Most people don’t make a habit out of thinking about taxes. We know we might be a little bit weird for having that as a hobby, but we’re okay with that. Most folks prefer to think as little as possible about their taxes outside of tax filing season or starting a new job. So their detailed knowledge of tax facts, well, isn’t so detailed.
And as you might guess, that’s kind of a problem.
In our experience, knowledge serves as the first and largest barrier between most taxpayers and a bigger tax refund. While knowing only the basic tax facts can help you file a perfectly acceptable, generally error-free return, we think you should push just a bit further. Unless you plan to enlist an expert tax preparation company like us, more knowledge will help you expertly navigate your tax return. To sum up, that translates to more money to you—and less to the IRS.
We’re going to kick this off with 15 tax facts you probably don’t already know.
There are a ton of things you’ve probably never learned about taxes. So let’s start with the basics before diving into more tax facts about tax preparation and tax representation.
Many taxpayers suffer from the common misconception that when you live abroad, you owe less—or nothing—when tax season rolls around. On the contrary, taxpayers who live in other countries typically face more complicated tax requirements that those living in the United States.
The U.S. taxes citizens based on their citizenship, not their location. For many, this adds a number of potentially complicated tax burdens. For expats, you must file a federal tax return with the IRS.
However, based on your state, you may or may not need to file and pay state taxes. The state you’ll need to check typically depends on where you last lived, so if that state doesn’t tax income, you’re in the clear. On the other hand, your state filing depends on where you earned your income. So if you didn’t earn any income in that state across a tax year while you were living abroad, you may not technically qualify as a resident. And as a result, you’ll be off the hook.
Other situations to note: When you’re overseas as a member of the military, or when you own or have a stake in any foreign bank accounts, and more. Also, sabbaticals from work, attending college, or military service. All can carry potential tax burdens, so it’s best to get in touch with a tax specialist to help you file.
As of 2021, nine states do not have an income tax. Depending on your financial situation and income, these states may offer attractive horizons for those considering a move.
To clarify, the states without income tax are:
Now for those states with an asterisk noted, they do not have personal income tax but do tax other money often considered income. For example, Tennessee does tax some dividends and interest. This should all but disappear by 2022, but in the meantime, Tennessee technically taxes some investment income.
In another instance, New Hampshire collects taxes on interest and dividends while avoiding personal income taxes. If you earn more than $2,400 per year ($4,800 as a joint filer), you’ll likely need to pay 5% on your investment income.
All in all, income tax may serve as the universal standard of federal tax returns. However, nearly 20 percent of states don’t share the same view. So depending on where you live, you may see a bump in the size of your paycheck.
Just because a state doesn’t tax income, that doesn’t mean the state doesn’t have other taxes. Because most taxpayers tend to view “taxes” most acutely in terms of the bills they may pay monthly or annually, they tend to view the states without income taxes more favorably. But in reality, your state routinely levies taxes of many kinds—and they probably balance out in general.
It’s a good reminder that state taxes serve as your state’s revenue. They still have most of same expenses as every other state, funding schools, trimming trees, filling potholes, and so on. While states may offer low or now income taxes or corporate taxes to attract new residents, they still need to balance their budgets. So that extra take home pay might go towards higher sales taxes, gas taxes, or a laundry list of other taxes.
If you want to lower your tax obligation, it pays to think about how you live and where your priorities lie. If you’re a single remote worker and don’t plan to own a home, you may save money living in a low income tax, high property tax area. Compare this to a small business owner who also owns a home. In this case, low property taxes or corporate taxes may save you more.
While the chance of winning the lottery is low—like, really low—the last thing you want to do is neglect to plan ahead should you win big. It doesn’t really matter whether you take the reduced lump sum or an annuity. But there are ways to mitigate your tax obligation, and your situation may not end up so dire depending on the state.
For example, redirecting a portion of your lottery winnings to a charity can help you reduce your overall obligation. Some lottery winners actually set up a charitable foundation or donor-advised fund to accomplish it.
Typically, states with high top income tax rates will place a pretty heavy tax burden on lottery winnings. For example, state and local taxes hit particularly hard for those living in New York City, NY. But dropping the nearly 4% local tax, and elsewhere in New York becomes much more attractive. And on the entirely opposite side of the spectrum, states like California and Delaware don’t tax lottery winnings at all. Pretty nice, right? Especially considering California’s high state income tax rates.
