Everything you need to know to file on time and maximize your refund.
It’s tax season and time to get organized to ensure you file by April 18. This checklist helps you gather the forms you need, identify your tax bracket and claim all of the deductions and credits available. We also explain how Obamacare works so you can maximize your refund and file hassle-free.
Key things to know about tax debt
First and foremost, understand that not filing your taxes and trying to dodge the IRS is a recipe for even more financial stress down the road. If you don’t have everything organized and need more time, file an extension. Just be aware that even if you file an extension on time and correctly, the IRS applies interest charges to any unpaid tax debt that’s owed to them. So you’ll end up paying more if you delay even with an extension.
If you have everything you need to file, but simply don’t have the money to pay the IRS and you know you’ll end up owing them, don’t just skip filing in an attempt to hide from the IRS. You’ll face harsh penalties and could pay interest up to 25 percent of the full amount owed. Instead, you should file your taxes while applying for Currently Not Collectible status. This is where the IRS allows you to file without paying because you’ve proven you don’t have the means to do so.
Currently Not Collectible (CNC) is really the best path for anyone who can’t pay. Once you’ve qualified for it, the IRS can’t legally attempt to collect until your financial situation has improved. Once there’s a change in your situation, you typically work out an installment agreement with the IRS to catch up on what you owe. In the meantime however, the IRS can’t put liens or levies on your assets or garnish paychecks – all steps they can take if you try to dodge them.
Don’t squander your refund
Once you’ve filed correctly and on time, the final step is to decide what to do with your tax refund. Really, there are 3 things to do with it that can help you improve your financial situation:
- Use it to pay off debt. This is our favorite option, of course. With the average refund from last year at $2,797, you can make a big dent in your credit card debt or even pay off more than a point on your mortgage for a home up to $250,000.
- Save it. Take the average refund from last year, put it into a 1-year CD at 1.25% interest that compounds daily and you’ll have $2,832 by this time next year. Put the money in a 5-year CD at the same rate and you’ll have $2,977 after 5 years.
- Spend in wisely. No, this does not mean going out and splurging on something you really don’t need. Instead, if you need a big-ticket item this year because something is about to break, using your refund to make the purchase will help you avoid credit card use later in the year. You can also plan a cash-only vacation to avoid debt this year, too.
Learn more ways to use your refund strategically with our helpful infographic: Tax Refund Tactics.