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Guest Post by FitMoney

As a parent of a teenager or young adult, you want to ensure that your child is financially secure and understands the importance of taxes. Filing taxes can often be confusing and intimidating, but it’s an important part of life when you start earning income. Once you know a few key concepts, filing your taxes doesn’t have to be so intimidating.

Teens and young adults need access to resources that explain the tax filing process in easy-to-understand language and walk them through their specific filing situation so they know exactly what needs to be done come tax time. Today, we’ll cover taxes from a young adult perspective and discuss how learning about this important financial component now can help prepare for future success.

Explain the basics of filing taxes and why it’s important for young adults

Filing taxes can seem daunting for young adults, but it’s an essential part of financial responsibility that shouldn’t be overlooked. Simply put, it’s a way for the government to ensure that they’re collecting the appropriate amount of money from individuals and businesses alike. When you file your taxes, you’re essentially reporting your income for the year and any applicable deductions you may have. It’s important to file because if you don’t, you could end up facing penalties. Additionally, filing can help you receive a refund if you overpaid taxes throughout the year. Even if you’re just beginning work, there could be money for you to claim.

Don’t let the tax season stress you out–it’s an opportunity to reflect on your own financial literacy throughout a calendar year.

Educate yourself on why and how we pay taxes

Sometimes the toughest part of filing taxes can be knowing where to start. Young adults need to learn if they should file, when to file, how to file, and what all those numbers across a paycheck mean.

Did you know that more income doesn’t necessarily mean a higher tax rate? It just means that only income over a certain amount will be taxed higher. What forms should you keep an eye out for in January? What can you do throughout the year to make paying your taxes easier? Sometimes, we’re left with more questions than answers, and these are just a few of the questions that are critical for building financial stability and health as your resume grows.

Knowing when and how to file

Knowing when and how to pay and file taxes is crucial to staying organized and on top of your responsibilities. It’s important to understand how you pay taxes throughout the year and when you need to file. This can depend on many factors including your job, income, or where you live. Secondly, figuring out how to file can seem overwhelming, but there are many resources available to help you navigate the process. Government websites or tax professionals can provide guidance and assist you in filling out necessary paperwork. Remember, filing taxes might seem overwhelming, but with a little research and support, you can successfully manage this responsibility – just don’t miss that Tax Day deadline!

Understanding your paycheck

A paycheck is an important part of understanding your taxes. Your paycheck outlines your gross pay, taxes deducted from your income, and the final amount of take home pay that you actually receive in cash or check form. The gross pay includes regular wages, any overtime wages. Also included on your paycheck are mandatory and optional deductions which are taken directly from your paycheck before the final amount of take home pay is calculated.

The look of your paycheck can often explain what forms to look out for at the start of tax season. Whether you’re receiving pay stubs from an employer or submitting invoices as a freelancer, it’s important to hold on to this important paperwork to keep track of what you owe and what you’ve paid. Once all deductions are included, the net amount of your paycheck is what you will receive as take home pay.

Tax season can be stressful, but it doesn’t have to be! All it takes is some time to know what to do and why you’re doing it. In just an hour, anyone can build confidence to not feel intimidated every time tax season comes around. It’s something we’ll do for the rest of our lives – so why not take the stress out of it?

Source: credit.com

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When preparing your taxes for the 2022 tax year, one thing you’ll need to know is your tax bracket. The IRS uses these tax brackets to identify your tax rate and determine how much you owe in taxes. This guide provides more information about these tax brackets and how they work. Keep in mind that this guide covers only general information. For more specific information regarding your personal taxes, it’s best to meet with a tax adviser.

“Closeup of a U.S. Tax Form with an emphasis on filing status — in this case, marked ‘single.’”

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2022 Marginal Tax Brackets

To determine your tax bracket, you first need to know your filing status. There are currently five different IRS tax filing statuses: single, married filing jointly, married filing separately, qualified widow(er) and head of household. Additionally, the IRS divides these tax brackets into seven tiers that range from 10% to 37%, which are based on taxable income ranges.

