1. You’re probably in for a refund.
Let’s start with the good news: About 3 in 4 Americans receive tax refunds each year, and the average refund is around $3,000. According to a TD Ameritrade survey, most taxpayers plan to use the windfall to pay off debt, save, or invest the money. Just 14 percent will use the money to splurge on a luxury item. Knowing that refund is coming might offer some motivation to file early. “If you file early, you get your money early, but if you owe, you do not have to pay early,” explains Mark Steber, chief tax officer at tax services provider Jackson Hewitt and chairman of the IRS’s Electronic Tax Administration Advisory Committee.
2. Refunds arrive faster for those who file electronically.
While most people opt to file electronically, about 3 in 10 Americans still stick with the old-school paper method, and that can cost them time. Electronic filers receive their refunds faster, usually in less than 10 days, and they can opt for direct deposit into their bank account for even faster access to their money. And thanks to an alliance between tax software companies and the IRS, anyone who earned less than $57,000 in 2011 can use name-brand tax software and electronically file their taxes for free. Visit www.irs.gov/freefile to get started.
3. Major life changes can mean major tax changes.
Anyone who got married, had a baby, got divorced, or experienced any other major lifestyle shake-up that affects the number of people in their household will need to update their taxes accordingly, says Steber, because those types of changes have a major impact on one’s tax status. In fact, choosing the wrong tax status can have a major impact on one’s tax refund (or liability), and it’s not always as easy as it sounds. For example, new parents sometimes make the mistake of forgetting to add their latest addition as a dependent, or married couples living separately might not realize they can still file jointly.
4. If you’re supporting a family member, you might be eligible for a tax break.
“If you’re taking care of a dependent parent and providing more than one-half of their support, then they may qualify as a dependent, like with a new child,” says Steber. As baby boomers age, that situation will likely become increasingly common, he adds. Specific costs, such as medical expenses or home renovations to make room for a live-in parent, could qualify as deductions, too. Parents welcoming home adult children could find themselves in a similar situation; Steber suggests getting customized advice from a tax professional to check on any potential tax benefits.
5. Independent income often means you can deduct business expenses.
Steber notes that many Americans, particularly those who experienced layoffs, have launched their own small businesses. “Tax law is favorable to that,” he says, and often miles driven, meals, and other expenses related to the business can be deducted from one’s income. Of course, anyone claiming those expenses needs to keep track of receipts.
6. A new tax year means different numbers.
When it comes to income limits for certain tax breaks, exemptions, and tax brackets, the numbers are constantly changing, which means you can’t just copy new income numbers into last year’s return. Barbara Weltman, a tax expert and author of J.K. Lasser’s 1001 Deductions and Tax Breaks, points out that the Alternative Minimum Tax exemption amount is higher this year ($48,450 or $74,450 if married filing jointly) and the home-energy credit amount has also changed, for example.
Weltman adds that because eligibility for various types of tax-advantaged accounts, such as the Roth IRA, depends on a income level that is indexed to inflation, people may qualify to make a Roth IRA contribution this year when they haven’t in the past, particularly if their income didn’t increase (or they lost their job). “Look at all the breaks available to you and don’t assume you can’t [make contributions] this year,” she suggests.
7. Reporting requirements have been ratcheted up a few notches.
Mark Luscombe, principal federal tax analyst for the tax firm CCH, notes that a new form–Form 8949–as well as a change to Form 1099-B means that investors (and their brokers) have additional reporting duties for 2011 for any sales or exchanges of capital assets, and the IRS will check to make sure the new information matches that on taxpayers’ returns. “If you’re not careful, you’re likely to be audited if the forms don’t match,” he warns. Any foreign assets, if the value of all foreign assets of a single taxpayer living in the United States is over $50,000 on the last day of 2011 or $75,000 at any time during 2011 (or $100,000 and $150,000 respectively for married couples filing jointly), also have to be reported on a new form (Form 8938). Small business owners receiving payments through PayPal, Amazon, or similar services should also know that those online payment processors will begin reporting income to the IRS for the first time this year. The rule applies to anyone who earns over $20,000 a year and exceeds 200 separate payments.
8. Taxes are due for 2010 Roth conversions.
In 2010, many taxpayers converted their traditional individual retirement accounts into Roth IRAs, which allows money to grow tax-free. That’s because in 2010, high earners (anyone earning over $100,000) were allowed to make the conversions for the first time. The IRS allowed taxpayers to pay the taxes owed in the conversion in two separate chunks, in 2011 and 2012, to ease the strain. “That means anyone who converted in 2010 and elected to defer the tax now must pay that first chunk, explains Luscombe.
9. It’s time to pay up for that 2008 homebuyer’s credit, too.
Weltman points out that anyone who took advantage of the first-time homebuyer’s credit in 2008 must pay back part of that credit, which was essentially an interest-free loan, now. (Taxpayers who picked up the credit in 2009 or 2010 are not required to repay it.) The IRS offers an account look-up tool to make it easier.
10. We should all prepare for a big shake-up.
In retrospect, filing 2011 taxes might seem like a piece of cake compared to what’s in store for taxpayers. The upcoming Congressional debates over how to balance the budget, the presidential election, and the expiration of the Bush tax cuts along with dozens of other provisions that are set to expire this year, suggest many changes are on the horizon. Says Steber: “2013 will be a crazy time for taxes.”
- 10 Things You Should Know About Your 2011 Taxes (money.usnews.com)
- Where’s My Tax Refund?: IRS Has $153 Million in Undeliverable Tax Refunds (turbotax.intuit.com)
- IRS has $1 billion in unclaimed tax refunds for 2008 (money.cnn.com)