What YOU NEED to Know about Tax Planning, Extensions & Debt| Incite Tax

Hey guys, today we're going to talk about tax planning, extensions, and tax debt. First off, tax planning covers multiple areas of a taxpayer's financial life. Several things to consider are that one, tax planning starts with understanding your tax bracket. In order to plan for the future, you need to know where you are today. If you don't know where you are today, how can you plan for the future? So the first tax planning tip is to figure out what federal tax bracket you're in. The United States has a progressive tax system. This means that people with higher taxable incomes are subject to higher tax rates, while people with lower taxable incomes are subject to lower tax rates. There are 7 federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. No matter which tax bracket you're in, you probably won't pay that rate on your entire income, and there are 2 reasons for that. First is you get to subtract deductions to determine your taxable income. That's why your taxable income usually isn't the same as your salary or total income. And second, you don't just multiply your tax bracket by your taxable income. Instead, the government divides your taxable income into chunks and then taxes each chunk at the corresponding rate. For example, if you're a single filer and you made $32,000 in taxable income, that puts you in the 12% tax bracket for the 2023 tax year for filing taxes in 2024. But you don't actually pay 12% on the whole $32,000. You actually pay 10% on the first $11,000 and then 12% on the rest. So once you know what tax bracket you're in, it allows you to do some more advanced tax strategizing things like bracket management. The second thing you need to know here is knowing the difference between tax deductions and tax credits. Tax deductions and tax credits may be the best part of preparing your tax return. It's a thing we love at Insight because they both help to reduce your tax bill, but in very different ways. Knowing the difference can create some very effective tax strategies that reduce your tax bill. Tax deductions are specific expenses that you've incurred that you can subtract from your taxable income. They reduce how much of your income is actually subject to taxes. Tax credits, on the other hand, are even better. They give you a dollar-for-dollar reduction in your tax bill. For instance, if you get a tax credit valued at $1,000, it actually reduces the taxes you owe by $1,000. We love tax credits. Number 3, taking the standard deduction versus itemizing. Deciding whether to itemize or take the standard deduction is a part of tax planning because that choice can make a huge difference in your tax bill. What is the standard tax deduction, you might ask? Basically, it's a flat dollar, no questions asked tax deduction. Taking the standard deduction makes tax preparation go a lot faster and a lot easier. It's probably a big reason why many taxpayers do that instead of itemizing, but they may be missing out if their itemized deductions are higher. Congress sets the amount of the standard deduction, and it's typically adjusted Every year for inflation. The standard deduction that you qualify for depends on your actual filing status. So for instance, if you were single in 2023, the standard deduction was $13,850, whereas in 2024 it's $14,600. Married filing jointly, $27,700 for 2023, and in 2024 it's $29,200. Married filing separately, it's $13,850 in '23, and in 2024 it's $14,600. And a special filing status called head of household is a really good one if you're single and have a dependent— $20,800 in the year 2023 and $21,900 in 2024. So those are kind of just the freebies, the gimme that the Congress and IRS gives you. What does itemizing mean? Instead of taking the standard deduction, you can itemize your tax return, which means taking all the individual tax deductions that you qualify for one by one. Generally, people itemize if their itemized deductions add up to more than the standard deduction. A key part of their tax planning is to track their deductions throughout the year. The drawback to itemizing is that it takes longer to do your taxes, and you have to be able to prove you qualified for your deductions. You also use IRS Schedule A to claim your itemized deductions. Some tax strategies may make itemizing especially attractive. For example, if you own a home, your itemized deductions for mortgage interest and property taxes may easily add up to more than the standard deduction. This could save you a lot of money. You might be able to itemize on your state tax return even if you take the standard deduction on your federal return. If you're in retirement and love donating to charities, you can also utilize strategies like bunching, where you group donations together into one year and skip a year. Or you can also utilize qualified charitable distributions too, being in retirement. And you can also utilize other charitable strategies like DAFs, donating appreciated assets, and many other tax strategies. The good news is that a good tax preparer can help you figure out which tax deductions you're eligible for and whether they add to more than the standard deduction. So just ask one of us here at Insight Tax. Number 4, know the current and popular tax deductions and credits. I won't go over these in detail, but here's a few: the Adoption Credit, American Opportunity Credit, Lifetime Learning Credit, Child Independent Care Credit, Child Tax Credit, Credit for the Elderly and Disabled, Earned Income Tax Credit, electric vehicle tax credits, home office expenses, charitable donations, medical expenses, mortgage interest, property taxes, Residential energy credits, saver's credits, and so many more. Number 5, you need to know what tax records to keep and how long to keep them in case you're audited. Generally, we recommend 3 years after the filing year. There are a few cases, however, when you need to keep things longer, like assets, like for real estate and houses and things like that. There are also 3 bad examples of how much longer the IRS actually has to audit you, and they say you should keep your records. 