2022 Tax Brackets for Married Filing Jointly and Qualifying Widow(er)s

Tax Bracket Taxable Income How Much You Might Owe (rounded to the nearest dollar)
10% $20,550 and under 10% of taxable income
12% $20,551 to $83,550 $2,055 plus 12% of taxable income over $20,550
22% $83,551 to $178,150 $9,615 plus 22% of taxable income over $83,550
24% $178,151 to $340,100 $30,427 plus 24% of taxable income over $178,150
32% $340,101 to $431,900 $69,295 plus 32% of taxable income over $340,100
35% $431,901 to $647,850 $98,671 plus 35% of taxable income over $431,900
37% $647,851 and over $174,253.50 plus 37% of taxable income over $647,850

2022 Tax Brackets for Individuals and Married Filing Separately

Tax Bracket Taxable Income How Much You Might Owe (rounded to the nearest dollar)
10% $10,275 and under 10% of taxable income
12% $10,276 to $41,775 $1,027.50 plus 12% of taxable income over $10,275
22% $41776 to $89,075 $15,213.50 plus 24% of taxable income over $89,075
24% $89,076 to $170,050 $29,502 plus 24% of taxable income over $172,750
32% $170,051 to $215,950 $34,647.50 plus 32% of taxable income over $170,050
35% $215,951 to $539,900 49,335.50 plus 35% of taxable income over $215,950
37% $539,901 or more $162,718 plus 37% of taxable income over $539,900

2022 Tax Brackets for Head of Household

Tax Bracket Taxable Income How Much You Might Owe (rounded to the nearest dollar)
10% $14,650 and under 10% of taxable income
12% $14,651 to $55,900 $1,465 plus 12% of taxable income over $14,650
22% $55,901 to $89,050 $6,415 plus 22% of taxable income over $55,900
24% $89,051 to $170,050 $13,708 plus 24% of taxable income over $89,050
32% $170,051 to $215,950 $33,148 plus 32% of taxable income over $170,050
35% $215,951 to $539,900 $47,836 plus 35% of taxable income over $215,950
37% $539,901 and over $161,218.50 plus 37% of taxable income over $539,900

How Tax Brackets Work

The United States uses a progressive tax system. In basic terms, this system increases a taxpayer’s tax liability as their taxable income rises. Simply put, the higher your taxable income, the higher the amount of taxes you can expect to pay.

There are four factors impacting these tax brackets: filing status, adjusted gross income, deductions and taxable income. Each of these factors is discussed below.

Filing Status

The IRS designates five different filing statuses:

  • Single: Taxpayers who aren’t married and weren’t married at any point in 2022.
  • Married Filing Jointly: Married couples who combine their income, deductions and credit by filing their tax return together.
  • Married Filing Separately: Married couples that choose to file their tax returns separately rather than jointly.
  • Qualified Widow(er): Widow(er)s who haven’t remarried and have a qualified dependent may be able to file as a qualified widow(er) for the two years following the year their spouse dies.
  • Head of Household: Unmarried taxpayers with a qualifying dependent.

You may qualify for more than one tax filing status. It’s important to evaluate your options and determine which status provides the greatest tax benefits.

Adjusted Gross Income

Your adjusted gross income is the difference between your total gross income and any qualifying adjustments. You can calculate your AGI by taking your total gross income for the year and subtracting any qualifying deductions. However, if you work with a tax preparer or use an online tax preparation service, these services will automatically calculate your AGI based on your answers to a series of questions regarding your finances.

It’s important to note that your AGI doesn’t determine your tax bracket. Instead, you can use your AGI to determine what tax deductions you may be eligible for. With this information, you can then calculate your taxable income, which is done by taking your AGI and subtracting all eligible deductions.

Deductions

Taxpayers have the option of taking either a standard deduction or itemizing their deductions. A standard deduction is a flat amount based on your specific filing status. Itemized deductions, on the other hand, require you to complete Schedule A and make a list of your qualifying deductions.

Using the standardized deduction is the easiest and most popular route. However, you may be able to decrease your tax liability by itemizing your deductions instead. It’s important to evaluate your specific situation to determine which option is best for you.

Here’s a look at the standard deduction amounts for the 2022 tax year.

  • Single: $12,950
  • Married Filing Jointly: $25,900
  • Married Filing Separately: $12,950
  • Qualifying Widow(er): $15,900
  • Head of Household: $19,400

Taxable Income

Once you calculate your AGI, you can subtract your standard or itemized deduction from your AGI to determine your taxable income. For instance, if you’re married and filing jointly with a combined income of $120,000 and you choose to take the standard deduction, your taxable income would be $94,100.

Examples of AGI and Federal Tax Brackets in Action

Now that you understand how to calculate your taxable income, let’s look at a few examples.

  • Jane has an AGI of $64,500 and is filing as head of household. She opts for the standard deduction of $19,400, bringing her taxable income to $45,100. Using the tables above
  • She owes 10% of the first $14,650, or $1,465.
  • Plus 12% on $30,450, the remainder of her income, or $3,654.
  • This brings her tax liability to $5,119 before any eligible credits.
  • Sarah and John have a combined income of $126,700 and their status is married filing jointly. They opt for the standard deduction of $25,900, which brings their taxable income to $100,800. Using the tables above:
  • They owe 10% of the first $20,550, or $2,055.
  • Plus 12% on $63,000, the amount of their income between $20,550 and $83,550, or $7,560,
  • Plus 22% on $17,250, which represents their income over $83,550, or $3,795.
  • This brings their total tax liability to $13,410.

