PORTLAND, Maine — Tax season is upon us but that doesn't mean it has to be a stressful time.
Brenda Pollock is a financial counselor with Evergreen Credit Union. She shared some tips ahead of time that can be useful for anyone filing.
Q: Taxes are mandatory payments made to local, state, and federal governments. Thinking about personal income taxes, what are a few things we should know about?
A: There are four things you need to think of:
Filing status is really important. It determines your tax rate and whether you are eligible for certain tax deductions or other tax breaks. Your status is based mainly on your marital status and whether you financially support other family or dependents.
Taxable income is the amount of your earnings that is subject to taxes in a given year. This is also referred to as adjusted gross income.
Tax bracket is the range of income used by the IRS to determine the percentage at which a given portion of your income is taxed. Tax brackets use filing status and taxable income to determine the rate at which you will be taxed and how much in taxes you owe.
Deductions and credits are ways to reduce the overall amount you will owe in taxes, but they work differently. Deductions reduce your taxable income (the amount being taxed), while credits reduce the amount you owe in taxes (your tax bill).
Choosing the right forms to use when filing your return can be confusing.
W-2: This form details how much money you have earned in a given year, as well as all the taxes you have paid on those earnings. This comes from employers and must be sent to you by January 31 each year.
Form 1099: This form details how much money you have earned in a given year, other than the salary paid to you by your employer. You should receive this form from clients if you worked as a contractor. It must be sent to you by January 31 each year.
Form 1040: This is the form used by U.S. taxpayers to file their annual income tax returns. If your return is more complicated, however, the IRS may require you to fill out additional forms.
However, we suggest that you consult with a qualified tax professional or the IRS to be sure of which forms you will need in order to file.
Q: Are there a lot of personal documents we should be preparing now before the April deadline?
A: Here are a few examples of some personal documents you will need:
- Social Security or Tax ID number for you and anyone else you are claiming on your taxes
- Proof of all income, including income from unemployment, Social Security, earned interest, and investment gains
- Proof of interest you’ve paid on your mortgage via a form from the company holding your mortgage
- Proof of student loan interest paid
- Proof of charitable contributions via forms or receipts from the organizations you donated to
Q. Your filing status may seem straightforward, but is it important to understand the meaning behind each status to make sure you select the one that is best for you?
A: Again, a tax professional can explore these options for you and advise which is best for you.
- Single means you were not married as of the end of the year for which you are filing taxes.
- Married filing jointly means that were married at the end of the year for which you are filing taxes and that you and your spouse are filing a joint return that combines your financial information.
- Married filing separately means you were married as of the last day of the tax year but have chosen to file a separate return from your spouse.
- Head of household means that you are not married, that you maintain the cost of a household, and that you support children, parents, or relatives.
- Qualifying widow(er) means your spouse is deceased, and you have a dependent child. You may retain the benefits of the married filing jointly status for up to 2 years after the death of your spouse.
Once you have determined what your taxable income is, visit IRS.gov to see what your taxes would be under any of the tax tables you qualify for.
Q: Are there any tips to cut or reduce our tax bills?
A: An unexpected tax bill can ruin anybody's day. Three are several ways you can reduce your taxes to help avoid that unpleasant surprise but a few tips we should all do is:
Tweak your W-4. The W-4 is a form you give to your employer, instructing it on how much tax to withhold from each paycheck.
- If you got a huge tax bill this year and don’t want another surprise next year, raise your withholding so you owe less when it's time to file your tax return.
- If you got a huge refund, do the opposite and reduce your withholding — otherwise, you could be needlessly living on less of your paycheck all year.
Stash money in your 401(k). Less taxable income means less tax, and 401(k)s are a popular way to reduce tax bills. The IRS doesn’t tax what you divert directly from your paycheck into a 401(k).
- For 2021, you could have funneled up to $19,500 per year into an account. In 2022, this rises to $20,500.
- If you're 50 or older, you can contribute an extra $6,500 in 2021 and 2022.
- These retirement accounts are usually sponsored by employers, although self-employed people can open their own 401(k)s. And if your employer matches some or all of your contribution, you’ll get free money to boot.
Contribute to an IRA or ROTH IRA. I encourage you to speak with a professional about which is best for you but you should know that for 2021 & 2022:
- The limits are $6,000 per year or $7,000 for people over 50.
- You have until the tax-filing deadline to fund your IRA for the previous tax year, which gives you extra time to take advantage of this strategy.
Q. Filing taxes last year was complicated and filled with last-minute changes. This year’s tax filing should be easier. What if you lost your job, started a new job or freelance work, collected unemployment benefits, had a baby, or had other life changes in 2021. How will these changes impact this year’s tax filing?
Brenda: Again, we suggest speaking with a professional to see if you were eligible for extra stimulus funds or advance child tax credits.
- There is currently no tax break on unemployment benefits received in 2021. If you did not have taxes withheld from your unemployment benefits last year, you may need to pay up when you file your tax return.
- Some new laws will help filers this year, such as the expanded $600 charitable deduction for married couples who don’t itemize and a larger break for child and dependent care expenses.
Q. How long should we hang on to tax records?
- You need to keep your supporting documents for at least three years after the tax-filing deadline, which is the length of time the IRS generally has to initiate an audit.
- That timeframe rises to six years if have self-employment income from several sources.
- People should keep the returns for themselves forever.
Q. Just a reminder when is the deadline for filing your returns?
- April 18, 2022, but in Maine, we have an extra day because of the holiday.
- The earlier you file, the sooner you can get your refund, and the less likely that an identity thief will claim it before you do.
- Don’t fall for an email, text message, or social media tax scam. The first contact by the IRS is normally by letter delivered by the U.S. Postal Service.
- Hire a professional. A qualified tax and financial advisor may offer more than just short-term tax advice.
- E-file and avoid mailing anything to the IRS if possible.