Don't Mess With Taxes

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Tax season 2024 officially starts Monday, Jan. 29. Lots of taxpayers have already filled out their 1040 forms and are just waiting for the Internal Revenue Service to start processing them next week.

Most of these early filers are expecting tax refunds. They also likely have relatively simple tax lives. Lucky them.

Others, however, have more complicated tax and financial circumstances. These folks have more tax documents with details that must be transferred to their return forms and schedules.

They also need to consider how their situations might affect their tax returns.

Below is a checklist of some key pre-filing tax questions that many of us need to ask and answer before we start working on our returns.

Start with last year: Your 2022 tax return is a good place to start, especially if last year was basically the same. Ditto with last year's state tax filing if you live in a state that collects an income tax.

Your old filings are good templates. They show your income sources — wages, any self-employment gigs (or full-time work), investment earnings — and what tax deductions and credits you were able to claim back then. If you're expecting to report the same, the old forms are a good way to doublecheck that you've got all this year's necessary filing information.

These older documents also have some data — for example, Social Security numbers (yours, your spouse's and any dependents' identification digits) and bank account info if you want your refund directly deposited — that you'll need again this year.

Getting to know this current tax you: Now come the questions. This is more than just the forms. It involves changes that could have tax implications.

Since every filer's tax situation is unique, some of these might not apply. But you might be surprised, so give them all a look.

Did you have untaxed income? This includes things like contract work or prize winnings. Depending on how much it is, you might have made estimated tax payments to both Uncle Sam and your state tax collector. Dig out (or reconstruct) those estimated tax records.

Do you get tips in connection with your work? You should have been keeping records of the gratuity amounts, especially if you've had to report them each month (as noted in the ol' blog's tax moves column there to the right) to your employer.

Did you get unemployment benefits? You should have a Form 1099-G with specifics on the unemployment benefits your received after you lost your job. But since many folks don't realize that unemployment benefits are taxable, it's worth a second reminder here.

Did you move last year? Sorry, you probably aren't going to be able to count on Uncle Sam to help cover your relocation costs. This above-the-line deduction is still around, but tax reform made the tax break available only to members of the Armed Forces. Still, you need to be sure that all your expected documents are coming to your new address. Also, if you were a resident of or had income from an employer in another state, it could mean added tax filing with those other tax jurisdictions.

Did your housing situation change without making a move? There are tax considerations if you made improvements to your home, including some for medical reasons, or even landscaping changes. The same is true if you sold, refinanced, or faced any foreclosure transactions on your personal residence. They may not provide an immediate tax break, but could help lower any potential tax cost when you sell. And if you own a second residence or any other real estate and you rented it out, the length of those rental periods could affect your federal and state tax bills.

Did you make your home more energy efficient? If any of your home improvements were energy related, you could be in for some tax savings. The Inflation Reduction Act includes myriad energy provisions, including a reworking of the tax breaks for residential energy efficiency upgrades. Covered home improvements include new exterior doors, windows and skylights; central air conditioning (A/C) units; heat pumps; natural gas, propane and oil water heaters, furnaces or hot water boilers; and even a home energy audit. The car in your driveway also could provide a tax benefit if it's a qualifying electric vehicle.

Did you work from home? This work arrangement isn't as prevalent as it was during the COVID-19 pandemic, but some employers still let staff continue to work remotely, at least part of the time. No commuting is nice, but working from home could complicate your taxes. And no, you probably won't be able to claim the home office deduction even if you were more productive working from home than a cubicle.

Did you start your own business? The home office tax break might be available if you are your own boss and take care of some of that business from your residence. In this case, make sure you maximize it. Also do your entrepreneurial homework, especially when it comes to business entity choices and, if your endeavor really took off, hiring employees.

Did you close your business? If, on the other hand, you put out a permanently closed sign, make sure you didn't overlook any of the tax tasks tied to business closures.

Did you retire? You made it! No more 9-to-5. But now you're financing your lifestyle with distributions from your retirement accounts. Depending on the type of plan you have, that money could be taxable. Double check income statements for your workplace retirement and/or IRA withdrawals. 

Did you work while getting Social Security payments? Maybe retirement just isn't for you, for either financial or personal reasons. Many retirees find they need more cash to supplement their Social Security benefits. Others just miss having a coworker community, so they get a post-retirement job. If either case is you, depending on how much money you earn, you could owe tax on some of your Social Security benefits.

