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March 7, 2022

6 Common Tax Time Questions Answered

Taxes are an inevitable part of our lives and they come due every year, whether we like it or not. The dread that comes with filing our tax forms is often accompanied by confusion as there are a multitude of scenarios for each person's individual tax needs depending on income, state of residence, any dependents, student loans, unemployment, government stimulus payments, and more.

Plus, there's that question of what to do with extra money if you do get a refund, what you should do if you can't pay your tax bill, or how to handle a tax filing extension. Read up on the answers to these questions and more information you should know before filing your tax return.  

How unemployment benefits impact your taxes

Whether the pandemic affected your work status this year or you have been out of work for other reasons, you may have been among the millions of Americans who received unemployment benefits.

Although these benefits offer some much-needed cash to help you pay your bills, the income could also, unfortunately, cause issues at tax time. Here’s why: Unemployment benefits are taxable, and if you didn’t withhold enough, you could owe money when you file your tax return. (Use this form to change your withholding.)

If you are receiving unemployment, you should get form 1099-G by the end of January from the agency that paid your unemployment benefits. The form will specify how much income you received and the amount you withheld for taxes. Be sure to hold on to these details, as you’ll need them to file your tax return.

While it’s too late to change last year’s withholding percentage, you can still benefit from filing your tax return early. If you owe money, filing sooner will give you more time to save before the April payment deadline (the deadlines are subject to change every year so be sure to go here to verify tax deadline day). 

How stimulus payments affect your taxes

If you received stimulus payments in the last year, the good news is they won’t affect your tax return unless you haven’t received the money yet.

If you qualify but didn’t get the payments, you can claim them as a Recovery Rebate Credit on your tax return, which will either increase the amount of your refund or reduce the amount you owe.

In the meantime, be on the lookout for fraud. The IRS warns of scammers offering to expedite missing stimulus payments via email, text, phone, or even social media. The most up-to-date information is available on their website.  

While there has been a steady stream of myths about the payments, AARP has debunked some of the most common.

To be clear, stimulus payments:

  • Are not considered taxable income
  • Won’t reduce your tax refund or increase your tax bill
  • Don’t have to be paid back

What to do if you need more time to file your return

The IRS allows a six-month filing extension for anyone who needs more time to prepare their federal return. An extension would push the deadline from April to October, and you must submit a formal request to receive one. You don’t have to explain why you’re asking for the extension, and the IRS will contact you only if your request is denied.

While an extension may offer more time to file your return, it doesn’t apply to your tax payment, which will accrue interest after the deadline. You should estimate and pay any owed taxes by the April tax deadline to help avoid possible penalties. According to the IRS, the failure-to-pay penalty is 0.5% per month up to a maximum 25% of your unpaid balance, until you pay off your bill in full.

What to do if you’re not getting a refund or can’t pay your tax bill

Once you finish your taxes and get a projected estimate of taxes owed, it can be frustrating to learn you won’t be getting a tax refund – or worse, that you have an unexpected tax bill. Fortunately, it may be possible to improve your outcome in both cases.

Start by double-checking your tax return for ways to boost your refund or lower what you owe through tax credits and deductions. For example, if you donated money to qualified organizations, you may deduct up to $300 of your cash contributions. Other commonly missed savings opportunities may include credits for your dependents, credits for low-to-moderate earners, and deductions for mortgage points.

If you've rechecked your tax return and still haven't lowered what you owe, there are a couple courses of action you can take.

  1. See if you qualify for an online payment plan that will help you pay off your balance over time.
  2. Borrow money from a trusted loan service with competitive rates and terms to help you find some tax payment relief.  

What to do if you’re getting a refund

If, on the other hand, you’ve filed your taxes and learned you’re getting a refund, it can be welcome and exciting news. But now the question becomes: What should you do with that money?

While it may be tempting to spend your refund on a dream vacation or by making big purchases you've been putting off, splurging on travel or other desires could cause you to miss out on opportunities to strengthen your finances.

Still have holiday debt or other lingering balances leftover from last year? Then a refund offers you an excellent opportunity to pay down high-interest credit cards. Consider using either the debt snowball or debt avalanche methods, which are proven strategies to  help you meet your debt payoff goals.

Another idea for using your tax refund is to create an emergency fund or to pad your savings. While experts recommend setting aside three to six months’ worth of expenses, any amount could make a difference, especially when you're surprised with an unexpected expense or bill.

Another savvy way to use your refund is home maintenance. If you have been ignoring a home repair due to financial constraints, you could use your refund to stop it from becoming a bigger, more costly problem in the future.

Then, after taking care of the basics, consider indulging in some small, fun reward. Taking the time to reward yourself when your budget allows can make it easier to stick with long-term financial goals.

When in doubt, review your options with the IRS or hire a tax professional.

Tax time can be nerve-wracking and stressful, especially if you owe money and cannot afford to pay. In this case, the IRS may be willing to work with you. Start by calling the agency at 800-829-1040 to discuss your options. Depending on your situation, you may qualify for a short-term extension, an individual payment plan, or an offer in compromise. You may even be able to temporarily delay the collection process until you can afford payments.

Try to avoid future tax stress and unwanted bills, check your tax withholding and adjust as needed. If you’re self-employed or a contract worker, you can make quarterly estimated tax payments throughout the year.

If all else fails, it may be worth your time and also be a huge stress-reliever to hire a tax professional to help you with your tax woes. If you're not sure where to start, the IRS offers great advice on learning which kind of preparer you need, how to check their credentials, and more.

If you have questions about this year’s taxes or filing, visit the IRS website or seek assistance from a qualified tax professional. We are not providing tax advice and every situation is unique, therefore professional tax help should be sought out.

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