Just because you have a big tax liability, it doesn’t necessarily mean you’ll owe a lot of money at the end of the year. In most cases, taxes are taken from every paycheck. You can deduct this amount from your total tax liability. For example, if Sarah and John, in the example above, paid $12,000 throughout the year from their wages, they’d only owe $1,410 when they file their taxes.

If, however, you do have a big tax liability, you may want to talk to a tax adviser, because how you pay your taxes could impact your credit score.

Tax Brackets and State Income Tax

States have the freedom to set their own personal income tax rules, which may or may not be similar to the federal tax system.

Of the 50 states, eight have no state personal tax:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

An additional nine states use a flat rate system, where all taxpayers pay the same percentage of their income. These states are:

  • Colorado
  • Illinois
  • Indiana
  • Kentucky
  • Massachusetts
  • Michigan
  • North Carolina
  • Pennsylvania
  • Utah

The remaining 33 states, along with the District of Columbia, use a progressive tax scale similar to the one the IRS uses.

Maximize Your Tax Return

Understanding how the tax brackets for 2022 work can help you maximize your tax return and minimize your overall tax liability. You can use tax preparation software now to enter your anticipated information to estimate your tax liability now. Additionally, there are several ways you can file your taxes for free to help save you even more money.

Learn more about preparing your taxes with this tax guide.

Source: credit.com

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While federal or state tax debt doesn’t show up on your credit report, it can have an impact on your credit down the line. Find out more about how tax debt impacts your credit, including your ability to pay debts and get loans, below.

In This Piece:

Does the IRS Report to the Credit Bureaus?

The IRS doesn’t report tax debt or payments to the credit bureaus. So, your credit won’t take a direct hit if you’re late on a tax payment. At the same time, you won’t get any sort of positive credit impact for making payments on tax bills on time. 

Credit bureaus only report items that are reported to them. Creditors, such as banks and credit card companies, report account information to one, two or three of the credit bureaus. They aren’t required to report to any or all of them, which is why your credit report can be different with each major bureau. The IRS doesn’t report at all, even if you sign an agreement with them to pay off your tax debt in installment payments over time.

Tax liens, which are public records, used to show up on credit reports and seriously impact credit scores. However, in April 2018, the three major credit bureaus agreed to remove tax liens and some other types of public records from credit reports, so they no longer show up.  

Consequences of Not Paying Your Taxes or Paying Them Late

If you don’t pay your taxes on time, you can incur interest, fees, and penalties. These amounts substantially drive up how much you owe in taxes, leaving you struggling financially to manage your budget. You might miss payments on other types of debt as you try to pay taxes, and those other missed payments may be reported to the credit bureaus. That can reduce your credit score.

Another tactic for paying off rising tax debt involves taking out a personal loan or using credit cards. This can increase your credit utilization ratio, which can also drive down your credit score.

Tax Liens

If you go for a period of time without paying your taxes or making arrangements with the IRS to do so, the federal government may issue a tax lien. This is true for state tax debt too.

Tax liens are assessed on property you own, such as a home or car. A lien puts the IRS or other tax agency in line to receive profits from the sale of the property in the future. For example:

Levies

Another consequence of not paying your taxes can be a levy. A levy occurs when your property is seized to cover a tax debt. Types of properties that might be levied include homes, cars, certain types of personal property and even cash in bank accounts.

Wage Garnishments

The IRS may also be able to get an order for a wage garnishment. This means a certain amount of every paycheck is paid to the IRS by your employer, reducing how much you take home.

Problems Getting a Loan

While tax debt doesn’t get reported to the credit bureaus, liens are public record. Lenders can look up public records to find out if you have any tax liens, and this can inhibit your ability to get a loan. This is especially true if you’re trying to get a mortgage. Lenders usually require that you make good on any existing tax liens before you can qualify for a mortgage.

What to Do When You Can’t Pay Your Taxes on Time and in Full

None of these consequences occur just because you can’t pay your taxes in full on April 15 of the year. The IRS has programs in place to help people pay their tax debt over time. It’s important to communicate with the IRS as soon as you know you can’t pay your tax debt so you can get an installment plan. If you’ve never had an installment plan and your tax debt is under a certain threshold, you can usually qualify automatically for a payment plan.

Do What’s Best for Your Finances

It’s important to consider your entire financial picture when making decisions about your taxes. If you owe a lot of money to the IRS, consider reaching out to a tax attorney or professional to find out if there are any relief programs you might qualify for. And keep an eye on your credit so you understand what’s impacting it and how you might improve it. Get started with ExtraCredit to see your credit reports and 28 of your FICO scores.

