As tax-related statements begin popping up in your physical and virtual mailboxes, you’re probably well aware that tax season is upon us once again.
With that April 15 filing deadline looming, FinanceBuzz conducted an exclusive survey of 1,045 Americans who plan to file taxes this year to find out how they feel going into tax season and how they’ll approach filing this year.
Overall, Americans are feeling prepared and confident when it comes to filing taxes, but that doesn’t mean they enjoy it. Here’s what we found.
- Over two-thirds of respondents (67%) plan to file their taxes in January or February, well before the April 15 deadline, while less than 2% expect to file after the deadline.
- Taxpayers are feeling good about their tax filing abilities, with 89% reporting that they feel confident they have their withholdings set correctly and 95% saying they're confident that they're taking all the deductions they can.
- A little more than half (55%) of those surveyed think they pay too much in federal taxes while 43% say the amount they pay is "just right."
- 79% would prefer to receive a refund than come out even or owe at tax time.
Americans are confident and ready for tax season
Though there are certainly more pleasant ways to spend a few hours (or days, depending on your financial situation) than working on a tax return, our survey found that rather than put off the inevitable, more than two-thirds (67%) of Americans plan to file their tax returns in January or February.
As eager as you might be to file it and forget it, Ben Watson, CPA and personal finance expert at DollarSprout.com, recommends people avoid the temptation to rush through the process.
“Many people will start receiving tax documents in the mail before the end of January,” he says. “While you may be eager to cash in on a big refund, wait until you’re relatively sure you’ve gotten all the documents you’re expecting before filing a return.”
What happens if you miss a required statement?
“If you file before receiving an important document, you may have to file an amended return that alters the amount of your refund, or cause you to pay instead,” Watson explains. “Tax documents such as 1099-MISC forms are supposed to be made available to their recipients by January 31, but often fall behind or get lost in the mail. Take a look at the documents you received last year as a guide to what you might expect this year.”
Taxpayers feel good about their withholdings and deductions
In addition to getting down to business and filing early, our survey found that more than half (54%) of respondents are "very confident" that they have their withholdings set correctly.
Withholdings are the amount an employee has elected to have taken out of their wages and put toward their income taxes. If the amount withheld is too large, an individual will receive a tax refund. On the other hand, if that figure is too small, a person will owe the IRS money at tax time.
If you’re unsure if you have your withholdings set correctly, you can use the tax withholding estimator that’s available on the IRS's website. You can then use the results to adjust your income tax withholding form accordingly. If your personal or financial situation has changed during the last year, you should consider completing a new W-4 form.
When it comes to tax deductions, which lower your taxable income, 55% percent of those surveyed are “very confident” that they’re taking all they possibly can.
Taxpayers can opt for the standard deduction or itemize their deductions. Doing the math to figure out which is more beneficial is key because it allows individuals to reduce the amount of income that will be taxed.
For the 2019 tax year, the standard deduction is as follows:
- Single: $12,200
- Head of Household: $18,350
- Married Filing Separately: $12,200
- Married Filing Jointly: $24,400
Itemizing your deductions lets you subtract certain IRS-allowed expenses you’ve incurred throughout the year to reduce your taxable income. For example, the IRS grants taxpayers the opportunity to lower their tax burden by deducting expenses like property taxes, charitable donations, medical expenses, mortgage interest, and more.
Even if you choose to take the standard deduction, you can still claim certain other deductions to reduce your taxable income. Some possible expenses you can deduct include: student loan interest, alimony payments you’ve made (not received), IRA contributions, and more.
While itemizing is more time-consuming than taking the standard deduction and requires that you’ve held on to the paperwork that supports your claimed expenses, it can save you money if the total exceeds the amount of the standard deduction.
Don't mistake confidence for happiness: Americans definitely aren't thrilled about paying taxes
You’d imagine that most people wouldn’t want to see their hard-earned money make its way into Uncle Sam’s hands, but, surprisingly, only 55% of those surveyed believe they pay too much in federal taxes, while 43% believe the amount they pay is “just right.”
Hating paying taxes is bipartisan, though those who identified themselves as a Republican were slightly more likely to feel they pay too much in taxes (57%) vs those who identify as Democrats (52%).
