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Tax Time Kickoff Series: Part II- How Can I Make the Most of My Tax Refund?

As we kick off tax season, the Center on Budget and Policy Priorities’ Get It Back Campaign and the Financial Clinic have teamed up to help you sort through what tax reform might mean for your tax refund, and what you can do to make the most out of tax time. This is part two of a three-part series.

 

Now that you have an idea of tax law changes that may influence your tax return it is time to think about how you can maximize your refund. Before you receive your refund or even file your taxes, you can make a plan for the additional income. Having a plan can keep you on track so that your tax refund helps get you closer to your financial goals. Additionally, by planning ahead, you can bring the right materials to your tax appointment and ask questions to help ensure everything goes smoothly.

Here are some suggestions to help you maximize your refund:

  • Plan to split your tax refund
    • Bring your checking AND savings routing and account numbers to your tax preparer (we recommend checking out a VITA site!). Tell your preparer you want to split your refund using Form 8888. This allows you to save a portion, and keep a portion for spending in your checking account. Decide what percentage of your refund you want to save ahead of time. In 2018, 1 in 5 VITA site customers surveyed at the Financial Clinic planned to save 50 percent of their tax refund.
  • Pledge to save part of your refund
    • Through America Saves, you can get a text message reminder about your pledge to save. This can be one-time savings or monthly savings.
  • Save for future educational expenses
    • Using tax Form 8888, you can put part of your federal return into a college savings account by listing the routing and account number for the savings account on the form.
    • In Arkansas, California, Hawaii, Maryland, Missouri, Oregon, Pennsylvania, Utah, Virginia, and New York, you have the option to split your state refund and place part of it into a 529 account for your dependent’s future educational expenses.
    • In Colorado, Delaware, Ohio, and Illinois you also have options to deposit state refunds directly into a 529 account, but not the option to split your refund.
  • Purchase savings bonds
    • Your tax return is one of the easiest ways to get a U.S. Savings Bond, and bond rates are higher than they’ve ever been. Ask your tax preparer about putting a portion of your refund towards a savings bond. You’ll use the same federal form, Form 8888  purchase savings bonds.
  • Participate in a savings program
    • SaverLife is a free online program where you can earn prizes for saving. SaveYourRefund is another program where you can enter cash prize drawings when you save a portion of your refund. Ask if there are any local savings programs in your community.

Making the most out of your refund once you receive it.

You’ve made your plan, filed your taxes, saved a portion of your refund, and received your refund. Now what? The next step is deciding what to do with the remainder of your refund.

Here are some suggestions from the Financial Clinic’s  coaches and customers:

  • Pay bills
    • Many customers like to use their refunds to pay bills in advance– like car insurance and rent– to help reduce stress.
  • Pay off debt
    • Using your refund to pay off your debt can make it easier to save throughout the year.
  • Treat Yourself!
    • Allow space to treat yourself to something small with your refund. This will make it less likely that you will be tempted to dip into what you plan to keep saved.

We hope this helps you get started planning for tax time! Be sure to check out our first blog in this series, and check back later in the week for “Part III: How Can I Plan for Changes to My Refund?”.

Do you provide financial coaching to others? Check out our Tax Time Mini-Toolkit to help you have tax planning conversations with the customers you serve

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Be sure to check out other helpful blog posts from both the Get It Back Campaign and the Financial Clinic.

Part I: What Tax Reform Changes Should I Know About?
Part III: How Can I Plan for Changes to My Refund?

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This blog series is co-authored by The Get It Back Campaign and The Financial Clinic. Be sure to check out other helpful blog posts from The Get It Back Campaign and the Financial Clinic.

The Get It Back Campaign helps eligible workers claim tax credits and use free tax filing assistance to maximize tax time.

The Financial Clinic builds working poor people’s financial security through direct services, partnerships that embed financial security practices into nonprofits nationwide, and policy campaigns in support of working families.

Tax Time Kickoff Series: Part I- What Tax Reform Changes Should I Know About

As we kick off tax season, the Center on Budget and Policy Priorities’ Get It Back Campaign and the Financial Clinic have teamed up to help you sort through what tax reform might mean for your tax refund, and what you can do to make the most out of tax time. This is part one of a three-part series.