Source: credit.com

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NOTE: The tax deadline for the 2022 filing season is April 18th, 2023. Learn more about changes the IRS has made here.

Filing your taxes can be complex, time-consuming, and stressful. For these reasons, some individuals and business owners turn to professional tax preparers to handle the tax filing process for them. However, there are numerous online tax software options that allow many tax filers to file their own taxes.

You don’t want to trust your taxes to just anyone. Instead, you want to use an online tax software with a strong reputation and one that can handle all aspects of your tax return. With so many options, it can be hard to determine which online software tool is the best for your specific situation. This professional tax software comparison reviews the top four online options to help you choose the right one.

In This Piece

What Is the Best Online Tax Software?

While there are a number of professional tax software options available, there are a few with a long-standing reputation for providing effective and affordable services. It’s important to note that while this software handles most, if not all, of the tax calculations, you still need to prepare for tax season by gathering all of your tax documents.

Below is a tax software for tax professionals comparison to help you better compare your options.

TaxSlayer

With nearly 60 years of providing tax preparation services, TaxSlayer is one of the top professional tax filing services online. It offers unlimited phone and email support, as well as live chat services for Premium accounts and higher. TaxSlayer also guarantees that its software provides the greatest tax refund, or it will reimburse you the difference.

Best of all, TaxSlayer stands by its services by offering a 100% accuracy guarantee. If there are any issues with your taxes, other than user error, it covers any penalties you may incur. If you’re anticipating a tax return, you can have any service fee deducted right from your refund check to avoid any upfront, out-of-pocket expenses. 

Costs: Basic filing of 1040s are free. The Classic package is $19.95, the Premium package is $39.99 and the Self-Employed package is $49.95.

TurboTax

TurboTax is one of the most popular online tax software options available and serves millions of Americans every year. Its services come with a 7-year guarantee that ensures 100% accuracy, which means TurboTax will refund you for any penalties or interests accrued due to an error in its software.

TurboTax offers three tiers of services, including Simple, Deluxe, and Premium. The Simple package is ideal for the most basic tax returns. The Deluxe package is best for those with more credits and deductions, and the Premium plan is for investors and self-employed tax filers. Users can also upgrade to receive unlimited Live Assisted support from tax professionals or opt to have the company prepare their taxes for them.

Costs: Simple 1040 returns are free, if filed by March 31, while Deluxe services start at $59 and Premiums packages start at $105.

FreeTaxUSA

There are several ways you can file your federal taxes for free, and FreeTaxUSA is one of them. Its free services include its Basic, Advance, Premium and Self-Employed packages. These tiered packages are available to individuals, families, contractors, self-employed taxpayers and small-business owners.

TaxFreeUSA also offers a Deluxe package that includes live chat service for an additional fee. State tax filing services start at $14.99. You can import your W-2s and previous year’s taxes for easier filing. Its services include a 100% accuracy guarantee, as well as free federal tax extension filing services and unlimited amends.

Cost: Federal tax filing is free, but you can upgrade to the $7.99 Deluxe package that includes live chat support. State tax filing services start at $14.99.

TaxAct

TaxAct is another popular online tax filing service company. It offers four tiered packages, including its free basic version for simple tax returns, its Deluxe package for taxpayers with loans and children, its Premier package that is designed for investors and its Self-Employed package for those who are self-employed, contractors and small-business owners. All packages include live support through its free Xpert Assist services.

TaxAct lets you import information from your previous year’s tax returns and current year W-2s to simplify the tax filing process. It also offers an accuracy guarantee that covers any penalties and interest you incur (up to $100,000) if there is an error in your tax return due to TaxAct software.  

Cost: Basic tax filing services are free. The Deluxe package is $24.98, the Premier package is $34.95 and the Self-Employed package is $64.98.

What to Know about Online Tax Preparation Software

Before selecting an online tax filing service, it’s important to do your research. This online tax service comparison can help you identify the different services various tax filing companies offer. All the services companies listed above offer an accuracy guarantee, which can protect you if there’s an error in the software.

After you compare tax software, it’s important to choose the right package. For example, if you own your own home or have children, you likely won’t qualify for the basic package. If, on the other hand, you’re an investor or self-employed, the premium package might be the best option.

Get Help with Your Taxes

If you’re uneasy about doing your own taxes or have additional concerns, don’t hesitate to reach out to a tax professional, such as a CPA, for tax advice or tax filing services. For more tax tips and resources, check out Credit.com’s online tax education resources.

