What to keep in mind before filing your taxes this year, according to tax experts.
It may come as no surprise that, on average, Americans spend 13 hours and $250 annually to file their taxes. As far as arduous adult tasks go, this one is among the biggest time and money sucks. Adding to the stress is the confounding web of rules.
As the tax filing deadline approaches — this year, it’s Tuesday, April 18 — Americans, yet again, contend with a barrage of options and intricacies that vary based on their circumstances. To use a tax filing software or go to an accountant? How to claim income from a side gig? What’s going on with the child tax credit? What are credits in the first place? Is it possible to get all this done for free?
Tax professionals encounter their fair share of questions during filing season. As more Americans shift to contract work or supplement their income with alternative revenue streams — earnings where taxes aren’t withheld from your paycheck — more people are unsure of how to account for this income. However, people often have free tax resources, answering these questions and more, at their fingertips courtesy of the IRS itself, says Caroline Bruckner, a tax professor and the managing director of the Kogod Tax Policy Center at American University. “Do not hesitate to go to the IRS website to try to figure out the answers to basic tax questions,” she says. Still, there are plenty of questions taxpayers may not think to ask until they’re knee-deep in tax preparation.
Though this is by no means an exhaustive list of answers to those questions, below, tax professionals clear up some tax misconceptions and offer helpful advice to make filing your taxes only a moderate pain.
Why is filing a tax return so complicated?
In countries like the Netherlands, Japan, and Sweden, taxpayers simply review a government form that has already calculated their taxes. In America, the process could be that simple for over 40 percent of households, according to one paper, but it is decidedly less straightforward.
Until Prohibition, the government was funded by excise taxes (taxes on specific goods at the time they’re purchased) and taxes on booze, Bruckner says. (Fun fact: Pre-Prohibition, alcohol was taxed differently and accounted for nearly 40 percent of government revenue.) “To make way for Prohibition, in 1913, [Congress] created an amendment that allowed the federal government to institute federal income taxes,” she says, “only on the richest people.” Around this time, states began adopting income tax in addition to federal income tax.
By World War II, paying income tax was expanded beyond the highest earners and companies and withholding on paychecks was instituted. In the decades since, “Congress has increasingly relied on the tax system as a means to deliver anti-poverty programs” to low-income families, Bruckner says, through credits such as the earned income tax credit and the child tax credit. Incorporating poverty reduction measures into the tax code makes filing taxes more complicated, says Beverly Moran, a law professor emerita at Vanderbilt University who focuses on federal income tax, “and the more complicated you make it, the harder it is for anybody to figure that out.” Two common issues preventing a more streamlined tax filing process, Vox’s Dylan Matthews reported in 2022: reporting self-employment income and itemized deductions.
Low-income people, who may not have time to collect a year’s worth of receipts or have enough money to seek a tax preparer, may miss out on credits and refunds. A complex system also opens the door for companies to charge for tax preparation software. Because these programs are money earners, companies like TurboTax lobbied the government to prevent free electronic filing. “There’s the tremendous benefit for these big companies that do pay tax returns,” Moran says, “because if tax returns were simple, you would do them yourself. But they get so complicated that people get afraid” — afraid of being audited, of owing thousands of dollars, of the stress of calculating expenses.
Who can file for free?
Since the process for filing taxes is notoriously complex, many people outsource the preparation. Even online services that claim to be free may require a payment after you’ve spent precious hours uploading all of your info. However, the IRS has a program called Free File where people earning $73,000 a year or less can file their tax return at no cost through free tax preparation software. The IRS partners with 11 online tax preparation companies, like ezTaxReturn.com and FileYourTaxes.com, and each has its own income and state eligibility requirements, so make sure to double-check before getting started. (A heads up: H&R Block and TurboTax are not a part of Free File.)
“Be aware that there are a number of different ways to get free tax help,” Moran says. “Don’t be dissuaded, because there are going to be a lot of strategies that companies are going to use to get you to the point where your return is done and then all of a sudden it’s $50 and you’re tired and frustrated and you just say, ‘All right, I’m going to pay the $50.’ You don’t have to pay that $50.”
Only choose a tax software that is listed on the IRS website. Searching for free tax software on Google often yields misleading options, with software that sometimes isn’t actually free ranking highly in search results, Moran says. If you are asked to pay while using tax prep software, Moran recommends switching to a different provider. Restarting the process can be frustrating, but if you qualify for free filing, you shouldn’t be required to pay.
Before you sit down to file, make sure you have the following information ready: income statements like W-2s or 1099s, adjustments to income (like student loan interest), dependent and spouse information, if applicable, and prior year adjusted gross income (this includes your wages, dividends, capital gains, business income, and retirement distributions).
The IRS also offers another free tax filing program called Volunteer Income Tax Assistance. People who make $60,000 or less, people with disabilities, and those who speak limited English can receive free in-person tax preparation from volunteer tax professionals. The Tax Counseling for the Elderly program — another free tax service — is available for people 60 years old and older. You can find a VITA or TCE site near you via an online lookup tool. In general, appointments are required, and sites are often overwhelmed, says Elaine Maag, a senior fellow at the Urban-Brookings Tax Policy Center, so try to get an appointment early.
