You Have Tax Questions? We Have Answers.
What's that old saying? Nothing is certain except death and taxes? While Benjamin Franklin was speaking about his own mortality at the time, the part about taxes certainty still causes much stress and confusion some 230 years later.
Considering all the factors that come into play when filing taxes (like whether you're filing single, married jointly, or married separately; your state's rules; your number of dependents; whether you filed for unemployment; or even if you received any kind of tax stimulus) it's no wonder the process can sometimes leave you with more questions than answers.
In addition, there's the question of what you should do with money from a refund, what you should do if you can't pay your tax bill, or how to ask for a filing extension. Find the answers to these questions and more, below.
How will stimulus payments affect your taxes?
Any stimulus payments you received in the last year won't affect your tax return unless you have yet to receive the money.
Tax season is rife with fraud, and the IRS warns of scammers offering to speed up any missing stimulus payments via email, text, phone, or even social media. For the up-to-date information, visit their website.
In addition, AARP has debunked some of the most common myths about stimulus payments.
To be clear, stimulus payments:
- Don’t have to be paid back
- Are not considered taxable income
- Won’t reduce your tax refund or increase your tax bill
Will unemployment benefits impact your taxes?
No matter the reason you cannot work – whether pandemic-related or something else, you might be able to count yourself among the millions of Americans who received unemployment benefits.
While these benefits offer some much-needed financial reprieve to help you pay your bills, the income could also cause issues at tax time, unfortunately. Why? Well, because unemployment benefits are taxable, and, if you didn’t withhold enough, you could owe money when you file your tax return. (Use this form to change your withholding.)
You should get form 1099-G by the end of January from the agency that paid your unemployment benefits if you are receiving unemployment. The 1099-G form specifies how much income you received and the amount you withheld for taxes. You'll need these details to file your tax return, so keep track of the document when you receive it.
Although you cannot change last year’s withholding percentage, you may still benefit from filing your tax return early. Filing sooner will give you more time to save up before the April payment deadline (note these deadlines are subject to change so be sure to go here to verify tax deadline day every year).
What if you’re not getting a refund or can’t pay your tax bill?
When you've done your taxes and end up with an estimate of taxes owed rather than a refund, it can be really disheartening. Fortunately, it may be possible to improve your outcome before you hit "send" or mail in your paperwork.
First, start by double-checking your tax return for ways to boost your refund or lower what you owe through tax credits and deductions. If you donated money to qualified organizations, you may deduct up to $300 of your cash contributions, for example. Other commonly missed savings opportunities can include credit for your dependents, deductions for mortgage points, and credits for low-to-moderate earners.
If you still haven't been able to lower what you owe after you've rechecked your tax return, you can try the following courses of action:
- See if you qualify for an online payment plan that will help you pay off your balance over time.
- See if you qualify for a loan from a trusted loan service with competitive rates and terms to help you with your tax payment relief.
What if you need more time to file your return?
Good news: The IRS allows a six-month extension for anyone who needs more time to file their federal return. An extension would push the deadline from April to October, and you must submit a formal request to receive one. The government won't ask you for a reason as to why you're filing an extension, and they will contact you only if your request is denied.
While an extension may offer you more time to file your return, it won't apply to your tax payment, which will continue to accrue interest after the deadline. You should estimate and pay any owed taxes by the tax deadline in April to avoid possible penalties. The failure-to-pay penalty is 0.5% per month up to a maximum 25% of your unpaid balance, until your bill is paid off in full.
What if you’re getting a refund?
You’ve filed your taxes and learned you’re getting a refund – what now? What should you do with all that money you didn't expect? Well, while it is tempting to spend your refund on a dream vacation or to make a big purchase you've been putting off, splurging on travel or other items could make you to miss opportunities to strengthen your finances.
Do you have holiday debt or other balances lingering from last year? Then a refund offers you the perfect opportunity to pay down those high-interest credit cards. Consider using one of two proven strategies to help you meet your debt payoff goals: the debt snowball or debt avalanche.
Another good way to use a tax refund is to create an emergency fund or pad your savings. While experts recommend setting aside three to six months’ worth of expenses, any amount can difference, especially when you're surprised with an unexpected expense or bill.
If you have been ignoring a home repair due to financial constraints, you could use your refund to stop it from becoming a bigger, more costly problem in the future. Investing in your home is generally a great idea.
Finally, after you've taken care of the basics, then that's the time to consider indulging in some small, fun reward. Taking the time to reward yourself when your budget allows can make it easier to stick with long-term financial goals.
When should you hire a tax professional or review your options with the IRS?
The IRS may be willing to work with if you owe money and cannot afford to pay. Start by calling the agency at 800-829-1040 to discuss your options. Depending on your situation, you may qualify for a short-term extension, an individual payment plan, or an offer in compromise. You may even be able to temporarily delay the collection process until you can afford payments.
Check your tax withholding to avoid future tax stress and unwanted bills and adjust as needed. If you’re a contract worker or self-employed, another option that might help spread out your taxes owed is to make quarterly estimated tax payments throughout the year.
It may be worth your time and relieve some stress to hire a tax professional to help with your tax woes. If you're not sure where to start, the IRS offers great advice on learning which kind of preparer you need, how to check their credentials, and more.
If you have questions about this year’s taxes or filing, visit the IRS website or seek assistance from a qualified tax professional.