Tax Season: Getting a Refund or Owing

Tax Season Tips for Filing, Getting a Refund or Paying

As you prepare to file your taxes, it's important to understand the possible outcomes. You’ll likely find yourself in one of two camps: Excitedly awaiting extra money in your account or curious as to how to pay what you owe.

Take a few moments to learn more about the basics of filing your taxes and what your options are once you know where you stand. It’s also a good idea to consult with a tax professional before filing or brush up on information available at irs.gov.

Tax terms to know

Understanding a few key tax terms can help you when it actually comes to filing paperwork.

• W-2 form: A tax form that reports the total amount of money an employee earned from an employer during the year and the amount of taxes withheld from their paychecks.
• 1099 form: Used to document income not from a “traditional” employer. Freelance work, stock payouts and independent contract payments are a few examples.
• Federal taxes: Processed by the Internal Revenue Service (IRS), they are used to fund national programs and services.
• State taxes: State taxes are processed by various state agencies and used to fund state government services, similar to federal taxes. Not all states require state income tax payments.
• Adjusted Gross Income (AGI): This is your total income minus certain deductions, such as contributions to retirement accounts or paid student loan interest. Note: Many deductions are subject to income limitations and may not be available if your AGI exceeds applicable thresholds.
• Standard deduction: This is a fixed amount that you can deduct from your AGI that reduces your taxable income.
• Tax credit: A dollar-for-dollar reduction in the amount of tax you owe. The Child Tax Credit or the Earned Income Tax Credit are examples of these.

Filing your taxes

Before you can determine if you’re set to receive a refund or will owe money, you have to actually file your taxes. Here’s a quick rundown of how that will look.

• Gather your documents. You will receive tax documents outlining information from the previous year from your employer. This will include W-2 forms, 1099 forms from contract-type work and any other paperwork that shows income you earned the previous year.

While the IRS oversees federal income taxes, some states charge state income taxes. These are monitored by various state agencies, so double-check to see if your state requires you to pay state taxes.

• Choose a preparation method. You can prepare your taxes yourself or have a reputable tax preparer file them for you. A variety of online software programs are available if you’d like to do it yourself. If you plan to use a tax preparer, research their reputation, preparation, filing fees and any guarantees they offer if your taxes are filed incorrectly.
• Be aware of deadlines. The deadline to file taxes is usually April 15, unless that day falls on a weekend. If you aren’t prepared to file by then, you or your tax preparer can file for an extension. This is typically good for six months, but even that date may vary, so be aware of your new deadline. While an extension may give you more time to file, you should still pay the estimated amount of taxes you owe in order to avoid potential penalties and interest.

Expecting a refund

Expecting to receive money back? While it’s fun to spend a bit of “play” money, here are a few smart ways to spend your tax refund.

• Pay down debt. Paying down any outstanding debt — student loans, credit cards, etc. — is a good option. Lowering your debt now will reduce the amount you pay in interest over time, giving you more money to work with down the line.
• Save. Save. Save. If you can, saving your tax refund can be a great way to start an emergency fund or prepare for an upcoming expense.
• Plan for your future. Whether you're saving for college, a new vehicle or exploring investment opportunities, using your refund to improve your future is always a good idea.

Preparing to pay

If you’re on the other end of the spectrum and found yourself owing this year, there are several ways to prepare for filing your taxes next year.

• Estimate the amount early. You can use an online calculator to figure out a ballpark number of how much you’ll owe. From there, you’ll be able to determine a plan.
• Adjust accordingly. If your current budget doesn’t account for the additional taxes you’ll owe, explore opportunities to trim other expenses. It might require sacrifices in the short term, but it will certainly be worth it once your taxes are in the rearview. 
• Get ready. If you can, work with a tax professional to determine a way to plan for the next year and set yourself up for financial success.

No matter which camp you find yourself in, there’s a light at the end of the tunnel. And you can move forward with the confidence that you’re prepared for the road ahead. 

By Taylor Provost, GM Financial

Taylor Provost loves puzzles of any kind, and that includes decoding complex ideas and concepts so she can share them with others in simpler terms. A true word nerd, you’ll often find her solving a crossword puzzle at home when she’s not road-tripping to a national park with her family.