Tax Day will soon be here. And even if you are the most conscientious and organized tax filer, your annual return could benefit from a second look before you send it off to the Internal Revenue Service.
Some good news: Nearly two-thirds of taxpayers got a refund last year, with the average refund running $2,903, according to the IRS. Most never hear from the IRS again, or at most get a letter asking to furnish additional information. Note, if the IRS wants something from you, they will write, not call, which is the hallmark of many IRS scams. The risk of getting audited is generally very low for most Americans.
Nevertheless, it’s still wise to be careful and always double-check your return. Here are some questions to consider.
1. Have you made all the contributions that you can?
You can make contributions to traditional IRAs, Roth IRAs, and health savings accounts (HSAs) up until the federal tax-filing deadline, April 15, 2024, for most 2023 returns, unless you file for an extension (which also must be done by the tax-filing deadline). If you're a resident of Maine or Massachusetts, the tax filing deadline is April 17, 2024. And if you are self-employed or freelance, you can open and contribute to a Simplified Employee Pension plan—more commonly known as a SEP IRA—even if you also have a full-time job as an employee. Good to know: Beginning in tax year 2023, a self-employed, or solo, 401(k) also may be funded past December 31, until the business tax-filing deadline.
One strategy many people use is to fund these accounts with a lump sum at this time of year with their expected tax refund. It's important to remember that putting the money in the account is just the first step.
"Unless you are set up to auto-invest all new contributions, which is a good step, you will want to determine how you want that money invested rather than just leave it in cash," says Ann Dowd, CFP®, a vice president at Fidelity.
Read Viewpoints: Investing ideas for your IRA
2. Did you file your state taxes correctly?
Many people who continued to work from home during 2023 may have worked for a significant amount of time from a different state than the one in which their company is located, or from their principal state of residence. That can have an impact on your state taxes.
State taxes are notoriously difficult to understand, which is further complicated by the fact that many states changed their laws recently. Many states have differences with federal law and some states don't have income taxes at all. Arizona, for instance, recently increased their income tax brackets, while Tennessee eliminated its state dividend and interest income tax in 2021. There are no shortcuts to finding out this information, unfortunately, so you just have to pay attention to the rules where you file.
"State taxes play a critical role in your overall financial plans, so it can help you to be educated on the impact state tax laws can have," says David Peterson, head of Wealth Planning at Fidelity.
You can consult state tax websites for specific information about taxes where you live or talk to a tax advisor who knows about the specifics in your state.
3. Do you qualify for tax credits?
A tax credit can reduce your tax bill by reducing what you owe dollar for dollar. Here are 3 credits that could help as you prepare your taxes.
- The Child Tax Credit for 2023 is $2,000 for each qualifying child in your household, generally under the age of 17 by the end of the year. You must meet other eligibility factors, including having modified adjusted gross income (MAGI) not more than $200,000 ($400,000 if you’re filing a joint return).
- Earned Income Tax Credit. If you have earned income less than $63,398 if you are married filing jointly ($56,838 if you are filing as a single person), you may qualify for a tax credit ranging from several hundred to several thousand dollars, depending on whether you have dependent children and are filing a single return or filing a joint return.
- The American Opportunity Tax Credit (AOTC) provides a dollar-for-dollar credit on a portion of qualified education expenses paid for an eligible student for the first 4 years of higher education. The full $2,500-per-student credit requires $4,000 in qualified spending, and is available to people whose MAGI is less than $80,000 for single filers and less than $160,000 for joint filers. Those looking for education credits outside of the AOTC could consider the Lifetime Learning Credit. If you meet eligibility requirements, the credit can be worth up to $2,000 per return, or 20% of the first $10,000 of qualified education expenses. Remember, you can claim only one of the education credits per student, not both.
4. Have you accounted for all your income and deductions?
It's always good to do a last-minute check on the details before you file your tax return. Here are just a few: Are you missing any 1099 forms? Did you account for any taxes due on unemployment payments received? If education costs changed over the course of the year, did you reconcile the changes with any qualified withdrawals?
The IRS widened tax brackets in 2023, which could result in potentially lower income taxes for many. It also increased the standard deduction and various savings incentives. If you’re not taking the standard deduction, consider your possible itemized deductions. The major ones included state and local taxes, medical and dental expenses, home mortgage interest, charitable donations, and deductions for casualty and theft losses from a federally declared disaster. If you think these may exceed the standard deduction, you may want to consider bunching enough charitable deductions to capture a larger write-off by itemizing deductions.
Another item many people may miss is claiming a home office deduction if they are self-employed. While the Tax Cuts & Jobs Act eliminated this deduction for full-time employees, those who count as freelance or sole proprietors, like many lawyers, can still claim it. "It's probably something worth revisiting. People like lawyers may not have qualified for a home office before because they had a primary office available, but many people may still be working from home most of the time," says Christopher Williams, Principal at EY Private Client Services.
Consider other ways to reduce income taxes in Viewpoints: Key tax moves for 2024.
5. Have you filed for an extension if you aren't going to file in time?
Tax Day is back to the usual mid-April cutoff (April 15, 2024, for most 2023 returns), but if you're not ready to file by that deadline, it's important to remember to follow the rules when filing an extension. The key one: You still need to pay what you owe by the tax filing deadline or you could face penalties and fees.
But also remember that there are key benefits to filing as soon as you are ready, namely reducing your exposure to tax-related identity theft and getting your refund earlier. There's no reason to let the government hold onto that money for you. Another benefit: Once you figure out your 2023 taxes, you can plan your finances better for 2024.
Those changes can be as simple as updating the tax withholding on your paycheck to long-range planning about your state residency. "You can use your tax return as a guide and make adjustments," says EY's Williams.