10 IRS Tax Tips Worth Noting

There are many tips taxpayers can utilize to optimize their outcome when it comes to taxes, but here are the top 10 that taxpayers should be aware of:

TABLE OF CONTENTS

Put “Tax Day” On Your Calendar And Set A Reminder Far In Advance
Be Organized With Your Financial And Tax Records
Read All IRS Letters You Receive In The Mail
Lower Your Tax Debt By Applying For The IRS Fresh Start Initiative
Adjust Your Paycheck Tax Withholdings
Take Advantage Of All Eligible Tax Credits
Optimize Your Tax Deductions
Contribute To A Health Savings Account (HSA)
Contribute To Tax-Deferred Retirement Accounts
Hire A Tax Professional For Assistance In Tax Filing

Key Takeaways:

  • Planning ahead by preparing your tax documents and income information, and putting the Tax Day deadline on your calendar will streamline the process of filling out your tax return and submitting your tax payments on time to avoid unnecessary penalties, fees, and interest.
  • The IRS Fresh Start Program helps qualifying taxpayers manage their federal tax debt through an offer in compromise, installment agreement, currently non-collectible status, or penalty abatement.
  • Hiring a tax professional, such as a CPA or tax attorney, can be monumental in achieving tax savings by using their expertise to ensure the accuracy of your tax return as well as optimize tax breaks such as tax credits and tax deductions.

1. Put "Tax Day" On Your Calendar And Set A Reminder Far In Advance

Understanding the tax filing deadline is one of the best tips for individuals, couples, and businesses to avoid unnecessary penalties and interest that will result in them getting a higher tax liability if they miss the due date. It is beneficial for taxpayers to research when the next Tax Day is, write that date on their calendar, and set a reminder well in advance to ensure they are able to gather their financial documents and tax forms and file their taxes on time.

This year, Tax Day fell on April 18, 2023, and this date falls around the same time each year. 

If taxpayers need more time to prepare and file their taxes, they also have the option to request an extension of time to file. However, it is beneficial to note, that this extension request as well as their tax payment is still due by the original tax deadline, and if these due dates are not met, they will be subject to the associated late filing and late payment penalties.

2. Be Organized With Your Financial And Tax Records

Maintaining the organization of tax records and financial documentation throughout the year is one of the easiest ways to reduce the stress of the tax season, as instead of scrambling to gather everything as well as file on time, taxpayers can seamlessly access any information needed to fill out the required tax forms. 

The types of records that taxpayers should keep in one place for easy access before Tax Day include:

  • All W-2s, 1099s, and mortgage interest statements from current and previous tax years.
  • Receipts and financial documentation from the previous year.
  • Documentation of business expenses.
  • Charitable contribution information.
  • Investment information.

3. Read All IRS Letters You Receive In The Mail

While IRS letters are nothing to panic about, it is important that taxpayers read any IRS letters they receive in the mail to stay up to date with their tax accounts. There are several reasons the IRS may send a notice letter, such as to ask a question about the tax return that was filed, provide information about the status of their tax return, or request payment for their taxes.

When taxpayers receive an IRS letter in the mail, here is what they should do:

  • Read the letter carefully, from start to finish, to learn if any action must be taken.
  • Review the information outlined in the letter to determine if they agree with the terms suggested by the IRS.
  • Take the necessary actions stated in the letter, such as updating account information or submitting a tax payment.
  • Reply to the letter if instructed to do so.
  • If individuals disagree with the information outlined in the letter, follow the instructions to dispute the details written in the letter.
  • Make a copy of the IRS letter to keep in their tax records.
  • Ensure the IRS notice is truly from the IRS and not a scam.

4. Lower Your Tax Debt By Applying For The IRS Fresh Start Initiative

The IRS Fresh Start Program allows qualifying taxpayers to manage their tax debts through programs that allow them to resolve their tax issues without undergoing additional financial hardship. This program has been especially impactful in helping taxpayers manage the economic struggles following the COVID-19 pandemic by increasing the threshold required for the IRS to issue a federal tax lien to collect payment for tax debts as it offers them an opportunity to get their finances in order without extra debts accruing on their account.

The four main programs within the Fresh Start Initiative include:

Offers In Compromise:

An offer in compromise allows qualifying taxpayers to settle their tax debt for a lower amount than was initially owed in the situation where paying their full tax liability would have resulted in them struggling to afford their necessary living expenses.

Installment Agreements:

An installment agreement allows taxpayers to pay off their tax debts in monthly installments instead of requiring them to pay off their full tax debt in one lump sum payment.

Currently Non-Collectible Status:

If taxpayers are approved to have their tax account listed as currently non-collectible, the IRS will temporarily delay all collection efforts, allowing the taxpayer time to get their finances in order before resuming their tax payments towards their tax bill.

Penalty Abatement:

As a form of tax debt relief for eligible taxpayers who have received IRS penalties due to failing to file or pay their taxes, the IRS offers penalty abatement, where they may remove the penalties from their tax bill. 

5. Adjust Your Paycheck Tax Withholdings

Taxpayers who earn their income through salaries or wages have the opportunity to adjust their tax withholdings from their paychecks, which can impact how much a taxpayer will owe or be issued with a tax refund when they file their federal income tax return. Employees can adjust their tax withholdings by submitting an updated W-4 Form, Employee’s Withholding Certificate to their employer.

