Tax season is the period when individual taxpayers draw up their financial statements and submit their tax returns.
Tax season began January 24, 2022, when individual tax returns are accepted and processed for income earned in 2021. The IRS (Internal Revenue Service) confirmed April 18, 2022, as the final day to file and submit federal tax returns in time.
Tax season can be stressful because you do not want to make any mistakes; it is quite a shame that they do not teach us much about taxes in school. This guide will explain why taxes are necessary, how to file taxes, and mistakes to avoid while filing tax returns.
Covid-19 impacted tax season to such an extent that it had to be re-scheduled. It was confusing at the time, but since it has become more “normal”, the IRS (Internal Revenue Service) can get back to their original schedule. During tax season, corporations and individuals must submit their financial statements and reports of the previous year.
All qualifying citizens and corporations must pay tax in order to sustain and maintain public works and services (roads, the military, Social Security, schools, etc.). There are various taxes citizens must pay, such as payroll taxes, sales taxes, and federal and state income taxes.
The tax season commenced on January 24, 2022, where tax returns are accepted and processed for 2021 and will end on April 18, 2022. This will be the final date to hand over federal tax returns unless you apply for an extension.
Why Do You Have To Pay Taxes?
Just like your household, the government needs money to run. All those employees need to be paid and those services need to be funded.
- 25% of taxes are spent on health programs such as Medicare
- 23% is spent on Social Security
- 16% is spent on the military
- 8% is spent on “safety net programs” such as SNAP
- 5% is spent on interest on the national debt
Imagine you are driving down the freeway and get pulled over. You are issued a ticket but don’t feel it’s fair and want to dispute it in court. So you attend your court hearing where a judge hears your case.
This scenario happens every day. But think about how many government services and employees you encountered during these events. The road you were driving on is maintained by the government, the police officer, the officer’s equipment, and the hierarchy of law enforcement that has to be in place for the cop to even be on the road at that time. Then you have the courthouse itself and all the employees including judges, clerks, and other staff. You could even add in additional services like the post office so you can get your court information.
When you start thinking about how much government infrastructure it takes just for the simple process of getting a speeding ticket you can see why we all need to pay taxes.
What Happens If You Avoid Paying Taxes?
You can face serious consequences by not paying your taxes. How much trouble you can get into depends on if you lied or simply made a mistake.
If you filed your tax return in good faith and didn’t pay all of your taxes due to mistake or misunderstanding then the consequences are less dire. You will still owe the taxes and you will be charged interest on the amount you owed. You may also pay a fine or penalty for paying late.
If you lied then this is considered a crime and the penalties are much stricter. Depending on the severity of the crime you could end up in prison for tax evasion.
Once your mistake (or fraud) is discovered you will be sent a bill from the IRS. Continually avoiding paying your tax bill can result in the IRS taking the unpaid amount out of your future tax refunds. The IRS is also allowed to place a hold on your property and assets (lien). After that, the IRS will seize your property and assets to pay your tax bills.
How To File Taxes
If you feel overwhelmed about the current tax season, do not fear! I have put together a few simple guidelines you must follow to file your tax returns swiftly and accurately.
1. Accumulate The Required Tax Documents
Some forms you will need are 1099s, W-2s, investment income statements, mortgage interest statements, and charitable contribution statements. The Social Security numbers and dates of birth of your spouse and dependents will also be required.
Many of these documents must be mailed by January 31st. Banks and investment companies often have these documents available online for download. Investment documents can be the most difficult to enter into the system. Once I received a tax document from my investment firm and for some reason, I decided to print it out. That was a mistake. It was easily an inch thick and filled with thousands of lines of tiny trades they had done over the year while rebalancing my accounts. Was I expected to enter these into my tax software by hand?
Often times investment companies, and even payroll companies, will integrate directly with tax software so your information will populate automatically. This saves time and helps avoid mistakes. M1 is a good example of this. It integrates nicely with both TurboTax and H&RBlock.
2. Choose A Filing Status
You need to choose from five different filing statuses to calculate your standard deductions, make sure of your eligibility for credits, and how much taxes you owe. The five filing statuses are:
- Single: Individuals need to file as a single taxpayer if they are divorced, unmarried, or legally separated.
- Married Filing Together: If you are married and both partners consent to file a joint return. At times, married couples save more money by filing jointly.
- Married Filing Individually: If you are married and do not want to file together. Married couples use this filing status if they want to be responsible for their taxes. This is typically used when spouses are separated and do not have joint finances.
- Head Of The Household: You can choose this status if you are unmarried, have a dependant, and paid for more than 50% of your household expenses. Usually, this means single parents or individuals who care for an unwell family member.
- Qualifying Widow(er): If your spouse passed on in the same tax year, you qualify for this filing status. You can file together with your deceased spouse but must be unmarried. Afterward, you can file as this status for two years, considering you have not remarried and live with a qualifying dependent.