Source: credit.com

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Studies show that parents spend, on average, more than $650 per child on back-to-school supplies. This number is even higher for adult children heading off to college. With ongoing inflation concerns and rising costs, you, like many other parents, are likely looking for ways to reduce these costs as much as possible.

If you’re lucky enough to live in one of the states that offer tax-free weekends right before school starts, this may be one of your best chances for saving money on clothes, shoes and school supplies. While these events can’t show you how to get more money on your tax return, they can help you save money on sales tax on the supplies you buy now.

What is a tax-free weekend? Keep reading to find the answer to this question and see if your state participates.

tax free weekend

In This Piece

  1. What Is a Tax-Free Weekend?
  2. What States Do Tax-Free Weekends?
  3. When Does Tax-Free Weekend Happen?
  4. How to Prepare for a Tax-Free Weekend
  5. Prepare for Tax Season

What Is a Tax-Free Weekend?

As the name suggests, tax-free weekend is a designated weekend, or in some cases even longer, when the state agrees not to collect sales tax on specific items. The idea for tax-free weekends started as a way of helping parents offset some of the costs for back-to-school supplies, such as clothing, shoes and computers. Many states also set limits on what items are tax-free. For example, in many states, only clothing items that cost $100 or less are eligible.

These weekends include both in-store and online purchases. Each state has its own rules for which items you can purchase tax-free and which you can’t. It’s important to understand the specific details of your state before you start shopping.

How Many States Have Tax-Free Weekends?

The number of states scheduling these weekends seems to grow every year. In 2022, a total of 20 states held one or more tax-free weekends, or weeks, during the year.

What States Do Tax-Free Weekends?

First, it’s important to note that five states, including Alaska, Delaware, Montana, New Hampshire and Oregon, don’t have a sales tax, so it makes sense that they wouldn’t participate in these events. Out of the other 45 states, 20 held at least one tax-free weekend.

Participating states in 2022 were:

  • Alabama
  • Arkansas
  • Connecticut
  • Florida
  • Illinois
  • Iowa
  • Maryland
  • Massachusetts
  • Mississippi
  • Missouri
  • Nevada (only for members of the National Guard)
  • New Jersey
  • New Mexico
  • Ohio
  • Oklahoma
  • South Carolina
  • Tennessee
  • Texas
  • Virginia
  • West Virginia

When Does Tax-Free Weekend Happen?

When is the tax-free weekend? That depends on where you live. Because tax-free weekend is not a national event, each state sets its own dates and determines how long the event will last. For example, Iowa’s tax-free event runs from Friday to Saturday, while New Jersey holds weeklong tax-free events.

Additionally, some states are starting to hold two tax-free events each year. For example, Florida holds its standard back-to-school tax-free event in late July but also has a tax-free event for outdoor recreational items in early July. Some states are also holding special tax-free events. For instance, in 2022, Tennessee held a tax-free event on groceries for the entire month of August as well as a year-long tax holiday on gun safety products such as gun safes.

When Does Tax-Free Weekend Start?

Because the main goal for tax-free weekends is to help parents offset the cost of school supplies, most states hold their event close to the beginning of the school year. For instance, states with an early start date for school, including Alabama, Mississippi and Florida, typically hold their weekend in July, while other states, such as Missouri, Oklahoma, and South Carolina, wait until August to hold their tax-free weekend.

You can check with your state offices to find out exactly when it starts in your state. Because these tax-free events include online sales, most events begin just after midnight, at 12:01 a.m. on the first day of the event.

When Does a Tax-Free Weekend End?

For a majority of participating states, these events last the entire weekend, including Friday, Saturday and Sunday. Some states, such as Iowa and Arkansas, only hold 2-day tax-free events, while other states, including Florida, New Jersey and Illinois, have weeklong events. Because most of these events begin just after midnight on day one, they often end just before midnight at 11:59 p.m. on the last day of the event.

How to Prepare for a Tax-Free Weekend

If you’re fortunate enough to live in a state that holds tax-free weekends, you want to make sure you head into this event prepared. Here’s a list of tips that can help you make the most of these tax-free events.

Find Out What’s Included

The last thing you want to do is get to the register just to find out some of the items you want to purchase aren’t tax-free. You can avoid this hassle by checking your state’s list of eligible items. If you’re shopping online, make sure no tax was added to eligible items. If you’re shopping in-store, always double-check if you’re not sure what items are tax-free.

Know the Limits

Most states also set limits on how much an item can cost to remain tax-free. In almost all cases, these limits are based on the price per item and not the total of everything you purchase. Be sure to check these limits and track the items you’re purchasing to make sure you don’t purchase ineligible items.