The Defense Department offers free tax software for active-duty service members, their families, members of the National Guard and reserve, and retired and honorably discharged service members called MilTax.
For those who make over $73,000, you can file for free using Free File Fillable Forms, where you enter your tax information yourself without the guidance of software. Keep in mind that this is for folks who have a good handle on their taxes and do not need much assistance. For simple tax returns (all you have is a W-2, for example), you can file your taxes with the free versions of TurboTax and H&R Block.
If you have any income beyond W-2 pay, consider working with a certified public accountant or enrolled agent
As more Americans bolster their income with side work or opt for self-employment, their tax returns get increasingly complicated. Because you are not an employee with the company, taxes aren’t withheld from any income you earn from, say, selling items on Etsy or driving Uber. You’ll need to pay self-employment tax for earnings of $400 or more for your side hustle. You can also use a portion of your mortgage, rent, and health insurance premiums as self-employment tax deductions. A certified public accountant or enrolled agent understands the complexities of tax law and can ensure you’re making the most of deductions and not paying more (or less) tax than you need to.
“They’re helping you maximize your deductions,” says Melanie Lauridsen, director of tax practice and ethics for the American Institute of Certified Public Accountants, “and how to better organize yourself to get the maximum [deductions]. You really don’t need to pay more taxes than what you really owe.” (Getting married, moving states, buying a home, having children, and holding complex stock investments can further complicate your taxes; a tax preparer can help you file in those situations, too.)
If you’re going to pay more than $1,000 in taxes on any income that is not subject to withholding, you need to pay these taxes quarterly, Bruckner says, or else you may face a penalty. This is because we have a pay-as-you-go tax system; any time you earn money, the government wants its share relatively quickly, not a year from now. This puts the on us on the taxpayer to calculate their quarterly payments since an employer isn’t withholding tax from their paycheck. “More and more people are working not only traditional employment but also have a side hustle or are gig workers and don’t even realize that they’re subject to quarterly estimated payments,” she says. “Then they go to file in April like they have every year and come to find out [they] didn’t pay any of these quarterly estimated payments … and for the first time ever, [they’re] going to owe instead of getting money back. That’s a nasty shock.” A tax pro can help schedule those quarterly payments for you.
When it comes to filing your taxes, your accountant will have a much easier time if you keep track of your income and expenses throughout the year. There are plenty of apps like QuickBooks and Mint to help monitor in real time the money going in and coming out, and its purposes. Lauridsen suggests self-employed people take a picture of every receipt for a work-related expense so you have a record of it. (Save these images to a folder on your phone for easy access come tax time.) Come prepared to your tax meeting with tracked income and expenses and any 1099s sent from clients you worked for. Other important information includes retirement account contributions, property taxes, mortgage interest, charitable contributions, educational expenses, and medical bills.
If you haven’t been keeping meticulous records all year, retrace your steps to compile a snapshot of your earnings and expenses. Comb through your bank statements and account for every time you got paid, every business expense, every mile you drove in your car for work (if applicable), and any medical expenses in a spreadsheet.
An ideal relationship with a CPA is ongoing. As your life and finances change, a tax professional can give you an idea of new applicable deductions or credits. “They can say, ‘You’re going to have some serious changes, but you bought a house — that’s a deduction — but you also were freelancing, so you have to make quarterly payments on that, then you started with a W-2,’” Lauridsen says. “They’re able to gauge and give you an assessment of what you should be expecting.”
Anticipate a smaller refund this year
Among the biggest tax conundrums Lauridsen encounters is the confusion between a tax credit and a tax refund. “If you overpaid some taxes, then you get a refund back,” she says. “A credit is something above and beyond the refund. It doesn’t have to do with what you paid in, but it’s a credit given to you.”
Where deductions reduce your amount of income before you calculate how much you owe in taxes, credits reduce the amount of tax you owe or increase your refund amount. There are five types of credits for individuals: family and dependent credits, income and savings credits, homeowner credits, electric vehicle credits, and health care credits. Pandemic expansions to credits such as the earned income tax credit and the child tax credit were not extended for 2022, which means refunds will be smaller this year.
For 2021 taxes, the child tax credit increased from $2,000 per child to $3,000 to $3,600 per child. This year, the credit returns to $2,000 per child. “If you were one of those persons who had the higher amount for the child tax credit last year, your refund could be impacted, assuming everything stays the same,” Lauridsen says.
Divorced couples or unmarried couples who share children cannot both claim the child on their tax return. Generally, the parent who has custody of the child for more than half the year can claim the child, Maag says.
The earned income tax credit, available to workers who earned less than $59,187, was about $1,500 for eligible taxpayers with no children in 2021. It is $500 for 2022. This change may also contribute to a smaller refund or whether you owe.
While tax season can bring myriad rules, forms, credits, and deductions, having a baseline understanding of your tax obligations can help streamline the process and eliminate any shock and disappointment come time to file.