How can you save money and avoid a variety of problems at tax time?
Guard against tax-related frauds. Examples include scam e-mails falsely claiming to come
from the IRS. Many of these are intended to trick taxpayers into revealing
Social Security numbers and other personal information that can be used by
criminals to steal victims' identity and money, including tax refunds. Others
involve phone callers saying the taxpayer owes money to the IRS that must be
paid promptly by wire transfer (that actually goes to the crook) or by loading
funds onto a prepaid debit card and then sharing the number. The scammer may
try to intimidate a targeted victim who refuses to cooperate, such as by
threatening arrest or suspension of a business or driver's license. For
information from the IRS about tax frauds targeting consumers, visit www.irs.gov/uac/Tax-Scams-Consumer-Alerts.
Carefully choose how to prepare your taxes. At tax time, you gather and submit a substantial amount
of sensitive information that, if misused, could cause you significant
problems. If you are using a computer program to prepare your return, make sure
that your computer has an up-to-date security package.
If you plan to hire a tax preparer, consider factors such as the preparer's
professional background and the likelihood that the preparer will be around to
help you answer questions the IRS may ask months after your return has been
filed. For tips from the IRS on how to
choose a tax preparer, including red flags to avoid, go to
After you choose a preparer, carefully review the completed tax return. Question any
income and/or deductions on the return that you do not recognize. Unsupported
income and deductions can be signs of an unscrupulous preparer who may
deliberately make fraudulent errors, such as inflated claims for deductible
expense. When the IRS detects these unsupported claims, the taxpayer is
responsible for paying additional taxes, interest and perhaps costly
Be cautious with offers by tax preparers to handle your
refund. These include suggestions that they can
somehow get your money faster or that you should direct deposit your refund
into any bank account other than your own. These services can be costly and
perhaps even put you at additional risk for fraud. "Keep in mind that the IRS
issues refunds to more than 90 percent of taxpayers in less than 21 days,"
noted Luke W. Reynolds, Chief of the FDIC's Outreach and Program Development
Find out if you may be eligible for free tax-preparation
assistance through the IRS. One example is the IRS "Free File" program, which allows taxpayers who earn $58,000
or less (for returns to be filed during 2014) to use a software program
available to them free through the IRS Web site to prepare and file their federal
taxes. Taxpayers who exceed the income threshold and are comfortable
calculating and preparing their own returns without a software program can
manually complete their federal forms through the IRS Web site.
Also, low-income, disabled, elderly and non-English speaking taxpayers can receive
free tax-preparation assistance by trained, certified volunteers through the
IRS-coordinated Volunteer Income Tax Assistance and Tax Counseling for the
Elderly programs. For details, start at www.irs.gov/Individuals/IRS-Free-Tax-Return-Preparation-Programs.
These various IRS-affiliated options enable you to electronically file your return,
which is generally the easiest and fastest way to get your return to the IRS.
Note: Certain tax returns are not eligible for e-filing.
Direct deposit your tax refund into your bank account. "Direct deposit is generally the fastest and safest way
to get your refund," Reynolds said.
Put some of your refund into savings or toward paying
down debt. If you're expecting a
refund, consider deciding how much of it you can save toward a goal or for a
"rainy day fund" for unplanned expenses. You can direct deposit your tax refund
into up to three different accounts at three different U.S. financial
institutions, including savings accounts. And, you can use part of your refund
to purchase a U.S. Savings Bond for yourself or for someone else. Also consider
using part of your refund to pay high-cost loans and other bills, starting with
the ones that charge the highest interest rates.
If you owe money on your taxes, consider the best way to
pay it. You can have your payment withdrawn
electronically from your bank account on a date you specify, such as April 15,
but make sure you have enough money in your account. If you don't have money to
pay your tax balance, you have several choices, including an IRS monthly
installment plan. Also remember that borrowing money on a credit card to pay
your taxes can be costly.
Plan for next year's tax return. If you're expecting to receive a significant tax refund
or owe money, consider filling out a new W-4 form with your employer to adjust
your "personal allowances." This adjustment will reduce or increase the taxes
withheld each pay period.
"Many people are excited about getting a big refund, but that really means they have
overpaid on taxes and missed an opportunity to invest or otherwise use the
money," said Elizabeth Khalil, a Senior Policy Analyst in the FDIC's Division
of Depositor and Consumer Protection. "If this happens year after year, it may
be time to reevaluate how much you are having withheld."
And, if you owed a lot of money on last year's taxes, you may want to increase your
withholding (or your estimated tax payments if you are self-employed) to reduce
the risk of a penalty for underpayment of your taxes during the year.
Regardless, you may be able to reduce your taxes through contributions to
tax-preferred retirement plans and higher education savings vehicles such as a
529 Plan for college savings.
For more information on taxes, start at www.irs.gov or consult a tax advisor. For
tips on other useful financial topics, visit www.mymoney.gov.