Here’s what taxpayers need to know as they head into tax preparation season.
Tax survival guide
What’s new this year?
The rules for the 2016 filing season are pretty much the same as for 2015. Thanks to low inflation, even the standard deduction of $6,300 for individual filers and $12,600 for married couples hasn’t changed. For those filing as head of household, it’s ticked up a mere $50 to $9,300. The biggest difference is that taxpayers have three extra days to pay this year. Tax Day falls on April 18 because April 15 is a Saturday, while Monday, April 17, is Emancipation Day in the District of Columbia. But that doesn’t mean you can afford to wait until the last minute. The IRS estimates that it takes most people about 16 hours to complete a Form 1040, with about half of that time spent on keeping and reading records. “If you want to prepare and file your own taxes, block out at least a solid day or two on your calendar,” says Tina Orem, a writer with personal finance website NerdWallet.com.
Should I do my own taxes?
If you have a relatively simple return and feel up to it. The IRS Free File program offers tax preparation software through a dozen different companies for taxpayers who earn less than $64,000 a year. But even though about 100 million people are eligible for the program, roughly 70 percent of Americans, only about 3 million people take advantage of it each year. The IRS offers all taxpayers free “fillable forms,” available on the agency’s website. These digital tax forms perform basic calculations and can be filed online. Paid tax prep software can walk you through even relatively complex scenarios, such as how to handle dependents, mortgage interest, and other credits and deductions, and is usually available for less than $100. But if you run your own business, own complex investments, or recently went through a major life change like a divorce, it’s probably smart to consult a professional.
Should I itemize?
Itemizing your return only makes sense if it gets you a bigger deduction than the standard deduction, which automatically knocks $6,300 off adjusted gross income for individual filers and $12,600 for married couples. About 7 in 10 taxpayers take the standard deduction, which can be claimed by anyone and requires no extra paperwork. But if you made a large charitable donation last year, paid mortgage interest, or had high state and local taxes, itemizing could be worth it. In most cases, it will be fairly obvious which comes with the bigger tax break, but when in doubt, do the math.
Can I still lower my 2016 tax bill?
Yes, you can. Taxpayers have until April 18 to make tax- deductible contributions to an IRA or a health savings account for 2016. If you’re not enrolled in a workplace retirement plan, such as a 401(k), you can make and deduct an IRA contribution of up to $5,500, or $6,500 if you’re 50 or older, no matter what you make. But even if you have a workplace retirement plan, you might be eligible for a smaller deduction, depending on your income. IRA contributions are valuable because they reduce your adjusted gross income dollar-for-dollar, lowering your overall tax burden. It’s also what’s known as an “above the line” deduction, meaning you can take it even if you don’t itemize. The same goes for health savings accounts. You can still contribute up to $3,350 for yourself or $6,750 for your family and have it count toward your 2016 taxes, as long as you set up the account before Tax Day.
What if I need help?
Most tax software programs offer on-demand assistance to their paid users, either by phone, online chat, or email. TurboTax, for instance, will connect its Deluxe and Premier users with a tax expert via video chat, starting at $54.99 for a federal return. For face-to-face help, the IRS Volunteer Income Tax Assistance program offers help filing basic tax returns for people who generally make $54,000 or less. You can find a location near you on the IRS website. Another federal program, Tax Counseling for the Elderly, provides free tax help for people 60 and older. Tax preparers typically charge $150 an hour for a basic federal and state return, but ask for a free consultation first, to get an estimated cost. “Most people do not need to spend hundreds of dollars to file their taxes when there are so many free and low-cost options,” says Liz Weston, a certified financial planner and advice columnist. ■