Many taxpayers find themselves tempted not to file when they know they won’t owe taxes. And technically, that’s their prerogative! While we encourage you to file every year, if you can guarantee you don’t owe the IRS any taxes, the penalty for not filing is, well, zero.
That’s because the IRS calculates its failure to file penalty based on your tax bill. So when your tax bill sits at $500, the IRS can calculate your penalty based on that. But when your tax bill sits at $0, the IRS calculates your penalty, which is—you guessed it—a big, fat $0.
But here’s the truth: Your tax bill rarely comes out to zero dollars exactly. While you may have perfectly assessed your tax obligation on the W-4 you filed with your employer, that doesn’t take into account every other financial item in your life. Perhaps you have access to tax credits, have a side income, or paid for your own health costs throughout the year. Hundreds of factors impact your tax obligation aside from your employment income
When you don’t file, you may not face any consequences or tax debt. But you’re losing out what may well be hundreds or thousands of dollars in tax refunds.
Regardless of how much you know about taxes, it all comes down to Tax Day—and that’s one place where the pros come in. Let’s run through a few tax facts you may not have heard about tax preparation.
Sadly, you read that right. When you file your tax return using pen and paper, you’re much more likely to end up with errors on your tax return. But how much more likely is it, really?
Turns out, a lot more likely. According to a handful of estimates over the last two decades, about 20% of taxes filed by hand have at least one error. These errors can include misspellings, incorrect math, or an illegible word or figure. But the result of the error ends up about the same. Errors on your tax return can delay processing and your refund—and even raise the likelihood of an audit.
While filing electronically or using a tax preparer doesn’t completely eliminate the chances of an audit, they do substantially lower them. That results in time and hassle saved, and earlier access to your tax refund.
In certain cases, you may qualify for free tax assistance or tax preparation services. Through the IRS’s Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs, you can access free basic tax return preparation.
The list of folks who qualify include:
The IRS does not typically staff the VITA and TCE programs itself; instead, IRS partners and community volunteers operate them. Of course, these professionals are IRS-certified, and can help taxpayers with questions about pensions and retirement-related issues. But should you qualify, they can often help you with your basic filing needs.
There are two certainties in life: death and taxes. But your age may help you avoid the latter in some cases. While the IRS doesn’t change the rules for senior filers, a few unique income situations may apply that eliminate the need to file.
You must file a tax return when your gross income exceeds the standard deduction for your filing status, plus an exemption amount. This truth applies whether you’re 18 years old or 80. However, Social Security income doesn’t count as gross income. For many seniors, this can result in $0 in gross income, meaning you don’t need to file a tax return.
However, you may receive other income that isn’t tax-exempt. If you work part or full-time, or draw taxes from a 401(k) or IRA that totals more than the standard deduction plus an exemption, you’ll still need to file. And there may be other reasons to file! By filing, you may be able to reduce your total taxable income with various tax credits and get a refund.
One persistent misconception about taxes? When you earn at a higher tax bracket, the IRS will tax all of your annual income at that higher rate. The reality is more complicated, but fortunately, results in more money in your pocket.
The IRS doesn’t know how much money you make before you make it. For example, you could change jobs, take an unpaid sabbatical, or do a million other things that might alter your income trajectory from January 1st. So it doesn’t make too much sense for the IRS to tax you assuming the amount of money you’ll make, does it?
That’s the myth. In reality, the IRS taxes you at a certain rate only after you’ve earned into a particular tax bracket. As you earn more, your tax obligation will go up, but you shouldn’t need to worry about a big tax bill assuming you’ve correctly marked all your withholdings. We’d recommend an annual paycheck checkup early in the year or after a major life event (marriage, a new child or dependent, etc.).
When you hit the jackpot, we all know Uncle Sam will come knocking. But depending on the state in which you won, you may not have to fork over any more in state taxes.
First, let’s talk federal taxes. Lottery winnings don’t count as income, so if you win less than $5,000, you may not owe the IRS anything. Above that, however, and you’ll hit whatever withholding rate you normally would based on your tax bracket—which will likely end up as a high one.
Next, state taxes. Typically, states with high taxes also impose high taxes on lottery winnings. And the same goes for states with low or no income taxes. If you live in California or Delaware, you can take a nice sigh of relief now. These states don’t tax lottery winnings at all!
Some tax prep companies (like us) handle a lot more than tax preparation. Here are some things you may not know about tax representation—and what it can offer you.