Set a Shopping Budget

Before the event starts, sit down and set a shopping budget. This step can make sure you stay focused on purchasing the things you need the most and prevent you from spending too much money.

Look for Bargains

Tax-free weekends don’t affect the stores’ profits. So, in an attempt to attract the most customers, many stores run sales during these special events. Check out various stores’ online ads to find out which ones are offering the best deals on the school supplies you need most.

Focus on Big-Ticket Items

If you want to get the biggest bang for your buck, focus on purchasing the most high-value items on your shopping list first. This practice can help you save the most amount of money. Just be careful that all the items you purchase are under the eligibility limits.

Prepare for Tax Season

Don’t miss out on the significant amount of savings you can receive at these tax-free events. Do your research and plan ahead. The same can be said about filing your taxes at the end of the year. You always want to do your research and understand how the IRS determines how much tax you owe.

Unless you plan to have a professional complete your taxes, you also want to know how to do taxes. Understanding how the tax filing process works and what credits and tax deductions you can take can help minimize your overall tax burden. If you need more help with your taxes, check out Credit.com’s tax center.

Source: credit.com

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How Much Money Do You Lose to Taxes, and Do You Care?

About half of Americans would rather get a bigger tax refund than an extra $115 per paycheck, according to a recent survey Credit.com conducted. But a bigger tax refund isn’t always a good thing. Learn more about what you can do with a larger paycheck.

Methodology

Note: This survey was conducted for Credit.com using Suzy.com. The sample consisted of a total of 1,028 responses per question and is not statistically representative of the general population. This survey was conducted in October 2022.

In This Piece

  1. More Than Half of Americans Prefer a Larger Tax Refund
  2. What Can You Do with a Bigger Paycheck Instead?
  3. How Can You Earn More Money Throughout the Year?
  4. Ways to Get a Bigger Tax Refund

More Than Half of Americans Prefer a Larger Tax Refund 

We asked more than 1,000 people aged 18 to 99 whether they’d like a $3,000 tax refund or $115 more in take-home pay on each paycheck. Surprisingly, 52% of the respondents in our tax refund survey said they’d take the bigger tax refund. 

Men were more likely to choose the bigger tax refund, at 54.2%, and millennials aged 25 to 34 were the most likely age group to choose the bigger tax refund. People aged 18 to 24 were least likely to say they’d take the bigger tax refund.

It’s important to note that in many cases, getting a tax refund means you overpaid the IRS throughout the year. You could’ve kept the money yourself and put it to work for all those months instead of letting the government earn interest on it. If you’re not sure what your tax refund might look like, see how you can maximize your tax refund so you can plan ahead.

What Can You Do With a Bigger Paycheck Instead? 

To find out how much money you lose to taxes, learn how to read a pay stub so you can add up your tax payments. If you’re paying too much and getting a refund every year, you can adjust your withholdings to get more out of your paycheck every payday. Here are a few things you can do with a bigger paycheck:

  • Invest more in retirement. When you’re paying less to the federal or state government every pay period, you have more money to invest in retirement. If you were already getting along without this extra money every pay period, it might be a good idea to contribute it to a 401(k) or other tax-deferred accounts. If your employer offers a contribution match, this is a great way to maximize retirement savings.
  • Pay off more debt. Alternatively, funnel that extra money every paycheck into paying off debt. Every little extra bit you can pay off each month cuts down on long-term interest expenses, so you may be able to save yourself a lot in the long term.
  • Invest in savings accounts. Sock the money away in savings accounts with high-interest yields for an easy, safe way to earn a little money on your cash. Savings accounts also ensure your money is readily available if you need it.

How Can You Earn More Money Throughout the Year? 

What if you’ve already adjusted your tax withholdings so you’re not losing money every pay period to taxes unnecessarily? If you want more take-home income every month, you may have to look for other ways of earning money, including:

  • Side hustles. Join the gig economy to make extra money delivering groceries or food, writing content for others, doing surveys or market research, babysitting, walking dogs or any number of other tasks. Remember that, as a freelancer, you’ll be responsible for paying taxes on anything you earn via a side hustle.
  • Investments. Make investments so your money is working for you. You might invest in stocks and bonds, more conservative options like CDs or property you can rent or flip for a profit.
  • Asking for a raise. Boost your paycheck by asking for a raise if you think you’ve earned it, your current job duties have grown and aren’t in line with your pay or you haven’t had a cost-of-living adjustment in some time.
  • Getting help with finances. Get help managing your finances so you can reduce your debt or interest payments. If you can lower how much you need to pay on debt every month, you have a lot more discretionary income to work with.