6 years if you underreported your income by more than 25%, 7 years if you wrote off a loss from a worthless security, and the third one, indefinitely, if you committed tax fraud or didn't file a tax return. So not sure why those people would even be keeping records if they committed tax fraud, but the IRS has an unlimited time to get you. A few more things to consider are the timing of income, The timing of expenses. A lot of times this has— these two have to do with business owners where you can actually tell someone not to pay you, or maybe you pay a vendor or a client or customer early. So timing of income and timing of expenses. Another thing to consider is saving to pay taxes or adjusting your W-4. It's very, very important to make sure that you're prepared to pay your taxes when the time comes. Of course, we all want to pay as little as possible, as little as legally possible, but you do have to prepare for it. Another strategy is using investing. You can do things like gain-loss harvesting with your stocks. You can do qualified dividends. You can do muni bonds and so much more. Another way to keep your money and get a tax break is by doing retirement savings strategies like IRAs, 401s, HSAs and 529s. Talk to your tax preparer and your financial advisor about these, and you can save a lot of money and keep your own money. The next section I'm going to talk about is common mistakes people make when it comes to filing tax return extensions. The most common mistake is thinking that an extension means it gives you more time to pay. That is absolutely false. It is only an extension of time to file your taxes. The IRS and all states require your taxes to be paid by the tax deadline, which is generally 4/15, April 15th. Some states do have a different date, and some states do have a different rule where maybe if you pay 90% in, you're okay and you don't get penalized. If you don't pay all of your taxes by the tax deadline though, you could owe additional penalties and interest. Another mistake is not filing a state extension. Don't forget about the state. Each state has different rules about filing their extensions. Some of them are piggyback states and they'll just accept the federal. Some states don't though. They also have different deadlines like we mentioned above, so make sure you know your state's rules, and especially if you file in multiple states. Another mistake is where people file the wrong extension form. Do you know what form to file? Do you know the difference between the Form 4868 for individuals and a Form 7004 for businesses? Don't file the wrong form or you might miss out on an extension and receive hefty penalties. And as a side note, you can also file these extensions electronically or on paper. Another mistake is actually using incorrect personal information. Did your name change? Did you get married? Did your address change? And don't forget to write your Social Security number on the memo line of your check if you're mailing in a check. This is done in case the check gets separated from your payment voucher, which happens all the time at the IRS. And the last mistake people make is not keeping the proof of a timely filed extension. Whether you filed it electronically or on paper, You need to keep the proof in case the IRS or the state says you did something wrong or you missed it. You have your proof. The last topic we'll talk about is tax debt. What is tax debt? When you forget to pay or file your taxes, or there's a mistake on your taxes, or the IRS wants to change your taxes, and the IRS says you owe more money as a result, you have incurred a tax debt. As of 2022, which is the last recorded info from the IRS that I could find, it was that 18.6 million people owed the IRS $316 billion in overdue taxes. Yes, I said billion. Usually a tax debt is comprised of 3 parts: actual tax, penalties, and interest. And unfortunately, those things— penalties and interest— can actually double and triple the actual balance due If not taken care of in a timely manner. There are a few different ways that you can find out how much you owe the IRS, including going online and signing up for one of their accounts, calling the IRS, or going to their office, or requesting something by mail. You need to know that the IRS can also lien and levy your property too. If you fail to settle your tax debts and pay the IRS what you owe, they might file a Notice of Federal Tax Lien to protect their interests. A lien affects your current and future properties, credit, and business assets. Unlike a tax lien, which represents a claim on your property in the event you don't pay your tax bill, a levy is the outright seizure of your property in order to satisfy the debt. So they can take your home, car, bank account refunds, or anything else they want. So watch out for those. They're usually used on people, again, who are not willing to even work with the IRS. But the IRS does have many options to help you pay your tax debt, including through filing, correcting, things like that. Make sure that you talk to a tax professional like one here at Insight Tax to make sure that we can help you get out of some of those, because sometimes the IRS is actually wrong, and we know how to utilize tax code like the first-time penalty abatement. I jokingly call that get out of jail free. So if it becomes too much, don't hesitate to talk to a tax professional like one of us here at Insight Tax. We can help you with the many, many options with your tax debt. Have a great one. Thanks.