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Get Ready for Tax Season!

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For some people, tax season is an opportunity to recoup some of the debt accumulated from the holidays. For others, it’s simply an exercise in more money leaving their pocket.

No matter where you fall on this scale though, here’s some general tax information as well as basic tips to help you on your tax journey.

Is It Good to Get a Tax Refund?

• On the positive side, tax refunds are a great financial boost! Whether you plan using the funds to save for retirement, pay off debt or invest, tax refunds are always a welcome surprise.
• However, the downside of receiving a tax refund is that you’re not keeping your money within your own decision-making power. Yes, you do receive the funds when you get a refund, but for many months out of the year that money has not been working on your behalf for things like investments, savings goals, debt payoff, etc.
• So in a perfect world in which you are maximizing your money, owing and/or receiving a tax amount of $0 is optimal.

What Percentage of Americans Receive a Tax Refund?

• According to the IRS, for the 2021 tax season 75% of Americans received a tax refund.
• Last year, the average individual income tax refund was $3,039.

What Do People Who Receive a Tax Refund Do With the Money?

• Pay off debt – 27%
• Put it in the savings – 9%
• Make a major purchase like an appliance or car – 9%
• Invest it – 9%
• Spend it on vacation – 7%
• Put it in a retirement account – 7%
• Splurge on a luxurious purchase – 3%
• Miscellaneous – 29%

What are the Most Common Tax Deductions?

• Property Taxes – may be deductible if you itemize, but a limit comes into play. Under a massive tax overhaul that was signed into law in 2017 deductible state and local income taxes, including property taxes are capped at $10,000. This limit is scheduled to last through the 2025 tax year unless Congress extends it.
• Mortgage Interest – Write-off is limited to interest up to $750,000 ($375,000 for married-filing-separately taxpayers).
• State Taxes Paid – Limited to $10,000.
• Charitable Contributions – Charitable contributions or cash totaling up to 60% of your adjusted gross income (AGI). Donations of items or property can also be deducted.
• Child Tax Credit – This could get you up to $2,000 per child, with $1,500 of the credit being potentially refundable.
• Child and Dependent Care Tax Credit – Covers a percentage of day care and similar costs for a child under 13, spouse or parent unable to care for himself or herself, or another dependent so you can work. Generally, it’s up to 35% of $3,000 of expenses for one dependent or $6,000 for two or more dependents.
• Medical Expenses – Medical and dental expenses qualify for a tax deduction, but only for costs that exceed 7.5% of your adjusted gross income. You can also deduct the mileage on trips made to the doctor’s office or hospital – $.18 for every mile traveled from January through June, and $.22 for every mile from July through the end of the year.
• American Opportunity Tax Education Credit – A tax break for the first four years of higher education. The maximum annual credit is $2,500 per eligible student. If the amount of taxes you owe is zero because of this credit, up to $1,000 can be refunded to you. Expenses can include tuition, fees, books or supplies for you, your spouse or dependent child.
• Student Loan Interest – The maximum interest you can deduct is $2,500. The amount you may write off depends upon your income.
• Lifetime Learning Credit Education Courses – Allows you to claim a tax credit for taking classes at a community college, university or other higher education institution. The top credit you can earn per tax return in $2,000, with the ability to deduct a maximum of $10,000 for an unlimited number of years. Like the American Opportunity Tax Education Credit, expenses can include tuition, fees, books or supplies for you, your spouse or dependent child. Here’s the catch – the credit isn’t refundable meaning you can use it to pay any taxes you owe but cannot receive it as a refund.
• Retirement Credits – Contributions to a 401(k) or IRA – both traditional and Roth – give you a tax credit of 50%, 20% or 10%, depending upon your adjusted gross income.
• Gambling Loss Deduction – Gambling losses and expenses are deductible only to the extent of gambling winnings. So, spending $100 on lottery tickets isn’t deductible — unless you win, and report, at least $100, too. You can’t deduct more than the amount you win.
• Residential Energy Credit – This one can get you up to 30% of the installation cost of solar energy systems, including solar water heaters and solar panels.
• Electric Vehicle Tax Credit – This nonrefundable tax credit ranges from $2,500 to $7500 for tax year 2022 and eligibility depends on the vehicle’s weight and manufacturer. For tax year 2023 (taxes filed in 2024), the credit is greatly expanded and also includes used vehicles.

What’s the Best Way to Prepare Your Taxes?

• While there are probably dozens of ways to prepare your taxes, in reality only three main ways exist:
  •  Bust out the calculator and fill out the paper forms yourself.
    • 16% of Americans still do this.
  • Choose a free or paid tax software that does the math and fills out the forms for you.
    • 44% of Americans file taxes in this manner.
  • Hire a tax professional to do the heavy lifting.
    • 2 in 5 Americans, 40%, hire a tax professional.

As we know, the best things in life – walking, jogging, hiking, exercising, playing in the yard, hanging out with loved ones, conversation, worship, smiling, etc. – are free. Squaring up with the government, however, is not one of them. And while tax season may not be everyone’s favorite time of year, be sure you have the information you need to make the most of your dollars!