When asked about the most annoying aspects of tax season, nearly one-third of those who responded selected "seeing how much of my income goes to taxes" as their top gripe. The second most popular answer was "gathering all my paperwork.”
Do those who think too much of their income goes to the government have a point? Not necessarily when you consider what individuals in the U.S. pay compared to those in other countries. According to 2018 data from the Organisation for Economic Co-operation and Development (OECD), the average personal income tax rate at the average wage for a single person with no children in the U.S. came in at 23.8%, compared with Belgium, which had the highest rate at 39.8%, and Germany, second highest at 39.7%
But when it comes to what corporations pay in taxes, individuals are definitely hit harder. Though the Tax Cuts and Jobs Act, signed by President Donald Trump in December 2017, reduced the corporate tax rate from 35% to 21%, the top individual tax rate is currently a heftier 37%.
Americans are probably overpaying and missing out on smart strategies
It’s easy to understand why 79% of those surveyed said that they’d prefer to receive a refund than come out even at tax time. After all, who doesn’t love receiving a little extra cash? But is this the smartest way to handle your money? Personal finance expert Watson says no.
“Getting a refund is generally considered to be a poor strategy for personal finance management — you’re basically overpaying throughout the year when you could be using that additional money to invest or pay off debt more quickly,” he explains. “In extreme cases, tax refunds can be delayed or not be paid if the process gets backed up or red tape gets in the way.”
When it comes to how they’ll pay a tax bill, nearly one-third of respondents plan to pay directly from a savings or checking account. Only 9% intend to use a credit card to pay their taxes.
Given that some credit card issuers offer rewards or cashback bonuses, you may be wondering if you should consider paying by plastic. Before you begin typing in those digits, you should be aware that paying for taxes via credit card will add additional transaction fees, typically around 2%. So, make sure the rewards outweigh the fees.
If your card offers a large bonus that exceeds the fee you’ll incur or you’re trying to hit a minimum spend to receive a sign-up bonus, and you have the ability to pay your bill in full to avoid accruing interest or late charges, it may be worthwhile. But do the math first.
Things to keep in mind as you prepare for tax season
1. Keep things organized.
A tax return can be a complicated puzzle with many pieces required to complete it. With that in mind, start by simply gathering and organizing the forms, documents, and tax statements you have for the year. Then, separate them into categories such as “income,” “deductions,” and “miscellaneous.”
2. Have last year’s return at the ready.
While things can certainly change from one year to the next — maybe your marital status is different, you’ve had a child, or you’ve started a side hustle — often much remains the same. Save yourself valuable time by having last year’s return handy. You can review and compare that document with the one you’re preparing to make the process a bit easier. Think of it as a check to ensure you have all the information you need.
3. Consider hiring a professional or using a commercial tax program.
No one wants to pay more than they should. At the same time, very few of us have the time and inclination to become well-versed in tax laws or codes. This is where hiring a professional or using a commercial tax program like Turbo Tax or TaxAct can help.
Robert Allman, EA, RTRP of Professional Public Accountants, LLC says many individuals make errors that could be avoided. From missing valuable tax credits and deductions to making simple math mistakes and filing under the wrong status, there are a number of ways to botch your filing which can cause financial headaches down the line in the form of an audit, overpaying, or even a fine.
When in doubt, get help. For those who can’t afford to hire a pro, the IRS offers hundreds of free tax preparation sites across the U.S. through its website.
4. Max out your retirement contributions.
Saving for retirement is always a good idea, but it’s particularly wise when it reduces your taxable income. If you haven’t contributed to an individual retirement account (IRA) or maxed yours out, you have until April 15, 2020 to do so and still affect your 2019 taxable income. Check out your retirement contribution limits for 2019.
Though tax season probably isn’t anyone’s favorite time of year, it’s unavoidable. To limit the amount you pay or to maximize your refund, be sure your withholding and deductions are optimized. If you’re feeling less than confident about your ability to file on your own, don’t wait to seek assistance. April 15 will be here faster than we think.
FinanceBuzz ran this survey through Pollfish, collecting 1,045 responses from adults (18+) in the U.S. who plan to file taxes this year. The survey was conducted on December 20, 2019.