Ways to Get a Bigger Tax Refund 

If after everything above you still agree with the 52% of respondents in our survey who said they’d rather have a bigger tax refund, there are some things you can do to get one. They include:

  • Adjusting your withholdings so more is taken out in taxes each paycheck. Note that this will reduce how much you take home out of each paycheck.
  • Maximizing your tax refund. While you can do your taxes for free, you may find paid tax filing software has more options for increasing your refund via credits and deductions.
  • Get expert help with taxes. Work with professionals who can help you learn more about your tax situation and how you can maximize your refund. Start with information on Credit.com to get help with your taxes.

Source: credit.com

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According to the National Retail Federation, almost half of all consumers say they expect to file their taxes in February. Those who are expecting refunds often want to get their returns in early to maximize the chances of a quicker refund. If you know you’ll owe taxes, you might push off filing your refund until April so you have more time before you pay it, but what happens if you file your taxes late? 

a person sitting at a desk with computer and coffee, stressed about documents lying on desk

In This Piece:

  1. 1 in 4 People File Taxes Late
  2. Busy Lives Interfere With Filing Taxes on Time
  3. Older Generations Need More Help Filing Taxes 
  4. Why You Should File Your Taxes on Time
  5. How Can I Make Sure I File Taxes on Time?

1 in 4 People File Taxes Late

We asked more than 1,000 people if they’d ever filed their tax returns late and followed up with a few questions about why someone might file taxes late. Just under 1 in 4 of survey respondents said they’d filed taxes late.

Our survey indicates that men are slightly more likely to file taxes late than women are. Around 25% of men in the survey said they’d filed taxes late before, while only around 20% of women said the same.  Younger and middle-age individuals are also more likely to file taxes late than older generations. Around 46% of survey respondents aged 25 to 49 said they’d filed their taxes late at least once.  

Busy Lives Interfere with Filing Taxes on Time

When asked what might cause them to file taxes late, 75% of people aged 18 to 49 said they just didn’t have enough time. Being too busy was the top reason given by people aged 18 to 34. Around 30% of men listed lack of time as a reason they might miss a tax deadline, making it the top answer for men. Only around 18% of women cited lack of time as a reason for failing to file taxes on time. For women, the most common reason was needing professional help with taxes.

Older Generations Need More Help Filing Taxes

For people aged 35 and older, requiring professional help with taxes was the top reason for filing late. This becomes even more common with each age bracket:

  • Age 35-49: 25.5% said they need professional assistance filing taxes
  • Age 50-64: 33.2% said they need professional assistance filing taxes
  • Age 65+: 43.4% said they need professional assistance filing taxes

Aside from being busy and needing assistance, other reasons people gave for not filing taxes on time included:

  • The costs of filing being too high
  • Being too confused by taxes
  • Forgetting when the deadline is
  • Being unable to pay what’s owed

Why You Should File Your Taxes on Time

Filing your taxes on time is the law. It also keeps you from owing late filing fees and penalties. 

What Is the Penalty for Filing Taxes Late?

The IRS charges steep penalties for failure to file your taxes. It’s 5% of the taxes due for every month the return is late—up to 25% of the taxes you owe. 

However, in 2020, 2021 and 2022, if your taxes are more than 60 days late, the minimum filing penalty is $435 or 100% of the amount of taxes you owe, whichever is less. 

What Happens If You Are Late Filing Your Taxes?

If you file your taxes late using a paid or free tax preparation software, it may help you calculate how much you owe in penalties. That amount will be included on the paperwork you generate showing you how much to pay. If that’s not the case and you file a return without calculating those amounts, the IRS is likely to send you a bill for the penalties.

Note that you’ll also owe interest on your total tax bill. The IRS charges interest on penalties and late taxes.

How Can I Make Sure I File Taxes on Time?

You can take a few steps to ensure you file your taxes on time, including:

  • Filing for an extension. You can file an extension each year. If you file by the April tax deadline, the IRS automatically grants you an extension for 6 months, which can provide you more time to gather the documents you need or get help with taxes. However, the extension is for filing your return online, not paying what taxes you might owe. If you pay late, you may be charged interest.
  • Preparing properly for tax season. Preparing well ahead of tax season can help you file on time. Keep your finances organized throughout the year. You might also have a folder to keep paperwork related to taxes–both physically and digitally.
  • Getting professional help. Get help from tax preparers or accountants to file accurate tax returns on time. Reach out to professionals sooner in the tax season to ensure they aren’t booked up.

Better Late Than Never

If you owe taxes and miss the tax filing deadline, it’s better to file late than to continue to avoid the issue. Reach out to a tax professional if you’re not sure how to file your taxes or need help understanding if you can reduce your tax burden.