3. Standard Deduction Vs. Itemizing
You can choose to go for the standard deduction or to itemize your deductions. This is an essential part of the process since tax deductions lessen your taxable income. The lower your taxable income is, the less your tax bill will be. Here is how you choose which route to go:
The standard deduction for the tax year 2021 for individual filers is $12,550 and $25,100 for married people filing together. In the 2022 tax year, these numbers increase to $12,950 for individuals and $25,900 for married filing together.
To determine whether or not you should itemize you’ll want to add up all your deductions and compare them to the standard deduction. If the standard deduction is higher then use that. If your itemized deductions are higher then you should itemize.
4. File Your Taxes
Are you finally done gathering all the required documents and forms? If so, you can start filing your taxes! First, you need to choose between doing your taxes yourself or hiring a tax professional to file your taxes.
What you choose will depend on the complexity of your taxes and your comfort level. I suggest filling your taxes early, especially when hiring a tax professional. Accountants are very busy during tax season so getting in early will keep you from feeling rushed.
If you decide to do your taxes yourself, here’s our guide to the best tax software.
5. Prepare And Organize For Next Year
Review the results of your tax return. Was your tax bill too much? Or did you receive a hefty tax refund? Whatever the results, you need to rectify your tax withholdings to prevent you from withdrawing too much or not enough money out of your salary for taxes.
Word of advice: do not chuck those tax forms, documents, and receipts away once you have sent your tax return to the IRS. Instead, file them and place them in a secure place so you can easily access them the following year.
I realize that these five “simple” steps might seem easier said than done, but if you gather all the required documents, and dedicate a few minutes or hours to your tax returns, you will eventually get the hang of it. The process will become easier each tax season.
Mistakes To Avoid When Filing Taxes
There is no room for mistakes! When doing tax returns, you spend a lot of effort to succeed, but the simplest mistake can be your undoing. Here are mistakes to avoid when you are filing taxes:
1. Filing Incorrect Information
A minuscule mistake like jotting down the wrong number, word, or letter can cause a delay in getting your return processed. Ensure that you provide them with the necessary information, so nothing gets left out. Report all your sources of income correctly to avoid your name from ending up on the IRS audit list. Include the following sources of income if appropriate:
- Retirement income
- Earned interest
- Unemployment income
- Self-employment income
- Dividends in brokerage accounts
Triple check your personal information and ensure that you have entered the correct income amounts, Social Security number, routing and account numbers, address, etc.
When you have the chance, it’s easier to work with banks and investment companies that integrate with your tax software. That way the information populates automatically. This saves time and eliminates the risk of having a typo. M1 integrates smoothly with both TurboTax and H&RBlock.
2. Choosing The Incorrect Filing Status
As mentioned above, choosing the appropriate filing status is the most crucial step. It can influence many parts of your tax return, such as your tax bracket, refund total, and deductions for which you qualify.
3. Filing Your Taxes Too Late
File your taxes as early and as soon as possible. The process can be overwhelming but do not worsen it by waiting until the last minute to file your taxes. It takes time and effort to complete your tax returns. Taxpayers spend hours on recordkeeping, tax planning, signing and submitting forms, and revising their tax returns.
They can penalize you for submitting your tax return too late. So, start early thoroughly go over everything to get those tax returns over and done with!
4. Losing Out On A Tax Break
Online tax companies such as H&R Block and TurboTax can assist you with tax breaks. They automatically check for credits if you file your taxes online. However, if you miss out on a tax break, you can forget about the deductions and credits you qualified for.
We can only win if we work smarter, so keep a close eye on your taxes and eligibilities for credits and deductions.
When it comes to investing, selling your holdings is often a taxable event. If you have a gain you’ll owe taxes on your profits. If you have a loss you can receive a deduction. Which individual investments you sell will impact your taxes. If you sell a stock you’ve been holding for more than a year your losses or gains are taxed differently than if you owned that stock for less than a year.
M1 takes this into consideration when you sell. When you choose to sell they will choose which stock will impact your taxes in the most positive way. The platform will automatically choose which individual stock to record on the sale from the lowest to highest tax burden. They will sell short-term capital losses first, then long-term losses. Moving their way to long-term capital gains, and selling stocks with short-term capital gains last.
To make tax time as seamless as possible, always keep documents and receipts in a secure place for the following tax season and avoid making mistakes that will delay the acceptance and processing of your tax return. The tax season began on January 24, 2022, and ends on April 18, 2022.
This will be the final date to hand over federal tax returns. When you do your tax returns this season, ensure that you choose the correct filing status and choose wisely between standard deductions and itemized deductions. Preparing, gathering documents, and completing a tax return can take hours. You can do it yourself, but consult a tax professional sooner rather than later if you fear that you might have missed something or feel hesitant.