by Robert Enyeart
Authors Note: While the Author is an inactive RTRP with the IRS, any information or opinions contained in this article are not a substitute for professional tax advice, or any other financial advice in general. A professional tax advisor or financial advisor should be consulted should you have any questions regarding your personal tax or financial situation.
It is said that nothing in life is certain except death, and taxes. Well, we are at the time of year again when many Americans file their federal and state tax returns. Hooray for certainties! It seems that every year there is always some new change or other quirk in the law that can make what is an otherwise relatively painless process more daunting than it actually is.
By now many of you should have received your necessary forms required to file your federal tax return. By law, an individuals W-2 Form should be mailed no later than January 31st. Another new form needed for filing a tax return beginning this year is the 1095-A the Health Insurance Marketplace Statement. This form provides information about you and anyone in your family that enrolled in a health insurance plan through the Health Insurance Marketplace in 2014 (i.e. www.coveredca.com, www.healthcare.gov). It also provides information on any advance payments of the premium tax credit that was paid to your health plan. If you applied for health coverage through the marketplace, you provided an estimate of your 2014 income, which was used to determine what, if any, premium tax credit you may have qualified for. When you file your return for 2014, you will find out the final premium tax credit for which you are eligible. The final premium you qualify for may turn out to be different than what was calculated when originally applying for coverage through the marketplace. If the advance payments you took were less than what you are eligible for, then you will receive the difference as a credit on your tax return. Conversely, if the advance payments totaled more than what you are eligible for, then you will be required to pay the difference with your tax return.
Other tax forms that you may be more familiar with deal with tuition, and scholarships. Schools must send Form 1098-T to any student who paid "qualified educational expenses" in the preceding tax year. Qualified expenses include tuition, any fees that are required for enrollment, and course materials the student was required to buy from the school. If someone else pays such expenses on behalf of the student (like a parent), the student still gets "credit" for them and therefore gets the 1098-T. Schools must send the form to the student by January 31 and file a copy with the IRS by February 28.
Scholarships and grants are more than likely tax-free if they meet certain criteria: You are a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities; the amount you receive is used to pay for tuition and fees required for enrollment or attendance at the educational institution, or for fees, books, supplies, and equipment required for courses at the educational institution. More information can be found from the IRS by clicking here.
Some people enjoy getting money back from Uncle Sam at the end of the filing season, while other people seem to change their withholding options on their W-4 form (Employee’s Withholding Allowance Certificate) with their employer(s) every few months so they can have the extra cash in their paycheck instead in the form of a refund. One must be careful with claiming too many or to few exemptions on their W-4 form as it may adversely affect their tax liability. An individual I know listened to the (bad) advice of a coworker and claimed what would be the technically correct number of exemptions, but also had their refund reduced at the end of the year by having the extra few hundred dollars spread out over several paychecks.
A good financial advisor will tell you that any excess money you give to the government via income tax with-holdings that you would otherwise be entitled to essentially is an interest-free loan. And they would be correct. But there are those of us who like getting extra money back as a lump sum versus ten or twenty dollars per pay period. It might be wise to adjust your with-holdings and direct the extra money into a retirement account. One would essentially be redirecting the money from the feds to themselves, and if done right might reduce your tax liability even further if pretax dollars are used to fund contributions into a 401(k) plan, or other similarly qualified retirement plan.
Personally, I enjoy receiving the money in the form of a refund, and I generally divide the money between a few different pots. Usually I put 50% into savings, and the rest into debt reduction efforts or for educational expenses.
With so many options for filing tax returns, it would be good to research your options if you are unfamiliar with filing taxes, or if you have a special tax situation that would prevent you from filing it without professional help. Be aware though, there are scams out there. The IRS has compiled a list of the most common scams of 2015 so far. I will offer one bit of advice though, because it is a topic that comes up every tax season. You cannot avoid paying taxes or filing a tax return because “taxes are unconstitutional”. To my knowledge no one who has used this excuse with the IRS has been successful, and they usually incur penalties and jail time on top of their original tax liability, and any legal fees incurred. The Sixteenth Amendment states “…The Congress shall have power to lay and collect taxes on incomes, from whatever source derived…” There are other references to taxes in the Constitution, so if someone is trying to convince you otherwise, they are unfortunately mistaken.
If you’ve made it this far without falling asleep, I hope you learned a thing or two, and if you have any questions please consult a tax or financial advisor.
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