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April 2019

These May Be the Reasons Why Your Tax Refund Was Smaller This Year 

This year’s tax season is over for the 103 million taxpayers that were able to file their taxes before the due date of April 15. However, many taxpayers are unhappy as they received a smaller tax refund than they had anticipated. According to the IRS, they paid a total of $220.7 billion in tax refunds as of April 5th, which is $6 billion less than last year. Thus, the average refund check amounts to $2,833, meaning $30 less than the average check from the previous year. Receiving this not so great news has caused confusion and stress to the millions of taxpayers that were counting on bigger checks.  

This is the first that taxpayers submitted their tax returns under the new Tax Cuts and Jobs Acts, which can help explain why their refunds didn’t work as they had during previous years. There are many different elements that can help us understand better what changed from last year. These include changes in your income or tax rate, changes on your state and local income tax rates, and possibly losing different tax cuts and deductions.  

There are different life events that could have come into play, resulting in a lower tax refund. For example, if you took an additional job that qualifies as a non-wage income. This is the highest self-employed tax rate, and that could have had an impact on your refund. Other changes could include: 

  • Selling investments 
  • Changing your filing status from last year’s 
  • Unemployment income being taxed 
  • Getting a significant raise with your W-4 Form staying the same 
  • Receiving Social Security benefits or Roth IRA distributions 

State and local income tax deductions also changed from the year before. This means that tax year 2018 had a new cap or limit on state and local property taxes, income taxes, and sales taxes. Therefore, if you live in a state with high income taxes and property value, your SALT deduction might have been smaller than the previous year, when there was no cap on this deduction.  

Besides the change in the SALT deduction, there are other deductions and credit that we might have missed this year. One example can be the $2,000 Child Tax Credit. If any of our children happened to turn 17 in 2018, or has an ITIN, they are no longer eligible for such credit. We might have qualified, however, to a smaller $500 Credit for Other Dependents, which still represents a $1,500 credit difference. Other examples of commonly-lost deductions and credits include: 

  • Having paid off our mortgage and not being able to deduct mortgage interests 
  • Not qualifying for the Earned Income Credit this year 
  • Having paid off a student loan and not being able to deduct loan’s interests 
  • Not being eligible for some of the education credits we got on previous years.  

If you feel that none of these examples apply to your case, don’t hesitate and get in touch with us. We will look into your particular situation and help you figure out what exactly happened that caused receiving a smaller tax refund this year.  

Paying Your Taxes Late? This Is What Could Happen 

It’s been a couple of days since the IRS tax filing date was due, which means that, if you forgot or didn’t have time to pay your taxes, you must start thinking about the consequences you might be facing. We should remind you that the longer you wait, the more severe the penalties will be, so try to find the time to pay your taxes to avoid a situation that will not be favorable for you. These are some of the consequences you might be facing if you didn’t pay your taxes on time.  

The very first aspect we must keep in mind is that, if we didn’t pay our taxes by the April due date, which was last Monday, we will be subject to interests and late fees. The IRS charges a failure-to-pay penalty that consists of 0.5 percent of your total balance per month. The maximum percentage that they can charge, though, is 25% of the total balance you owe. This is why it is important to cover our taxes due as soon as we have a chance.  

Besides the late payment penalties we will be subject to, we will also have to pay for interests. Interests are charged based on the federal short-term rate, plus 3 additional percentage points. We should remember that these are daily compounded interests, which begin on the day our tax payment was due. This means that your balance will increase rather quickly, so we should make sure we delay our payment the least time possible, or we will be subject to a much higher balance.  

For those who requested an extension, even when it might have been granted, such an extension doesn’t apply to our balance due. This extension only applies for submitting our income tax report, but if we are expecting to have a balance owed, we need to cover such balance by the April due date. In order to do so, we must fill out Form 4868 so we can pay an estimated amount. The advantage of doing so is that we don’t have to cover the full balance, and if we cover at least 90% of our due balance, we might be able to avoid the failure-to-pay penalty, which does give us extra time to pay the full amount.  

If we are going through financial hardship, the best way to go is to request a payment installment agreement with the IRS instead of simply failing to pay our balance. Besides the extra time and the convenience installment agreements provide, this also reduces the interests we pay, and the rate drops from 0.5% to 0.25% per month. This way, we will make sure we’re minimizing the penalties we are having to cover while still being able to pay out our balance, keeping us safe from much tougher situations, like having our property and bank accounts seized by the IRS.  

