and educational material expenses. In select cases, student loan interest can also be deducted if your modified adjusted gross income is below $75,000 (or $150,000 for a joint return).
Have you taken advantage of this little-known tax "loophole" yet?
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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