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Money and Banking Tips for the Tax Season
How can you save money and avoid a variety of problems at tax time?
Guard against tax-related frauds. Examples include scam e-mails falsely claiming to come from the IRS. Many of these are intended to trick taxpayers into revealing Social Security numbers and other personal information that can be used by criminals to steal victims' identity and money, including tax refunds. Others involve phone callers saying the taxpayer owes money to the IRS that must be paid promptly by wire transfer (that actually goes to the crook) or by loading funds onto a prepaid debit card and then sharing the number. The scammer may try to intimidate a targeted victim who refuses to cooperate, such as by threatening arrest or suspension of a business or driver's license. For information from the IRS about tax frauds targeting consumers, visit www.irs.gov/uac/Tax-Scams-Consumer-Alerts.
Carefully choose how to prepare your taxes. At tax time, you gather and submit a substantial amount of sensitive information that, if misused, could cause you significant problems. If you are using a computer program to prepare your return, make sure that your computer has an up-to-date security package.
If you plan to hire a tax preparer, consider factors such as the preparer's professional background and the likelihood that the preparer will be around to help you answer questions the IRS may ask months after your return has been filed. For tips from the IRS on how to choose a tax preparer, including red flags to avoid, go to www.irs.gov/taxtopics/tc254.html.
After you choose a preparer, carefully review the completed tax return. Question any income and/or deductions on the return that you do not recognize. Unsupported income and deductions can be signs of an unscrupulous preparer who may deliberately make fraudulent errors, such as inflated claims for deductible expense. When the IRS detects these unsupported claims, the taxpayer is responsible for paying additional taxes, interest and perhaps costly penalties.
Be cautious with offers by tax preparers to handle your refund. These include suggestions that they can somehow get your money faster or that you should direct deposit your refund into any bank account other than your own. These services can be costly and perhaps even put you at additional risk for fraud. "Keep in mind that the IRS issues refunds to more than 90 percent of taxpayers in less than 21 days," noted Luke W. Reynolds, Chief of the FDIC's Outreach and Program Development Section.
Find out if you may be eligible for free tax-preparation assistance through the IRS. One example is the IRS "Free File" program, which allows taxpayers who earn $58,000 or less (for returns to be filed during 2014) to use a software program available to them free through the IRS Web site to prepare and file their federal taxes. Taxpayers who exceed the income threshold and are comfortable calculating and preparing their own returns without a software program can manually complete their federal forms through the IRS Web site.
Also, low-income, disabled, elderly and non-English speaking taxpayers can receive free tax-preparation assistance by trained, certified volunteers through the IRS-coordinated Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs. For details, start at www.irs.gov/Individuals/IRS-Free-Tax-Return-Preparation-Programs.
These various IRS-affiliated options enable you to electronically file your return, which is generally the easiest and fastest way to get your return to the IRS. Note: Certain tax returns are not eligible for e-filing.
Direct deposit your tax refund into your bank account. "Direct deposit is generally the fastest and safest way to get your refund," Reynolds said.
Put some of your refund into savings or toward paying down debt. If you're expecting a refund, consider deciding how much of it you can save toward a goal or for a "rainy day fund" for unplanned expenses. You can direct deposit your tax refund into up to three different accounts at three different U.S. financial institutions, including savings accounts. And, you can use part of your refund to purchase a U.S. Savings Bond for yourself or for someone else. Also consider using part of your refund to pay high-cost loans and other bills, starting with the ones that charge the highest interest rates.
If you owe money on your taxes, consider the best way to pay it. You can have your payment withdrawn electronically from your bank account on a date you specify, such as April 15, but make sure you have enough money in your account. If you don't have money to pay your tax balance, you have several choices, including an IRS monthly installment plan. Also remember that borrowing money on a credit card to pay your taxes can be costly.
Plan for next year's tax return. If you're expecting to receive a significant tax refund or owe money, consider filling out a new W-4 form with your employer to adjust your "personal allowances." This adjustment will reduce or increase the taxes withheld each pay period.
"Many people are excited about getting a big refund, but that really means they have overpaid on taxes and missed an opportunity to invest or otherwise use the money," said Elizabeth Khalil, a Senior Policy Analyst in the FDIC's Division of Depositor and Consumer Protection. "If this happens year after year, it may be time to reevaluate how much you are having withheld."
And, if you owed a lot of money on last year's taxes, you may want to increase your withholding (or your estimated tax payments if you are self-employed) to reduce the risk of a penalty for underpayment of your taxes during the year. Regardless, you may be able to reduce your taxes through contributions to tax-preferred retirement plans and higher education savings vehicles such as a 529 Plan for college savings.
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