Are you still contributing to your retirement plan? Some or all of it might be deductible. Your accounts' annual and tax statements will help you decide. Don't forget about nest egg plans you've set up if you're self-employed, whether as your full-time work or as gig work. These contributions also can be used to reduce your tax bill, so have those statements handy, too. And don't overlook the tax benefits of the Saver's Credit if you qualify.

Did you tie the knot? Exchanging vows with your soulmate, even on the last day of the year, means a difference in your personal and tax life. Among the tax to-do's to take care of after you say "I do" is determining your new married filing status, either jointly or separately.

Did you and your spouse split last year? When your divorce was official could affect your taxes. For divorces and separation agreements finalized in 2019 or later, alimony payments are not deductible for the payer or counted as taxable income to the recipient. However, if your divorce was finalized in 2018 or earlier, you're grandfathered into the old system: alimony is still deductible, again as an above-the-line deduction, to the payer and still counts as income to the ex-spouse getting the payments. Have the paperwork showing the year of your marital split and, as long as they haven't made any modifications to that prior dissolution agreement, the amount paid/received for tax deduction/payment purposes.

Has your family changed? Whether your brood got larger or smaller could affect how you file, as well as some tax breaks. A new baby is another dependent. If that child was adopted, there are tax breaks for that process.

If you answered yes to the previous marital split question, then double check your filing status. Yes, just like getting married, dissolving matrimonial bonds means changes at tax time.

Once divorced, you no long will be filing jointly, but you might not be filing as a single taxpayer either if you have children and you are the custodial parent. For tax purposes, you will likely be head of household.

And if you're sharing custody, you and your ex need to sort out the post-divorce sharing of child-relate tax breaks.  

Other family related tax questions include —

• Did you pay for a dependent child's (or another dependent's) care so you could go to work?
• Did you receive any assistance from your employer to pay for education expenses, child care costs or adoption expenses? .
• Did you hire a nanny or other household help? The extra hands are a great help, but the assistance also could mean more tax duties for you, the employer.
• Did you pay a student's tuition or take out a loan to keep yourself or your student in class? You might be able to claim the Lifetime Learning Credit or deduct some of interest paid on the college loan.
• Are you supporting older family members? It could be your children who graduated college but are struggling to find their footing in this economy. Or it could be your aging parents. Depending on how much financial help you provide and the living arrangements, you might qualify for the tax credit for other dependents.

Did you have money in a foreign account? Make sure you have those numbers. You need to report it to Uncle Sam on your tax return, and possibly as a separate Reports of Foreign Bank and Financial Accounts, or FBAR, filing.

Did you have any nonresidential debt that was canceled? It generally is counted as taxable income. In some cases, however, specific tax laws exclude the forgiven debt from taxable income. That's the welcome situation for some students whose college loans recently were forgiven. Check, however, with your state tax department as to whether it is or isn't providing canceled education debt tax relief.

Did you have health care coverage? If you bought your medical insurance through the marketplace, either the federal one or your state's marketplace, you might qualify for the Premium Tax Credit (PTC). The PTC, which as a credit provides a dollar-for-dollar reduction in your tax liability, usually is taken upfront in the marketplace insurance purchase process to help reduce monthly policy premiums. But the advance PCT means at tax filing time you must reconcile that early credit amount against the final, actual credit amount you can claim.

Did you serve in the military? If so, did you receive combat pay? It could affect your claiming of the Earned Income Tax Credit (EITC). Your posting as a member of the armed forces also could affect your filing due date.

Do you qualify for the EITC? Speaking of the EITC, this tax credit is overlooked by filers way too often. Some ignore it because they think it's only for families, but eligible single taxpayers also could get some EITC help. The amounts depend on your filing status and income, and are adjusted annually for inflation.

How old are you? I know, it's not a polite question. But it is a necessary tax question. Aging could affect your taxes. Many older taxpayers don't realize there are several tax breaks they can claim. They range from larger standard deduction amounts to added contributions to retirement accounts to filing the special Form 1040-SR. And if you just turned 73, you might be facing a required minimum distribution (RMD) for the first time. Or maybe you met your RMD by making a Qualified Charitable Distribution. 

Can you read this post without any trouble? Regardless of your age, visual impairment could net you a larger standard tax deduction.

Taxes truly are personal: I know, this is a lot of questions. And I really didn't mean to pry. But the tax fact is that there's never too much information to take into account when it comes to filling out your annual return. Or planning for next year's taxes, but that's another post. After Tax Day 2024!

So make sure you take a good look at your life, not just tax forms or statements, when you get ready to file. It could make a tax difference.

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