We’ve established that taxpayers regularly lose out on millions of dollars in refunds. But failing to file once won’t lose you your refund entirely. You have up to three years to claim the money the IRS owes you.
That may seem like a lot of time, but it ticks down much faster than you may realize. And many who don’t file their tax return don’t always think the money is waiting for them. According to the IRS, many don’t file because they didn’t earn enough money to be required to file. However, if you’ve had taxes withheld by an employer, you may actually be eligible to have those taxes refunded to you.
And even if you haven’t earned enough to need to file, you may still qualify for various credits and deductions, such as the Earned Income Tax Credit—and some of these refundable credits mean that filing may result in the IRS owing you. Since there’s no penalty for failure to file when you don’t owe the IRS, it’s always best to file just in case. Actually, it may put some additional money in your pocket.
If you’ve never faced tax debt before, you may not realize just how quickly it can spiral out of control. But knowing this in advance can help you avoid the overwhelming stress and potentially life-changing impacts of tax debt.
We’ve mentioned a couple times already how the IRS applies a penalty for failing to file your tax return, but figures that penalty off of your total owed. So when you owe nothing, the total sits at a nice, comfy $0. The picture isn’t so rosy when you owe. The IRS applies a 5% penalty for each month (or part of a month) you fail to file—up to 25%. So if you owe $1000, after five months, this penalty alone raises your bill to $1250.
When you fail to pay, the IRS will apply a separate penalty, at 0.5% of your unpaid taxes up to 25%. If you have failed to pay and to file, they’ll collectively only total 5% of your unpaid bill, so at least there’s that.
Unfortunately, interest on your unpaid taxes just accrues until you pay or arrange a payment plan. With all of these together, and depending on how long it takes you to get squared away with the IRS, it shouldn’t be too hard to see why we recommend knocking back tax debt before it ever gets its footing.
As a full-service tax representation firm, we often hear from clients struggling against tax debt. Therefore, one thing we hear over and over is just how scary receiving your first (or second, or third, or…you get the picture) letter from the IRS can be. Then it triggers your fight or flight response, and causes you to either shut down your debt—or shut down entirely.
Enlisting a tax representation firm that handles issues of tax debt and liabilities can help stop those letters. Generally a tax team will take over communication with the IRS on your behalf as we work to lower your tax bill and negotiate a favorable repayment plan as needed. But in the interim? Those scary letters stop. It’s truly a weight off your shoulders.
The possibility you may end up on the receiving end of an IRS audit looms large over nearly every taxpayer rushing to finish their taxes at the last minute. And to some extent, that’s healthy. It’s good to recognize that timeliness and accuracy are of the utmost importance when filing your taxes!
But you shouldn’t stress yourself out too much. The IRS doesn’t audit huge numbers of tax returns. It’s pretty well documented that your odds of an audit are actually lower when you’re ultra wealthy, simply because the IRS doesn’t have the resources to take on every person in the highest tax bracket. However, the IRS doesn’t just audit everyone—in fact, the number is generally less than 1%. If you file accurately to the best of your knowledge, it’s unlikely you’ll face a tax audit.
How do you picture a tax audit? Some imposing and serious suited IRS agent knocks on your door and informs you there are charges being brought against you? Of course, maybe you don’t picture exactly that. But it sounds pretty serious, right?
As far as scary sounding IRS run-ins go, tax audits are way up there on most folks’ lists. But trust us when we say they’re usually way less scary than you probably imagine them to be. The IRS will inform you of a tax audit by mail—not in person or by phone. So either of these methods of contact may be signs of a tax scam.
Instead, easy-to-resolve issues—or simply your tax return’s relationship to another tax return that showed errors, mistakes, or irregularities—trigger most audits. In conclusion, providing clarifying information, receipts, and other financial documents may resolve things without revealing you owe some big tax bill.
Knowledge is power. Consequently, the more knowledge you have about how taxes work, the more you can do during tax season (and year round) to give yourself a leg up and get the tax refund you deserve. So, use these overlooked tax facts as a starting point, but don’t stop there. Explore further in our blog where you can read up on tax credits, tax tips, and even how politics shapes how—and what—you pay.
A better tax future is closer than you think.
Looking to maximize your tax refund today? We’re here to help beyond just the tax facts. So give us a call at 1-800-410-8605 or send us a message today and we’ll get your tax filing process started to get you the best tax refund possible.