Financial analysts are predicting that the 35-day federal government shutdown will affect the upcoming tax season. Millions of Americans filing taxes will likely be hindered because fewer IRS agents had been available to them earlier in the year to assist in explaining and filing tax returns.
Although the shutdown is at least temporarily over, the empty offices of the IRS for the last month are expected to result in a chaotic and confusing tax season rife with delays, exacerbated further by some of the new regulations that have been enacted this year. With complications like these, many families are facing financial hardships and struggling to make ends meet, providing perfect examples of the importance of properly understanding the tax code.
While tax laws seem to change almost annually, most alterations are relatively minor. Conversely, most of the tax system remains constant, and yet we often send in more to the IRS than is actually required.
“A 2001 study by the Government Accountability Office shows that as many as 35% of Americans overpaid their federal taxes by $500 or more that year,” said Dr. Michael Finke. Professor of Personal Financial Planning and Director of the Retirement Planning and Living Consortium at Texas Tech University. “Most of us see taxes as complicated,” Dr. Finke said, “but the truth is we don’t need to be an accountant to figure out the basics of the tax system.”
According to Dr. Finke, the first step is to discover which deductions a taxpayer is eligible for. First, we look at “above-the-line” deductions, such as interest on student loans, health insurance and retirement money saved in a 401(k). By subtracting items like these from the taxpayer’s gross income, he or she will arrive at their adjusted gross income. Then, they can then move on to “below-the-line” deductions. For example, the itemized business expenses with which most taxpayers are familiar.
The process of filing taxes has become more complicated over the years with the rising number of possible deductions available to us. “We tell our elected representatives that we think we should get a break on our taxes if we own a home, or pay for educational expenses or drive a Tesla,” Dr. Finke said. “In 1986, we had a massive tax simplification where many of these deductions were cut. But they’ve crept back in over the years with a vengeance.”
This tax season, lower-income earners should also make sure they file for the earned income tax credit (EITC), an incentive that gives the taxpayer credit on every dollar he or she makes, up to a certain amount. Low-income families with children benefit the most from the EITC, with an overall 30 million Americans receiving benefits from it per year.
Finally, with this precarious tax season upon us, taxpayers may wish to consider adjusting their W-4 form, which sets how much money will be set aside for taxes from their paychecks. Dr. Finke recommends seeking a professional for this, though it will likely be worth the trouble.
If a taxpayer withholds too little, he or she will be penalized when it comes time to pay taxes. On the other hand, if a taxpayer’s W-4 has him or her setting aside too much income to be withheld for taxes, this can lead to scrimping and saving all year only to get a large refund annually, in turn causing more headaches for smart and steady financial planning.
Dr. Michael Finke contributed to this article. Dr. Finke is a Professor of Personal Financial Planning and Director of the Retirement Planning and Living Consortium at Texas Tech University, where he leads the doctoral program—considered the premier academic program in financial planning.