This year, tax time brings several changes that could impact your federal tax refund and change how you file your taxes. The Tax Cuts and Jobs Act (TCJA) of 2017 includes some changes that could leave you with a tax refund different from what you were expecting. Here are six tax law changes you should know:

  1. New tax rates
    •  The amount of tax you pay is based on your income bracket. When you file your taxes this year, your tax bracket may be slightly lower or higher, depending on your annual income.
    • Two other factors that influence the amount of taxes you owe include other tax credits you are eligible for and the amount of taxes you paid in advance throughout the year.
  2. Eliminated exemptions
    • In the past, you could claim personal exemptions for yourself and your tax dependents. These exemptions reduced your taxable income, lowering the amount of taxes you pay. Now, you can no longer claim these exemptions. If your family has one or two dependents, the new standard deduction provides a similar benefit (see #3). If you have more dependents, the elimination of personal exemptions means that more of your income may be taxable.
  3. Increased standard deduction
    • The standard deduction, like other tax deductions, reduces your taxable income, which lowers the amount of taxes you pay. The new standard deduction has nearly doubled, helping to offset the elimination of exemptions.
    • Here’s how the new standard deduction compares to last year:
    • [table id=2 /]
  4. Child Tax Credit changes
    • The Child Tax Credit helps offset the cost of raising children by giving you money back at tax time. There are three significant changes to the Child Tax Credit (CTC):
      • Amount – The CTC is now worth up to $2,000 for each qualifying child under age 17. Previously the credit was worth up to $1,000 per child.
      • Minimum income – If you earned more than $2,500 in 2018, you may be eligible for the refundable part of this credit worth up to $1,400 (also known as the Additional Child Tax Credit). This means that even if you don’t owe taxes, you will still receive the refundable portion as a tax refund.
      • Taxpayer identification requirement – Children you claim for the CTC must have a valid social security number (SSN) that authorizes work. As the tax filer, you and your spouse (if present), can have an Individual Taxpayer Identification Number (ITIN) or an SSN.
  5. New Credit for Other Dependents (“Family Tax Credit”)
    • As part of the changes to the CTC, there is a new $500 non-refundable tax credit available that you can use to claim dependents. This includes children 17 and older, children with ITINs, and other relatives (for example, dependent parents). Since this credit is non-refundable, it only helps reduce the taxes you owe and doesn’t provide a refund.
  6.  Itemized Deduction Changes
    • If you filed Schedule A in the past, there are several changes to itemized deductions. Three that you should know about include:
      • State and local taxes – The amount you can deduct for state and local income taxes, real estate taxes, and personal property taxes is limited to a combined total of $10,000 ($5,000 if married filing separately).
      • Home mortgage interest – Interest on home equity loans is no longer deductible. This is one of several changes to this deduction.
      • Medical expenses – Medical and dental expenses are deductible if they are more than 7.5 percent of your adjusted gross income (AGI), which is the same as last year. This will increase to 10 percent of your AGI in 2020.

What else do you need to know?

  • These tax law changes are temporary. These changes are effective when you file your taxes this year for the 2018 tax year, and expire after 2025, unless otherwise noted. In 2026, these tax laws changes are set to revert to previous levels.
  • Professional free tax help is available. There are other changes under tax reform that may affect you. Since there are several factors that can influence the amount of taxes you owe and the size of your refund, it is important to get tax help from a qualified tax preparer. The Volunteer Income Tax Assistance (VITA) program has a network of experienced tax professionals who provide tax preparation for free. Volunteers receive specialized training and must pass a certification exam annually. (There isn’t a similar requirement for paid tax preparers.) Learn how to find a free tax site near you or call your local United Way 2-1-1 service line.
  • There are new tax forms. This year, there is one Form 1040 to file (two half-sheets) with other forms available. This form replaces Forms 1040A and 1040EZ. Additional forms that you need to file depend on your personal tax situation.
  • Refund delays continue. The Protecting Americans Against Tax Hikes (PATH) Act of 2015 requires tax refunds that include the Earned Income Tax Credit or Additional Child Tax Credit to be held until February 15 so the IRS can check your income against what your employer reported. The IRS strives to issue refunds within 21 days of processing, however, additional delays are possible following the partial government shutdown. If you’ve submitted an ITIN renewal with your tax return, expect further delays since your ITIN application must be processed before your tax return.

We hope this helps you get started planning for tax season! Be sure to check back next week for Parts II and III of the blog series:

Part II: How Can I Make the Most of My Tax Refund?
Part III: How Can I Plan for Changes to My Refund?

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This blog series is co-authored by The Get It Back Campaign and The Financial Clinic. Be sure to check out other helpful blog posts from The Get It Back Campaign and the Financial Clinic.

The Get It Back Campaign helps eligible workers claim tax credits and use free tax filing assistance to maximize tax time.

