Filing Taxes Key to Overall Financial Wellness
Tax season is here again. Tax preparation may be one of the most demanding financial tasks of the year. As the Internal Revenue Service (IRS) 2022 Federal Income Tax Returns filing date approaches, you’ll want to start pulling your financial documents together. The filing deadline for individuals is Tuesday, April 18, 2023.
Filing for an Extension
If you’re not able to file your federal income tax return on time, you can file for an extension for an additional six months to file your federal income tax return. To request an extension, you must estimate the amount of tax you owe and pay this amount by the April due date. If the IRS believes that your estimate was not reasonable, it may void your extension.
What If You Owe?
One of the biggest mistakes you can make is not filing your tax return because you owe money. If your return shows a balance due, file and pay the amount in full by the due date, if possible. If you can’t pay what you owe, file the return and pay as much as you can afford. You’ll owe interest and possibly penalties on the unpaid tax, but by being proactive and filing on time, you’ll limit the penalties assessed. You may be able to work with the IRS to pay the remaining balance in installments. Owing taxes or having a tax payment installment plan can negatively affect your credit rating as well as keep you from buying a car, getting a mortgage, or being hired for a job.
Protect Yourself from Tax Identity Theft
Tax-related identity theft occurs when someone uses a stolen Social Security number (SSN) to file a false tax return to claim a fraudulent refund. You may not even know this has happened until you file your return and receive a notice from the IRS that more than one return was filed using your SSN. Email phishing scams can include links to bogus websites intended to mirror the official IRS website. These emails instruct consumers to “update your IRS e-file immediately.” The sites may ask for information used to file false tax returns, or they may carry malware, which can infect computers and allow criminals to access your information. Remember, the IRS does not initiate contact with taxpayers by email, text messages, or social media to request personal or financial information. If you suspect you are a victim of tax identity theft, continue to pay your taxes and file your tax return, even if you must file a paper return. Also, file a report with the IRS.
Benefits of Filing Taxes
Filing your annual tax returns is a key component to overall financial wellness. Filing your taxes can help you move from a short-term mindset, such as paying rent or making small purchases, to working on long-term financial goals, such as buying a home or investing for retirement. The tax preparation process provides the tangible returns of establishing good financial habits, developing techniques to navigate financial systems, reducing stress and life disruptions caused by financial problems, and empowering people to work towards achieving financial goals. Consider filing a tax return even if you’re not required to or don’t owe any taxes. You might be eligible to receive a refund of withheld taxes and/or take advantage of tax credits, like the Earned Income Tax Credit.
Leveraging Your Tax Refund
Tax refunds are a portion of your earnings from the previous year. They are the excess tax collected by the federal and/or state government, which have now issued you a tax refund for this overpayment. Ways to leverage your tax wisely and make your refund to work for you are:
- Pay off high-interest rate debt which will save you money and may help improve your credit score.
- Start or increase an emergency fund. Try to save enough to cover between three to six months of expenses.
- Prepay your mortgage which will shave months off your mortgage payments.
- Add to or open a retirement fund.
- Start a college fund.
- Invest in the stock market.
- Invest in yourself by paying for a training program to jumpstart your career.
- Start a business.
Tax Filing Resources
Personal income taxes can be complex. The DFPI recommends consulting with a tax advisor for help. Here are some in-person resources that offer free or reduced cost tax services to qualifying taxpayers: