Is there any time of the year you don’t worry about taxes? If you’ve paid your taxes this year, you’ll worry about paying them next year. If you still owe taxes, you’ll worry about how to get them paid, and if you’ve been overpaying taxes, you’ll worry about how to cut it down to help you achieve your financial goals, especially if you’re a high earner.
Beneath these worries are puzzling questions you wish you had answers to. But don’t worry; this blog will answer your burning tax questions. Here are 10 most common tax questions and their answers.
- When will I get my tax refund?
When you get your refund depends on how and when you file your tax return. Most people get their refunds within 21 days of filing. If you choose to have your refund deposited directly into your bank account, it could take up to 5 days to access it.
If you file a paper return, it could take about two months and longer if you request a paper check.
You can check your refund status using the Where’s My Refund tool. Put in your Social Security number, filing status, and the amount you’re expecting in refund.
- How do I pay lesser taxes?
There are two major ways to reduce your tax liability: tax deductions and credits. Tax deductions allow you to reduce your taxable income. For instance, when you make income from your business or job, you can reduce your taxable income by contributing to your own individual retirement account or an employer-sponsored retirement plan. You could also have a high-deductible health plan with access to a Health Savings Account (HSA) or a Flexible Spending Account (FSA).
These accounts help you hold in cash for saving or contribute pretax dollars to invest. These smart tax moves significantly reduce your taxable income and save you more tax money.
On the other hand, tax credits allow you to reduce your tax liability. An example is the Child Tax Credit. If you have a child or dependent, a child tax credit helps to reduce the cost of raising a child. The Child Tax Credit is worth up to $2,000 in 2022 and is partially refundable in 2022.
- Tax credit or tax deduction, which is better?
If you’re wondering if a tax credit is better than a tax deduction, the answer is yes because a tax credit allows you to reduce your taxable burden dollar for dollar. For example, if your tax bill is worth 20,000, a $2,000 tax credit would reduce your bill by $2,000
For a tax deduction, if you had a $2,000 tax deduction with a taxable income of 50,000, your taxable income wouldn’t reduce by $2,000. Instead, your taxable income would now amount to $49,000. Depending on where you fall on the tax bracket, you would save between $0 and $370 compared to $2000 with a tax credit.
- Can I deduct my medical expenses?
Every year, the IRS allows you to deduct unrefunded expenses for qualifying medical expenses if they exceed 7.5% of your adjusted gross income (AGI). These expenses could be:
- Preventative care
- Dental and vision care
- medical expenses
- Prescription medication
- Travel expenses paid to receive medical care
- Psychologist and psychiatrist visits
- Prescription appliances
The amount you can deduct depends on your income and if you can itemize deductions. An example is if your AGI is $100,000 and you itemize your deductions, you can deduct any reimbursed medical expenses over 7.5% of your AGI or $7,500 (7.5% of $100,000).
- What happens if I can’t file my taxes on time?
Failing to pay or file taxes on time could lead to tax penalties. You could get hit with a late filing penalty of up to 5% of the unpaid balance each month (up to a maximum of 25%). Not paying your taxes on time could also lead to a monthly penalty of 0.5% of your unpaid taxes.
To avoid tax penalties, you should request an extension for your taxes and file form 4868 by the April deadline, and you’ll have till the October deadline to file your tax return.
But you should know that the extension is only for filing and not paying your taxes. As long as you pay up to 90% of your tax liability by the filing deadline, you won’t risk getting a late-payment penalty.
- What is the difference between marginal and effective tax rates?
Since the United States uses a progressive tax system, income is taxed based on a marginal tax rate. This is the tax rate of the tax bracket that your last tax bill falls in. The higher you earn, the higher your marginal tax bracket. For 2022, the marginal tax bracket begins at 10% on taxable income above $1, with the highest tax rate being 37% on taxable income above $539,900 for single filers and $647,850 for couples who file jointly.
The easiest way to calculate your effective tax rate is to determine your taxable income and then calculate your total tax bill. Thereafter, you divide the total taxable income to get the right tax rate you should pay.
- What income do I have to pay taxes on?
The IRS requires you to pay taxes on all of your income on all your earning across the globe. From your earned income(salary, awards, equity, and bonus) to unearned or passive income (rental or investment) every profit you make is taxable by the IRS.
- Do I have to pay taxes when I sell my home?
When you sell your taxes, you may owe capital gain taxes if there is a gain between the purchase price of your home and your sales price. But you can reduce your taxable gain by keeping track of any improvement made to your home.
- Which tax record can I keep or discard
If you can, the best idea is to keep your tax return forever but to avoid clutter while staying safe with the IRS. You need to keep at least three years of records reporting your income, expenses, and deductions, which is the length of time the IRS has to initiate an audit if it finds a substantial error. If you have self-employed income from different sources, you should keep records for at least six years because that is the required length the IRS has to initiate an audit for a business owner. However, some states have different time frames for audits.
In addition, you should keep a record of your stock and mutual fund purchases you make in a taxable account as well as your nondeductible IRA contributions until you withdraw all your money from the account.
- How can I avoid tax scams?
While there are a lot of ways to reduce your tax liability legally, a lot of people fall into traps from scammers in the name of claiming deductions and credits. To avoid tax scams, you have to choose your tax expert carefully, ensure they have an IRS Preparer Tax Identification Number and sign your return with that number.
Also, beware of any call or email from anyone claiming to be from the IRS; the agency usually sends you a letter through snail mail if it has any issue or question about your return.
The most effective way to protect your income from being overtaxed is to create a tax strategy that aligns with your financial goals. At Tax Goddess, Our goal is to create a tailored tax strategy and help you maximize your tax opportunities to reach your financial peak.
Ready to create a solid roadmap to success? Book a call with our team today to get started.