Last-Minute Tax Tips to Keep in Mind Before Deadline

As the Internal Revenue Service mentions, approximately a quarter of Americans wait until the last two weeks before the deadline to prepare and file their income tax report. If you are part of that 25% of the population, there are only two possible routes of action, either get around it and prepare your taxes before Monday or request an extension. This way, you will be able to avoid failing to report on time, which would represent getting fines and interests when you finally come around it. Whichever you might choose, we have prepared some important last-minute tax tips you should keep in mind before the deadline arrives.  

Regardless of when we are preparing our tax returns, we must remember that organization is a key element of this important process. It will help us save time and money as we know where every receipt and useful paper are. Keep all your receipts in one place, including those for purchases, payments, business expenses, healthcare, and education. Also, make sure you have all the forms you need, such as Form W-2, which shows your earnings and taxes withheld by your employer.

Whenever we are running low on time, filing our tax returns online is the best way to take advantage of every single minute. This is the most convenient, accurate, and accessible way to file your income tax, and since 1990, almost 1 billion people have filed their taxes electronically. Besides, the vast majority of taxpayers actually file this way, either by themselves or with the assistance of a professional tax preparer. Besides the advantage of accuracy, filing our tax online can also mean a faster refund. 

It is not uncommon to make easily avoidable mistakes when we are preparing our tax return, especially when working against the clock trying to have everything ready. So, make sure you don’t end up overlooking any of these errors since even the simplest one can cause a delay in our refund. The most common tax mistakes include math errors, which can be prevented using a calculator or any tax software, writing our Social Security Number incorrectly, and even forgetting to sing a form. Keep your eyes open and proofread everything.  

With less than a week in the calendar before the deadline is here, having an alternative might be the best route to take for some. If we believe won’t be able to make it to April 15th, considering an extension request could work out for us. When we apply for an extension, this means that we have until October 15th to finish preparing our taxes. However, we must remember that an extension does not grant us more time to pay our owed taxes, so we still need to cover our balance by April. If we were looking for a payment extension, we should contact the IRS and request a payment plan instead.  

4 Common Tax Myths We Shouldn’t Believe Anymore

There are many different misconceptions that some of us might believe, whether because of lack of information, or because we heard someone close to us repeat them. However, debunking this common tax myths will help us have a better understanding of how taxation in the US actually works. We will also feel more confident and trusting of the system, knowing that our taxes are being put to good use.   

To begin with, one of the biggest and most common tax myths is that getting a tax refund is a bad sign. Also, many people still believe that earning more money will make us end up paying more taxes. The way the government spends tax funds is a big and understandable concern but thinking that most go to foreign aid is simply wrong. Lastly, assuming there are plenty of loopholes that benefit the rich and keep them from paying taxes also isn’t accurate.   

Tax Refunds Are a Bad Sign  

Among taxpayers, it isn’t really uncommon to hear some of them getting worried about receiving a tax refund. The idea behind this myth is that you ended up overpaying taxes because the government took an interest-free loan from you. However, this is most definitely not the case. There are many different reasons why you are getting a tax refund, and you should put it to good use. We would spend away small tax refunds, but we can use bigger ones to invest them or pay off debt.  

The More You Earn, The More Taxes You Pay  

One of the most interesting common tax myths is that the more you earn, the more taxes you will pay. This might sound logical at first, but when we understand how tax brackets work, it doesn’t anymore. We can move up from one tax bracket to a higher one when we receive a raise, for example. Nonetheless, thanks to marginal tax brackets, these brackets do not apply to our entire income, only to that marginal amount.   

Most Tax Money Goes to Foreign Aid  

As responsible taxpayers, it makes sense to be concerned about how and where the government is spending our tax money. However, one of the most common tax myths is that the government spends 10% of tax funds on foreign aid. The truth behind this myth? Only 1% is used to aid foreign countries. In case you are wondering, the programs that receive more tax money are Medicare, Medicaid, and other similar programs, getting 26%. Social Security receives 24%, Defense and Security receive 15%, and the Safety Net program receives 9% of tax money.   

The Rich Avoid Paying Taxes through Loopholes  

This has been a common topic of debate, especially since the new tax law came in effect. Besides, Alexandria Ocasio-Cortez’s 70% tax threshold proposal added to this discussion. Many people believe that there are several loopholes within tax laws that benefit the rich. Even when loopholes do exist, they aren’t as many as people believe. Interestingly, such loopholes only benefit the super-rich who earn millions through investment income. Thus, tax-efficiency investment accounts may be what allows such loopholes to work, and not really tax law.