Tax Day is fast approaching. If you have any hope to receive a tax refund, you will have to file your tax return by May 17, 2021. This is also the season when tax preparation companies and TV ads start bombarding us with claims that they can get us a better refund or “reduce our tax liability in half.” Unfortunately, many of these claims end up being not true and downright risky. However, there is a lot you can do to legally reduce your tax liability and keep more of your hard earn money: If you haven’t already, you should meet with a financial counselor to make sure you take advantage of what’s out there for you and avoid pitfalls.
Tax planning is the simple process of analyzing your current financial setup and making certain moves to ensure you pay the lowest taxes possible. This year more than ever you need to make sure to:
1. File your taxes to claim a Recovery Rebate Credit.
This is especially important for those who did not receive the Economic Impact Payments or those who received less than the full amount. They must file a 2020 tax return to confirm their payments and check their eligibility for this credit. Consult with a tax preparer for specific circumstances.
2. Avoid paying high tax preparation fees and applying for refund anticipation products.
NYC Free Tax Prep Service sites, prepare and electronically file federal and state returns for free for taxpayers earning up to $68K. Filing electronically would allow you to receive your refund in as little as 10 days. Refund anticipation loans and checks’ fees can be costly and may even damage your credit if not properly handled.
3. Make sure to select the right filing status and adjust your withholdings if necessary.
Your filing status determines the rate at which your income will be taxed and the level of standard deduction available to you. If you got a big refund last year but struggled to make ends meet during the year, you should review your withholdings. If you ended up with a high tax bill, you should consider increasing your withholdings in your W4.
4. Get familiar with important tax credits.
You may qualify for the Earned Income Tax Credit, the child tax credit, and the child and dependent care credit. The IRS has a helpful list here: Credits and Deductions for Individuals.
5. Get a tax credit for saving for your retirement.
Depending on your Adjusted Gross Income (AGI) and your filing status, you can get a credit for up to 50% of the money you save for retirement to reduce the amount of taxes you owe. For example, a person filing as head of household with an AGI of $29K who saved $1,200 in a 401K can claim a 50% Saver’s credit for her contribution worth $600. If you owe taxes, this credit will reduce your debt. If you do not owe taxes, this credit will not give you a refund.
6. At work, consider contributing to Flexible Spending Account (FSA) or participating in a commuter’s pre-tax account.
When you enroll into these types of accounts, your paycheck will be lower, as money is being set aside tax-free for FSA-eligible expenses such as some over-the-counter medication, copays, etc., and MetroCard or parking expenses. When it’s time to pay for those items, you will use the pre-tax money through an FSA debit card. It might look like you’re getting less money in your paycheck, but in reality, you are saving money and paying fewer taxes throughout the year.
Want to discuss your basic tax planning ideas or learn tools to improve your tax planning?
- If you are currently working with a NYLAG financial counselor, reach out to them now to discuss your tax planning options.
- Connect with a NYLAG financial counselor.
- Call our NY COVID-19 Legal Resource Hotline with a legal concern related to COVID-19.