Tips For A (More Enjoyable?) Tax Filing

It’s that time of year when the April 15th individual tax deadline is right around the corner.  If you’ve already filed your 2024 tax return, you probably don’t want to think about taxes until next year.  If you haven’t filed your taxes yet, you probably belong to the majority of people who don’t want to think about taxes… ever.  So, in the spirit of making tax filing more enjoyable, digestible, or just less painful, here are a couple tips that may help you avoid some common problems taxpayers run into this time of year:

1) Double check the withholdings coming out of your paycheck each year.

It’s probably one of the most common and unpleasant surprises unassuming taxpayers get hit with when they file their tax returns.  The taxpayer has had nothing but refunds in prior years and is naturally anticipating a similar refund in the current year.  They fail to notice that their employer inadvertently withheld way too little tax from their paychecks during the year.  Job changes, incorrect W4 elections, multiple jobs, employer errors, and others, can all contribute to insufficient withholdings.  The best way to guard against this is to check your first couple paystubs of the new year to ensure that the withholdings seem reasonable and sufficient to cover your expected income for the year.

2) Avoid withdrawing from retirement accounts before reaching retirement age (59 ½). 

Your retirement accounts likely consist of a significant amount of hours worked, investment growth, and discipline to save all that money.  If you pull it out before reaching retirement age (59 ½), the entire distribution is subject to a 10% early-withdrawal penalty in addition to whatever the normal tax would be.  Certain accounts, like a ROTH, will be penalized even further by taxing distributions that would otherwise be non-taxable.  This extra tax penalty can be a significant hit to your overall net worth and retirement savings, not to mention all the additional investment income you will miss out on.  So, as much as possible, avoid pulling out of your retirement accounts early.  Think about how much you’ll save if you don’t!

3) Even if you can’t pay the tax you owe, it’s still best to file your tax return by the due date. 

Let’s say you owe a lot to the IRS, you either don’t want to pay it or can’t afford to pay it, so you decide not to file your tax return.  While we can hope that this would make the whole thing disappear, the IRS will discover the unfiled tax return sooner than later and assess a “failure to file penalty” on the balance due.  It is a 5% penalty per month on the balance owed, up to a maximum penalty of 25%, making it one of the IRS’ largest tax penalties.  It accrues from the date the tax return should have been filed to the date the tax return is filed.  You can completely avoid this penalty by filing your tax return by the due date (or extended due date), even if you can’t pay the tax owed.  So, taxpayer, don’t delay; file that tax return by the due date. You can thank me later :)

Please note that the advice above is general in nature and may or may not be applicable to your unique situation.  It’s always a good idea to consult with your tax advisor to ensure that all aspects of your situation are accounted for.