The Financial Clinic builds working poor people’s financial security through direct services, partnerships that embed financial security practices into nonprofits nationwide, and policy campaigns in support of working families.

What to Expect When You File Your 2018 Taxes

By Darren Liddell | Director of Program Innovation | The Financial Clinic

Happy Tax Day! The heart of 2018’s tax season is almost over and as Volunteer Income Tax Assistance (VITA) programs begin to wrap up this tax season and prepare for next year, there are many tax changes on the horizon.

In late 2017, Congress passed the Tax Cuts and Jobs Act (TCJA). The TCJA  marks a shift in tax law that will both negatively and positively impact the taxpayers who come to VITA sites. These shifts include changes to tax brackets, the reduction of some tax credits and deductions, and increases in others. You may be wondering what you need to do to prepare for next tax season and how these new changes in tax law will impact you and your family. Let us bring some clarity to the changes for you.

What you need to know as you close out your 2017 return:

  • First, if you have yet to file your 2017 tax return, please keep in mind that the new tax bill changes do not affect your current year’s (2017) tax return.
  • One of the most important things to keep in mind for tax year 2018 is that health insurance is still a requirement. If you do not have health insurance in 2018, you may have to pay a penalty on your 2018 tax return. This will be treated the same as this year’s taxes, including some exemptions for certain taxpayers who qualify. In 2019, the health care mandate will be eliminated.

Key changes that will take place when you file your 2018 tax return:

  • The way that the IRS calculates many deductions and credits will change. Most notably, the standard deduction will be larger (see table 1 below), however, personal exemptions ($5,400 per person claimed on you return in 2017) have been eliminated. Additionally, if you have non-child dependents, you may qualify for a new $500 per person credit. What does all of this mean for you? See the paragraph below for information on who will be most impacted by the changes.
    • Table 1:
Filing StatusTax Year 2017 Standard DeductionTax Year 2018 Standard Deduction
Single$6,350$12,000
Married Filing Jointly$12,700$24,000
  • If you have children under age 17, you may qualify for a larger Child Tax Credit that will increase your refund, however, if your children do not have Social Security Numbers, you will no longer be able to claim the Child Tax Credit. This will significantly reduce tax refunds for families of children with ITINs.
  • Your tax bracket, which determines how many dollars in taxes you are responsible for paying throughout the year, may change.
  • If you are self-employed, the amount of income tax you are responsible for may be reduced because of the changes in the new tax bill regarding pass through businesses. However, it’s important to note that self-employment tax will not be reduced.
  • One of the most important behind the scenes updates in the tax bill is a change in the calculation of interest by the IRS. Over time (it will take 5-10 years for customers to really feel the changes) tax break thresholds will rise slower and all numbers adjusted for inflation by the IRS will be less. So, some individuals eligible for deductions and credits will lose their ability to benefit from the tax cuts if they make above $12,000-$24,000, depending on their filing status.

Recommended action steps to prepare for the 2018 tax season:

Taxes are immensely personal and the impact of these changes will vary based on your income, household size, number of children, and eligible tax credits. The biggest benefits to  low- to moderate-income households will be the increase in the refundable portion of the Child Tax Credit – $1,400 (post-tax reform) compared to the $1,000 refundable portion of the Child Tax Credit from 2017’s “old” law, which could potentially mean a larger tax refund for customers with children 16 and under. Those with small businesses may pay less in income taxes. The amount of small business taxes should remain about the same, and in the short-term, small business owners will pay fewer taxes than in recent years.

The biggest losses to low-to-moderate-income households include the elimination of the personal exemption, which will affect parents and multi-generational families with dependents over the age of 17, and those taking care of elderly parents.  These households will end up paying more in taxes when these new rules go into effect. The decreased impact of itemization due to the increase in the standard deduction and the elimination of some prior itemized deductions will make many ineligible for itemization. Those eliminated include casualty and theft losses (except those attributable to a federally declared disaster), unreimbursed employee expenses, moving expenses, and employer-subsidized parking and transportation reimbursement.  The Joint Committee on Taxation estimates that 94% of households will claim the standard deduction in 2018, up from about 70% now.  Finally, while most customers are expected to receive higher refunds and pay less in the tax year 2018, many of the tax changes that benefit individuals are set to expire between now and 2025, meaning that unless those provisions are extended, most moderate-to-middle income taxpayers should expect to be paying a lot  more in taxes 5-10 years from now.

Still need to complete your taxes? To find a free tax site near you please call 311 or visit irs.treasury.gov/freetaxprep/.