Where do refunds come from?

Where do refunds come from?  Good question!
Cori at Convenient Tax Service put together a list of questions she gets asked most often about taxes.  Here are the Top Ten tax questions answered!

What should I claim at work? Form W-4 is the form where you instruct your employer what to withhold on your paycheck for Federal and State income taxes. The “right” withholding depends on several factors but a general rule of thumb is to start with your tax filing status and number of children.

Once you indicate the filing status “single” or “married”, if you would like a higher refund at the end of the year claim less exemptions. If you want a lower refund claim more. Note: If you are married you need to coordinate your W-4 with that of your spouse to be sure you are not “double claiming” the same number of exemptions or you may find yourself under withheld and in a balance due situation when it comes in making out your tax return.

What to withhold is an art more than a science in the sense that there are many factors that affect whether you get money at the end of the year. Whatever changes you make, we recommend making small changes and seeing if you like the outcome when it comes to your bottom line taxes.

What is the difference between a 1040, 1040A and a 1040EZ. As a general rule, if you own a home, a business or rental property you will need to file the 1040 or “long form.” The 1040EZ is strictly to be used by taxpayers with only W-2 income and no dependents. The 1040A is for everyone in the middle.

The best advice is that if you are unsure which form is for you, go for the 1040. There are more “lines” to ignore but it will help to be sure you catch any deductions you may be entitled to but aren’t aware of already.

What State form goes with the Federal? The State of Wisconsin designed their State forms to fit perfectly with the corresponding Federal forms. For example, taxpayers filing a 1040 or “long form” should be careful to use the WI1. Why does it matter? If you don’t use the right form you will not be able to claim credits on the State that correspond to specific lines on the proper Federal form. 1040A uses the WIA and 1040EZ should use WIEZ.

Save money by using Goodwill online donation chart to maximize your contributions. Charitable donations are still a very important tax write off when utilized according to the IRS guidelines. Typically they are only the most valuable to taxpayer who also itemize their deductions, but it is a good habit to get into keeping track of this deduction. The value of non-cash items such as clothing, toys, furniture, etc. – the type of stuff you drop off at Goodwill and get a slip for – are able to be deducted from your taxable income in certain circumstances. To put a value on these items go to Goodwill.com and download a free Donation Value Guide to help give a value to the items you give away.

I am married, should I file married or separate? Generally speaking, Married Filing Separate or MFS tax status is not the same as filing as a single person. For most couples, the tax code is set up to favor Married Filing Joint or MFJ over MFS. In fact, many of the credits are cut in half or even eliminated when a couple files MFS.

It is worth noting that for some taxpayers this filing status makes sense to protect one spouse from the tax debt of the other spouse. This requires analysis and further discussion.

I got married late in the year, do I file as Single or Married Filing Joint? The IRS (and State) consider your marital status on December 31, 20xx as your status for the year. Even if you married on the last day of the year you are only able to file as either Married Filing Joint or Married Filing Separate (which is in general a “penalty status” in that you lose key deductions). Exceptions apply for couples living apart for the last 6 months of the year.

How can I get the most money back on taxes? The money you receive as a refund is determined by several factors including number of dependents, whether or not you own a home and number of credits such as education, child care, etc. that you can claim. A general rule of thumb for all taxpayers, though is that the less an employee claims on the W-4, the more they will receive back as a refund on their taxes.

Note: If you want a higher refund but don’t want to make big changes to your paycheck, file a new W-4 with your payroll department and request an additional $10 - $30 bucks taken out of your check. It won’t “hurt” all the much in small increments but will add up over the year. Think of using the IRS as a “forced savings” plan – with no interest, of course.

What is my tax bracket? The questions really should be “what are my tax brackets” since the IRS taxes our income on a graduated basis – meaning a portion of our income is taxed at 10% up to a certain amount (depending on filing status) and then it “goes into” the next bracket of 15%. The biggest tax jump is from a tax of 15% to the next tier of 25%. Your “tax bracket” technically refers to the top number of tax you pay on your income – either 0%, 10%, 15% or 25%. For some taxpayers 28% or more but most taxpayers tap out between 15% & 25%.

How do I pay less tax? How much you pay in taxes has many factors including marital status, number of dependents, whether or not you own a home and the credits you can claim. In general terms, the two best ways to maximize your refund (by paying less tax) is to maximize your deferred compensation options (if you have it) through your employee to lower your actual taxable income and by taking full advantage of the Schedule A Itemized Deduction form.

Deferred Compensation: Deferring your income to a time when you are in a lower tax bracket (ie: when you are retired) can save 10% - 25% or more on every dollar you can without now. In addition that money grows tax free.

The Schedule A Itemized Deductions for charitable deductions are often “underutilized” in the sense that many taxpayers are more generous during the year in donating cash and non cash items without tracking. It is important to follow IRS guidelines for donations but taxpayers who itemize can save 10% – 25% on every dollar of value they donate. It may be an incremental but important deduction.

Can I claim my child once they are over 18? One of the most misunderstood deductions is oddly enough one of the most frequently used – especially when children reach the ages or 17 – 20 or so. Generally speaking, your child can be on your tax return as your dependent up until the year they turn 19 (whatever their age is on December 31, 20xx) unless they are a full time student for at least one half of the year. If they are a student they can be considered as a deduction until the year they turn 24 (again, whatever their age on December 31, 20xx). You can still claim a child who is over 19 if they are either permanently and totally disabled or have very low income.

If you have more questions, feel free to reach out to Cori at Convenient Tax Services for a very affordable, convenient, and friendly experience!

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