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People short on cash could use a tax refund, yet millions of households continue to sit on last year’s tax returns.
The taxman received 128.2 million individual income tax returns as of May 8, reflecting a 9.4% decline from a year ago, according to IRS data. At this time last year, 141.5 million taxpayers submitted returns.
The number of refunds issued has also gone down: 87.6 million of these checks have been distributed as of May 8, down 13.7% from last year. The average refund is $2,779, which is up $50 from 2019.
Indeed, since the Treasury Department and the IRS have given taxpayers and their preparers three more months to submit 2019 returns and pay last year’s taxes, people seem to be taking their time to file.
“Part of it is people taking advantage of the July 15 deadline, and I bet some of that has to do with CPA firms as well,” said Matt Rosenberg, CPA and member of the American Institute of CPAs’ Financial Literacy Commission.
Refunds are a lifeline during today’s economic tumult, especially considering the uncertainty around a second wave of $1,200 stimulus checks.
“It’s nice to have the extra time, but I still encourage people to calculate their tax liability right now,” Rosenberg said. “If you’re able to claim a refund, you can take it. If you owe, you have an opportunity to budget and pay for it.”
Making the most of your time
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If you’re going to take advantage of the additional time, make it worth your while.
Sock away more savings if you have the cash: You now have until July 15 to save up to $6,000 in your IRA (plus $1,000 if you’re 50 and over), and have the contribution count for 2019.
Many savers can also deduct the contribution on their taxes, based on their modified adjusted gross income for the year, even if they have access to a retirement plan at work.
Similarly, you have more time to put money into a health savings account and make it count for last year. You can save on a tax-deductible or pretax basis in an HSA and have your cash grow tax free. Money withdrawn to pay for qualified medical costs comes out tax free.
You can only fund an HSA if you have a high-deductible health plan. For 2019, the maximum contribution is $3,500 for self-only coverage ($7,000 for family plans).
Dig for extra deductions and credits: You don’t want to wait until the last minute to search for last-minute write-offs.
Take some time to look through your statements and see if you qualify for any “tax extenders,” a basket of tax breaks that must be renewed by legislators each year.
Those extenders include a $4,000 above-the-line deduction for tuition and fees for your college kid, as well as a write-off for private mortgage insurance you paid last year.
Pay attention to your state: You have more time to submit your federal return, but you should also check your state’s deadlines. Most states have given taxpayers more time to file, but not all of them have. The AICPA maintains a list of states and their deadlines here.
Avoid playing games with your taxes: Got the cash now to pay last year’s taxes and you can afford to part with the money? Just do it. Don’t try to outsmart the IRS by investing funds that should be earmarked for Uncle Sam.
“Investing the money if you don’t have to pay it right away is risky,” Rosenberg said. “The rate of return you get is low on anything that’s safe and probably isn’t even worth the headache.”
More from Smart Tax Planning:
Firms that took a PPP loan under $2 million get a break
House Democrats’ stimulus bill rolls back $10,000 SALT cap
The HEROES Act may allow you to undo this retirement withdrawal