Methodology

This survey was conducted for Credit.com using Suzy. The sample consisted of a total of 1,035 responses per question and is not statistically representative of the general population. This survey was conducted in October 2022.

Source: credit.com

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Let’s say that you find yourself with some tax debt this year. It’s less than ideal—if you’re scrambling to pay off your tax debt, it might have a huge impact on your financials. But does tax debt affect your credit score? And does an IRS collection go on your credit report?

The IRS doesn’t report directly to the credit bureaus. And a tax lien won’t show up on your credit report either. But that doesn’t mean taxes won’t impact your credit score. Read on to find out more about how federal taxes and credit can be related.

Does IRS Collection Go on Your Credit Report?

The IRS doesn’t report information about the taxes you owe, when or how you pay them or whether you’re in collections to the credit bureaus. In fact, the Taxpayer Bill of Rights includes a right to privacy and confidentiality. That means that in many situations, your tax information is not public knowledge.

What does this mean? 

  • Your payments on a tax bill, whether on time or otherwise, generally don’t impact your credit positively or negatively.
  • If you’re late paying your taxes, the IRS won’t report that information to the credit bureaus.
  • The IRS itself typically won’t report your debt to the credit bureaus at all.

Does IRS Debt Ever Show up on Your Credit Report?

Prior to April 2018, federal tax debt could show up on your credit report via another path. If the IRS files a tax lien against you for taxes owed, the information becomes public record. That’s true of most liens.

Credit reports used to include information about liens. In April 2018, the credit reporting agencies modified policies on how certain public records, including liens, were dealt with. That included removing all tax liens from credit reports.

What does this mean?

  • Tax liens won’t show up on your credit report, so tax information probably won’t ever show up.
  • This is due to a policy change from the credit bureaus, though, and that can always be reversed if things change.
  • Tax liens are still public records, so creditors or others can find out about them if they look.

How Do Taxes Affect Your Credit Score?

Just because taxes don’t appear on your credit report doesn’t mean they won’t have an impact on your credit score. If you’re behind on taxes or dealing with paying off a large tax bill, that could have an impact on your overall finances. In turn, that could negatively impact your credit score. Here are a few ways this can happen:

You Prioritize Tax Debt Over Other Debt

In the worst-case scenario, you might make payments on tax debt instead of payments owed on a mortgage, car loan or other debt. If you do this for several months, you could risk serious issues like foreclosures or repossessions. Even if you only do it for a month or two, you can end up with late payments reported on your credit report. All those things are bad for your score.

In less severe cases, you might be able to make tax payments while also making timely payments on your other debts. But perhaps you’re not paying down balances on those debts quickly because you’re prioritizing your tax debt. That can lead to a higher credit utilization ratio for longer, which can impact your credit score.

You Use Revolving Credit to Pay Taxes

If you aren’t starting with a large balance on your credit card accounts, you might think about using them to pay down your tax bill. That’s one way to remove the stress of a potential tax lien. For many people, the interest expense of paying off some credit card debt is preferable to facing consequences from the IRS.

But this option does impact your credit score. If you max out or drive up your credit card balances to pay off tax debt, you increase your credit utilization ratio. Credit utilization is about 30% responsible for your credit score, so that can make for a big impact!

You Take Out a Loan to Pay Taxes

Instead of revolving credit, you might use an installment loan to pay off some tax debt. Whether you’re taking out an unsecured personal loan or a home equity loan, this new debt will have at least some impact on your credit. First, there’s the hard inquiry that may be required to evaluate you for the loan. Hard inquiries can negatively impact your credit score a bit. 

Then there’s the fact that you have a new account on your credit score. That can also cause a temporary drop in your score if it changes the overall age of your credit.

It’s Important to Deal With Taxes Promptly

Tax debt doesn’t magically go away, and the impact to your life and finances can get bigger the longer you ignore the issue. If you owe taxes, make a plan to pay them as soon as you can. 

Does filing taxes late affect your credit score? Not directly, but it can lead to all the issues discussed above. If you know you’ll owe taxes, don’t avoid filing because you can’t pay. Interest on tax debt is often less than the fines for not filing your return on time. You can also reach out to the IRS to set up installment plans or other payment arrangements on large tax bills.

It’s also a good idea to be familiar with how your other debts might impact your taxes. For example, if a creditor forgives your debt and sends you a 1099C cancellation of debt, you may need to pay taxes on that amount.

Learning how to do your taxes yourself and getting a head start on the process every year can be a good idea to get ahead of tax debt. When in doubt, consider consulting a tax or financial professional to help you come up with the right plan for you.

Not sure what your credit score is to begin with? Sign up for ExtraCredit® and get the full story about your credit with information from all three major bureaus and 28 of your FICO® scores.

Source: credit.com