If taxpayers choose to have a higher tax withholding than what they end up owing, they will receive less money in each paycheck but will receive a tax refund when they file their taxes. If taxpayers instead underestimate their tax withholding, they will receive more money in each payroll period, but they will owe money in taxes at the end of the tax year. 

Personalizing their withholding adjustments can be beneficial in the case that they need more disposable income throughout the year and wish to receive a higher paycheck, or if they would prefer to potentially overpay their taxes, they will not have to worry about owing a substantial tax liability when the Tax Day deadline approaches.

The IRS provides a tax withholding estimator tool, in which taxpayers can input their income and financial information to estimate how much they will owe in taxes. Based on this calculation, they can determine how much tax to withhold from each paycheck.

6. Take Advantage Of All Eligible Tax Credits

Tax credits reduce a taxpayer’s tax liability by directly subtracting the qualifying dollar-for-dollar credit amount from their tax bill. There are three main types of tax credits, including refundable tax credits, partially-refundable tax credits, and non-refundable tax credits, that impact whether any tax credit value that exceeds the tax liability is eligible to be issued to the taxpayer in the form of a tax refund.

Some common refundable tax credits that allow taxpayers to receive a tax refund in the case the credit amount exceeds their tax liability include:

  • Earned Income Tax Credit (EITC)
  • Premium Tax Credit

An example of a partially-refundable tax credit that allows taxpayers to receive a percentage of the leftover credit amount after their tax liability is reduced to zero includes:

  • American Opportunity Tax Credit (AOTC)

A few examples of non-refundable tax credits in which the excess credit amount will not be issued to the taxpayer in the form of a tax refund include:

7. Optimize Your Tax Deductions

Tax deductions are a type of tax allowance that reduces how much a taxpayer must pay in taxes by subtracting deductions from their taxable income. Tax deductions can either be standardized, in which a set standard deduction amount can be subtracted from the taxpayer’s tax bill based on the tax rate of their tax bracket and their filing status, or itemized, in which taxpayers must deduct all eligible expenses individually using an itemized list. There are different tax deductions available related to business, education, health care, and investments.

Standard deductions are typically easier for taxpayers to claim as it does not require them to list out individual expenses and keep documentation as evidence of these expenses in the case that their account is chosen for a tax audit. However, there are certain situations in which taxpayers may achieve higher tax savings through itemizing their deductions. One of these circumstances in which itemizing deductions could be advantageous for taxpayers is for homeowners whose combined amount of their mortgage interest, mortgage insurance premiums, points, and real estate taxes exceed the standard deduction for their tax bracket. Additionally, if the sum of the taxpayer’s local and state taxes, such as property tax, income tax, real estate tax, and sales tax, along with their mortgage interest, surpasses the standard deduction, itemizing their deductions may be beneficial.

8. Contribute To A Health Savings Account (HSA)

Contributing to a health savings account (HSA) is another advantageous action taxpayers can take to save money on taxes, especially for taxpayers who have a high-deductible health plan.

There are three ways in which health savings accounts are tax-advantaged: 

  • Contributions to a health savings account can be deducted from the taxpayer’s gross income.
  • The interest on a health savings account is tax-free.
  • Withdrawals from a health savings account for eligible medical expenses are tax-free.

9. Contribute To Tax-Deferred Retirement Accounts

When taxpayers increase their contributions to a tax-deferred retirement account, such as an employer-sponsored 401(k) retirement plan or an individual retirement account (IRA), they do not have to pay taxes on that money until it is withdrawn in the future, which directly lowers their tax bill. Other benefits of contributing to retirement accounts include raising the potential of compound interest on their investment, saving on taxes in the long term, and avoiding current taxes on investment gains.

10. Hire A Tax Professional For Assistance In Tax Filing

By hiring tax professionals such as tax attorneys, certified public accountants (CPAs), and former IRS agents, taxpayers can ensure that their taxes are prepared and filed accurately while also optimizing their tax benefits. The Internal Revenue Code (IRC) is consistently updated due to changes in the tax law, and this legal jargon can be overwhelming to understand, so tax professionals can relieve the stress of making a mistake by offering expert guidance throughout the tax preparation and filing process.

Whether taxpayers are wage employees who only need to file a W-2 form from their employers, also have self-employment income, or are fully self-employed, tax professionals can ensure that they optimize all possible tax-exempt expenses, credits, and deductions that can save them money in taxes. From tax preparation to actually filing their tax returns, tax experts provide answers to all their questions about tax requirements and offer advice on how they can benefit from tax incentives. Additionally, they can provide expertise regarding specific types of taxes, such as gift tax, excise tax, and alternative minimum tax that can overall help taxpayers understand their tax situation.

The experts at Ideal Tax are here to help you navigate your tax situation and save you money when you file taxes. Contact us to schedule a free consultation with a tax professional to ensure your biggest savings during the next tax season.

Author: Luis Ceja - Director of Operations
Author: Luis Ceja - Director of Operations

Luis serves as the Director of Operations for Ideal Tax, overseeing a multifaceted team including case management, tax professionals, document specialists, customer support, training, and development.

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