Filing for a Tax Return when Taxes Return

Tax time is over. Some of us have had to pay the piper; others will have the luxury of getting some money back from the clutches of the IRS. If you missed your chance to file for a tax return, have no fear — tax season comes every year, so you’ll have the opportunity in 2013 to get back some of what you gave.

Lindsey Buchholz, a lead tax research analyst for the Tax Institute at H&R Block, gives a comprehensive rundown on filing for a tax return, and how you can make it a transaction within your full control.

When it comes to financial literacy, your tax obligation to Uncle Sam is one area where you can have more influence than you might expect. While the tax code is complicated, understanding your tax obligations can be easy if you have the right tools. We’re here to help you understand where you can take action in just a few steps.

Tax Returns are a Financial Transaction

Most people think of their tax return as a yearly obligation and not a financial transaction.  However, there are many decisions that you make in your everyday financial life that will affect your tax return. For example, the U.S. tax system is a “pay as you go” system, meaning that every time you receive a paycheck from your employer, a certain amount is withheld from your pay and given to the government to ensure that you’re paying your fair share all year long. But, what exactly is your fair share?  Well, it depends entirely on your particular circumstances.

1. Tax Withholding. Understanding your tax situation will help you fill out your Form W-4 to ensure you are having the proper amount of taxes withheld from your pay. Form W-4 is the document your employer uses to determine how much in taxes to withhold from your pay. If you get a large refund each year or you end up owing money, you should adjust your W-4 and provide the updated copy to your employer so that it more closely matches your situation.

2. Taking the standard deduction vs. itemizing your deductions. Most people have the option to claim the standard deduction or can elect instead to itemize their deductions.  Itemizing your deductions makes sense if the total exceeds the amount you would get to deduct if you took the standard deduction for your filing status. For example, for single individuals in 2011, the standard deduction is $5,800. If your itemized deductions exceed $5,800, you should itemize. How do you know if your itemized deductions will exceed your standard deduction? Add them up!

Some kinds of deductions are limited by your adjusted gross income (AGI), as shown in the list below.  If you’re not sure what your AGI will be for this year, look at your prior year’s return to get a general idea if your tax situation will remain similar. If you know your tax situation will differ significantly from last year, there are calculators like H&R Block’s available online that you can use to estimate your tax liability for the year. Common itemized deductions are:

  • Home mortgage interest
  • Real estate taxes
  • Property taxes
  • Charitable contributions
  • Medical expenses (deductible medical expenses are those that exceed 7.5% of your AGI)
  • Non-reimbursed employee business expenses, job search expenses, and other miscellaneous expenses (In general, deductible miscellaneous expenses are those that exceed 2% of your AGI.)

3. Credits and deductions. In addition to itemized deductions, you may be eligible to claim a credit or above-the-line deduction on your tax return. “Above-the-line” means you do not have to itemize to get the tax break. The tax code offers credits for many different things including child care, adopting a child and taking higher education courses — above-the-line deductions include HSA after-tax contributions, higher education expenses and student loan interest paid during the year.

Some expenses, such as those for higher education, may qualify for both a credit and deduction. However, you may not claim both using the same expenses. So, when faced with a decision on whether to claim the credit or the deduction, you should figure it both ways and determine which is the most beneficial. In most cases, credits are better than deductions because they are a dollar-for-dollar credit against the amount of taxes you owe as opposed to a deduction, which reduces your income subject to tax by a set amount.  As such, a deduction is like a percentage-off coupon on a total rather than a dollar-for-dollar reduction in the tax you owe.

4. Taxable transactions.  Aside from the decisions you will actually make on your tax return, there are other factors during the year that could result in additional tax owed on your return.

  • Unemployment. Many people do not realize that unemployment compensation is taxable income. It is important to note that unless you specify otherwise, no taxes are withheld from unemployment compensation unless you specifically elect to have them taken out by providing the payer with Form W-4V.
  • Retirement Accounts. Individuals who make withdrawals or receive distributions from retirement accounts may have to pay taxes and/or penalties on the money received.  As a general rule, money that was not taxed before it was placed into a retirement account will be taxed when it is withdrawn. Early withdrawals and non-qualified withdrawals from a retirement account often carry a 10% penalty. Before making any withdrawals from a retirement account, you should consult the plan administrator or a tax professional to assess the tax consequences of the withdrawal.
  • Self-employment income. If you’re self-employed, you are required to make quarterly estimated tax payments to the IRS. The amount of these payments is entirely dependent on how much income is earned each quarter. These payments will be reflected on your tax return as income taxes already paid and will therefore reduce the total tax liability due at the end of the year when all income and expenses are accounted for on the return.
  • Contributions that reduce your tax liability. Some decisions you make during the year may also reduce your tax liability at tax time. Common examples are contributions to an employer-sponsored retirement plan or a health savings account. When contributions to these types of accounts are made, the money is put into a pre-tax account, meaning that it will reduce your income subject to tax. This allows many employees to contribute more money to their retirement accounts during their working lives. However, it is important to remember that pre-tax retirement contributions will be taxed at the ordinary income tax rates in effect when withdrawals are made.

Down to Dollars & Sense

Financial literacy touches many areas of your life. When it comes to taxes, taking a year-round view is important to understanding your financial implications. In fact, H&R Block thinks financial literacy is so important that we offer a Dollars & Sense curriculum to help parents teach their children about financial responsibility. Through this program, H&R Block provides a free personal finance curriculum to high schools through its grant process.

The curriculum uses a game-like simulation to teach students how to budget, use debit and credit cards, save money, pay rent and avoid debt. Since 2009, H&R Block Dollars & Sense has awarded more than $2.5 million in curriculum grants and scholarships to high schools and students nationwide.  For more information on this program, visit

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