In a 2019 Ohio Credit Union League consumer survey, the majority of respondents, 62 percent, know how much they pay in income taxes each year. But 38 percent of respondents admitted they haven’t been paying attention.
There’s no doubt taxes can be convoluted. A recent NerdWallet study found that almost half (48 percent) of Americans don’t know in which tax bracket they belong. In fact, the study found that about 1 in 14 Americans don’t understand how tax brackets work.
However, most consumers do know how their finances should look when their withholdings are adjusted correctly. According to a different NerdWallet survey, about 56 percent of Americans know they should adjust their withholdings to get their tax refunds as close to $0 as possible. In the Ohio Credit Union League survey, about 45 percent of respondents said they understood they should strive for that $0 refund.
While the majority of respondents in the Ohio Credit Union League survey, 70 percent, check their withholdings once a year, another 30 percent only check their withholdings every five years or when they start a new job.
Those are the consumers who could suffer in a year with new tax laws. According to a report by the Government Accountability Office, about 73 percent of taxpayers’ employers are over-withholding from their paychecks as a result of the law changes. These taxpayers may receive larger refunds from the IRS come April, but their paychecks throughout the year will be missing money that could have gone toward bills and everyday expenses.
Conversely, the Government Accountability Office reported that 21 percent of taxpayers, about 30 million Americans, are being under-withheld by their employers as a result of the new tax law. These taxpayers could be stuck with an unexpected bill from the IRS in April.
According to the Government Accountability Office, the IRS has recommended that Americans remain diligent about checking their withholdings, especially as the new tax laws take effect.
Failure to understand certain tax nuances can become costly. Here are some tips to help you be successful in the new tax season.
- Start getting organized now. It might be tempting to wait until the tax deadline looms to start thinking about filing, but you stand a better chance of getting the most out of the system if you file carefully and rationally. As soon as you receive your W-2 from your employer, begin by making sure the information matches your pay stubs. Then, begin gathering relevant documents, including last year’s return, any relevant property data or real estate documentation, proof of charitable donations, and receipts for medical, business, or education expenses.
- Adjust your exemptions and withholdings. Check your current W-4 form to make sure you’re claiming all the allowances that make sense for you. Also, make sure your employer isn’t over-withholding or under-withholding money from your paycheck. At the end of the year, your goal should be to owe no money and receive no money from the IRS.
- Understand what money is taxed and what isn’t. Specific accounts in the U.S. are exempt from taxation. For instance, growth and earnings in a Roth IRA aren’t taxed. Neither is money in a flexible spending account, which can be used to pay for medical or childcare expenses, or income from a 529 education plan, which can be used to save for higher education.
- Understand what you can deduct from taxes. Most taxpayers understand that charitable donations can be deducted from taxes. But, the average consumer typically overlooks a host of other possible deductions throughout the year. For instance, parents may deduct the cost of babysitting if they volunteer at a charitable organization. Comb through your year and don’t be afraid to ask questions that could lead to the right deductions.
- Always file taxes – no matter what. In the eyes of the IRS, late is better than never. Even if you’re having a difficult time getting the documents together and know you’ll miss the deadline, be sure to file, eventually. There’s no penalty for missing the April 15 deadline if you are owed a refund, you’ll just get your cash back later. If you’re more than three years late, any unclaimed tax refunds are automatically turned over to the U.S. Treasury.
- Get help. If you’re confused about any portion of your taxes or feel you’re not receiving all the deductions you should, seek help. Free tax return preparation programs are available to people with limited incomes (generally making less than $54,000 a year), people with disabilities, the elderly, and taxpayers who speak limited English. Credit unions can help you find the right tax help for you.