Why send money to the IRS if you don’t have to?
The key is to know what you can and can’t do when it comes to paying taxes.
Take a moment to review these tips to maximize your deductions.
Keeping Good Records
You can avoid headaches at tax time by keeping track of your receipts and other records throughout the year. Good recordkeeping will help you remember the various transactions you made during the year, which in turn may make filing your return a less taxing experience.
Records help you document the deductions you’ve claimed on your return. You’ll need this documentation should the IRS select your return for examination. Normally, tax records should be kept for three years, but some documents—such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property—should be kept longer.
In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return:
- Bills and invoices
- Credit card and other receipts
- Mileage logs
- Canceled, imaged or substitute checks or any other proof of payment
- Any other records to support deductions or credits you claim on your return.
Good recordkeeping throughout the year saves you time and effort at tax time when organizing and completing your return. If you hire a paid professional to complete your return, the records you have kept will assist the preparer in quickly and accurately completing your return.
Determining Whether You Need to File
You must file a tax return if your income is above a certain level. The amount varies depending on filing status, age and the type of income you receive.
Even if you do not have to file, you should file to get money back if Federal Income Tax was withheld from your pay, or you qualify for a refundable credit that may give you a refund even if you do not owe any tax. Refundable credits include:
Earned Income Tax Credit. The Earned Income Tax Credit is a federal income tax credit for eligible low-income workers. The credit reduces the amount of tax an individual owes, and may be returned in the form of a refund.
Additional Child Tax Credit. This credit may be available to you if you have at least one qualifying child and you did not use the full amount of your Child Tax Credit
Did you know that the IRS will give you money back just for having a child living in your home? Refundable tax credits give extra money to people who are raising children. That includes grandparents and great grandparents. If you qualify, you may be able to pay less to Uncle Sam each year.
Keep in mind that a tax credit is better than a tax deduction. So don’t miss the chance to claim these credits. What’s so great about a credit? Plenty! You get to subtract a tax credit from any federal income tax that you owe. A deduction only reduces the income that you use to figure out the taxes you owe. Simply put, a credit keeps more money in your pocket.
Earned Income Tax Credit
The Earned Income Tax Credit (EIC) is for low-income people and families. You don’t have to be raising a child to receive this tax credit. But people who are raising children get a bigger tax break. Is your tax credit greater than the tax you owe to the government? Good news! You will get a refund from the IRS.
To get the EIC, you must work during the tax year and be at least 25 but under 65 years of age. You must also file a federal tax return. Plus, you can only earn so much money. There are age limits for the children you claim when you take your tax credit. Are your children full-time students? Then you can claim them until they turn 24. Otherwise, you can only claim them until they turn 19. Children of any age can qualify if they have a disability.
Child Tax Credit
Does your family earn too much money to receive the Earned Income Tax Credit? You may still be able to get the Child Tax Credit. You take this credit right off your tax bill. The child for whom you take the credit must be under age 17. Generally, you must claim that child as a dependent on your federal income tax return.
If you don’t receive the full benefit of your child tax credit, you may be able to get the “Additional Child Tax Credit.” This will give you a larger tax benefit and it is a refundable credit, meaning you may receive a refund even if you didn’t pay any income tax.
If you are self-employed or retired, chances are you should be paying quarterly estimated tax payments. Individuals are subject to an underpayment penalty unless their total withholding and estimated tax payments equal the smaller of 90% of the tax shown on their return or 100% of the tax shown on last year’s return (110% for higher income levels). Generally, the underpayment penalty will not apply if the tax due after subtracting withholding is less than $1000 or if you had no tax liability on your last year’s return.
The required annual payment must be paid in four equal installments to avoid a penalty. If any installment is paid late, the penalty is charged in that quarter. The quarterly payments are generally due April 15th, June 15th, September 15th and January 15th.