Sorry: We feel obliged to inform you that tax time is right around the corner.
We know you’ve just packed away the tree ornaments, but those W-2s and 1099s will begin arriving soon. To test your knowledge on tax basics, take the quiz below. Then, if you bomb — no shame! — just read on to raise your tax IQ.
Here we go!
Will you owe a fine for missing the April 15 filing deadline?
The government does assess both failure-to-file and failure-to-pay penalties — from the due date of the return until the tax is paid in full — and those aren’t cheap.
The failure-to-file penalty is 5 percent of your unpaid taxes each month the taxes are due and not paid, up to a maximum of 25 percent. “If your return is over 60 days late, there’s also a minimum penalty for late filing; it’s the lesser of $210 or 100 percent of the tax owed,” the IRS adds.
The failure-to-pay penalty isn’t quite as hefty, coming in at one-half of 1 percent of your unpaid taxes for each month or part of a month, up to a maximum of 25 percent, of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. Other factors can increase or decrease this amount, so be sure to check out the IRS website for more details.
However, the IRS also states the following:
The IRS may abate your penalties for filing and paying late if you can show reasonable cause and that the failure wasn’t due to willful neglect. Making a good faith payment as soon as you can may help to establish that your initial failure to pay timely was due to reasonable cause and not willful neglect.
Still, we don’t recommend taking your chances here. When you owe money to the IRS, the agency will charge you interest that compounds daily: “The IRS doesn’t generally abate interest charges and they continue to accrue until all assessed tax, penalties, and interest are fully paid.”
Consider yourself warned.
Which is better: a tax credit or a tax deduction?
Tax credits typically are more valuable. The reason is simple. A tax deduction lowers your taxable income, while a tax credit lowers your tax bill dollar for dollar.
Here’s an example, with rounded numbers for simplicity. Let’s say you have a $50,000 income and fall into the 25 percent tax bracket. A $1,000 tax deduction reduces your taxable income to $49,000, which would drop your tax bill by $250 — 25 percent of $1,000.
However, if you were to have a $1,000 tax credit, your tax bill would be reduced by $1,000. You come out $750 ahead with a tax credit.
Tax credits come in two types: refundable and nonrefundable. Let’s say you owe $500 in taxes and have a $1,000 nonrefundable tax credit. In that case, your $500 tax bill would be wiped out and that would be the end of the story. But if you have a $1,000 refundable tax credit, your tax bill would be wiped out, plus you would get $500 back from the government.
So, which of these two types of tax breaks is better? As the experts at TurboTax state:
If you were ever faced with a hypothetical choice between a $100 tax deduction and a $100 tax credit, you would want the credit.
If you want to learn more about what credits and deductions are available, this IRS page is the place for you.
Do you need an accountant to get your taxes done right?
Most taxpayers probably will be fine on their own.
Today’s tax preparation software makes it easy to complete your own tax return even if you’re self-employed or have cashed in some investments. You have plenty of options from which to choose, but some of our favorites include:
If your income is below a certain level, you can even use some programs to file your taxes for free. Just head to the IRS Free File site for links to participating software providers. However, note that information about the program for this year’s tax season has yet to be released, so you’ll need to check back as the tax season progresses.
Of course, tax professionals have their place. If you own a business or have a complicated tax situation, using a pro can be money well spent.
If you’re not sure whether you need a tax preparer, remember that many online tax prep sites will let you prepare your return at no cost and charge you only when you file. You can try these sites first, and if you find yourself confused or the numbers don’t seem to add up, you can easily shift to an offline preparer without paying a dime to the website.
Have a great tax tip to share? Sound off in the comments below or on our Facebook page.