Don’t Fear the Reaper… or the Tax Man

Until April 15th, 83,000 tax preparers (and their associated employees) along with the roughly 74,000 IRS employees & contractors are doing their best to touch, complete, review, and accept or reject the 261 million returns that will be filed. Can’t you just picture them with their mechanical pencils and green visors lined up ready to get started – OK, I’m dating myself there but, having worked in the industry for a while, I can assure you that there is definitely a buildup of tension when the season opens and you kiss loved ones goodbye for the next couple of months…. Whew, flashback…. Back to business… Let’s review a solid strategy for making sure that you are in the nice pile and not the naughty pile once all is said and done.

First, take some time to figure out whether or not you actually need to file. Depending on your income, while you may not really need to file a tax return, it may make sense if you would be eligible for a refund, rebate, or qualify for a subsidy program that requires a tax return with your application.

Once you’ve decided whether or not you should file (and I generally lean towards filing versus not filing), you need to figure out who is going to do that filing for you and you have lots of choices. If your return is fairly simple (a W2, a 1099, and perhaps a SSA for your Social Security) you can use one of the local free services like AARP’s Tax Aide. These are great people who have trained specifically to help people with simple returns so consider taking advantage of them. The next step up is going to be an enrolled agent who is someone trained in preparing taxes, has taken exams and continuing education (72 hours every three years) provided by both the state and the IRS. They also must adhere to an ethical standard in the work that they do. If you have a complicated financial situation (a small business or two, some rental properties, perhaps an investment that kicks off a K-1), you could consider using a CPA just be aware that you are going to pay more and the CPA you interviewed might not be the person actually doing the return as many firms hire a bunch of temporary help to handle the masses during tax season.

And, of course, you can choose to do things yourself. I’m a bigger fan of the programs you download and can use independently like H&R Block or Turbo Tax than I am of the online “free” programs. Nothing is more frustrating than needing a return from a previous year and not being able to access it because the online program has been updated or isn’t available any longer. As of this week, New Yorkers can be part of the IRS new free filing site ( but it does not include 1099/self-employed folks or those in the higher income ranges yet. New York State has not caught up with a fully free online filing process either…

OK, you’ve decided how you are going to prepare your taxes so now we have to gather your records. Yes, there are still forms that will be mailed to you but many forms are now being delivered electronically and the onus is on you to make sure you download that material. More than once we’ve worked with a client who forgot to include interest / dividends / capital gains because they forgot to include one of the 1099s that they received electronically (don’t worry, the IRS will let you know…. they always download their materials). And while most of the forms you’ll need should be available to you by the end of January, more complicated tax forms (like K-1s) can arrive whenever so it’s not uncommon to have to file an extension because you haven’t gotten what you need.

In addition to better understanding what we owe or what we are going to get back, tax filing season is also the time for better understanding what credits and deductions we might be eligible for. While many people will use the Standard Deduction, now that it has been increased substantially, it is good to review your expenses and make sure you aren’t leaving any dollars on the table. Someone in higher education? Don’t forget to look at the American Opportunity Credit or the Lifetime Learning Credit. Does your working child earn enough to contribute to an IRA? Run the taxes with them as a dependent and as an independent before you file to see if the Saver’s Credit might get you a little extra back (even if you end up making the contribution for them). Don’t be afraid to ask your preparer if there is anything you could have done differently that would have helped your situation. Too many people who use paid preparers just pick up their return, pay their bill and leave. You’ve paid for a service so make sure you are getting the most out of it.

Over the past several weeks, it seems I’ve seen more than few tax returns where someone paid the penalty for not throwing enough into the withholding pot to “Penalty Proof” themselves so how does that happen? For any given year, you need to contribute enough into the system (through withholding or estimated payments) to equal at least 90% of your current tax liability or 100% of your tax liability for the previous year, whichever is smaller.  Huh???  Let’s walk through an example: Say your tax liability for 2022 was $7,615 but in 2023 your taxes are going to be $11,835.  You would need to have withheld either $10,652 (90% of your current tax liability) or at least $7,615 (your 2022 tax bill, which is the smaller of the two).  Now, let’s say you’ve only had $6,890 withheld for the tax year.  You will have a penalty for “Underpayment” of your taxes ($6,890 being less than either $10,652 or $7,615).  If it was an honest mistake and a one-time accident, the IRS does allow you to ask for the penalty to be waived but it certainly isn’t a well I would recommend tapping more than once.

For everyone not managing their tax payment through paycheck withholding or their IRA distributions, how do we make sure we throw enough in the pot?  There is another option – the estimated tax payment.  Estimated payments are loosely scheduled quarterly payments that you send to the IRS with a little voucher that allocates the payment towards your upcoming tax bill – but sending the IRS a check whenever you realize you should be topping up your tax payments works just fine to avoid the Underpayment Penalty.

Without a pretty strong reason, we don’t want to be giving the government too much extra money they probably won’t spend responsibly so walking the balance between over-paying and under-paying can require some planning.  If you haven’t ever done tax planning, it’s never too late to get started.  Gather your documents and tell your tax preparer you want to do some tax planning.  With a little coaxing, the better ones will understand what you are looking for – if they look back at you with their face scrunched into a pained expression, consider finding a new tax preparer.  Chances are, you’ll save some money in the long haul and that’s really what it’s all about.

And, of course, follow the time-tested adage…. If you owe, the IRS can wait – be the last one dropping off their return at the post office on the deadline. If you are going to get a refund, file sooner and electronically so you have a shot at seeing your refund before the summer solstice.