Why Your Tax Return Might Be Lower In 2023 & Other Last Minute Tax Questions

Howdy, hey, and hello there, fellow taxpayers,

Welcome to the season of deadlines and forms aplenty; welcome to tax season! In our great country of America, even the way we file our taxes reflects our rugged individualism. It’s our responsibility to navigate the complicated and murky waters of our tax system. If you’re worried about not having some basic tax knowledge, don’t worry, I’ve given some very general answers to some common tax questions below.

But before we begin, let me be clear: while I know enough to be dangerous to myself and others, I am not a tax advisor, accountant, or any kind of tax professional. In fact, I'm only certified in making bad puns about taxes. While general tax questions are easy to answer, remember everyone’s situation is unique, and it’s always best to consult a real professional for your specific circumstances. As I wrote this article, I did have a lifeguard at the pool; a tax advisor named Theresa Desautels, from the fine folks over at Brass Taxes who helped me ensure that the information I’ve given you here is sound.

Let’s dive in.

If you cannot pay what you owe, the IRS does have options to help you out. You can request an extension of 60-120 days to pay your entire balance via the Online Payment Agreement application or by calling 800-829-1040. The IRS makes it a point to note that no user fee is charged for this extension. 

If you owe less than $100,000, you can choose a short-term plan with a payment period of up to 180 days. And if you owe less than $50,000, you can choose a longer-term plan that requires monthly payments (but a fee might apply). You can apply for a payment plan via the Online Payment Agreement (OPA) Application or by completing a Form 9465 sending it along in the mail with your bill. Also, you can request an installment agreement over the phone by calling the phone number listed on your balance due notice.

If you need more time or assistance, you may qualify for an offer in compromise. An offer in compromise means agreeing to pay less than what you owe. But you have to file all your tax returns and make any estimated tax payments for the current year before the IRS will consider this option.

If you're having a hard time financially, the IRS may temporarily stop collecting your tax debt. But this doesn't mean you don't owe the money — you still have to pay it eventually, and penalties and interest will keep adding up until you do.

For additional information on payment options, please visit the IRS website.

In terms of your credit score, the IRS doesn’t report your tax debt directly to the three major credit bureaus. And as of 2018, they no longer report tax liens, which is the government's legal claim against your property due to a failure to pay a tax debt, on consumer credit reports. But, lenders can still find this data if they search public records for tax liens. The best way to prevent the IRS from levying a tax lien is to establish a payment plan.

Whether or not you need someone to do your taxes depends on your situation. Suppose you have a relatively simple financial situation, like you’re a single person that rents an apartment, and your only source of income, which is $50,000, is from one job as a W2 employee. In that case, you might consider doing your own taxes. 

If you make less than $73,000 per year under the Free File agreement, you should be able to file your taxes for free with one of the tax preparation companies that partner with the IRS.

But before you decide, here are some questions that tax advisor Theresa Desautels, from the fine folks over at Brass Taxes, implores you to ask yourself to determine whether you want to do your taxes on your own:

1. Are you adept and comfortable with numbers and following instructions? 2. Tax forms can be intricate and complex, are you detail-oriented and able to follow instructions carefully?
3. Am I a freelancer who needs help figuring out what counts as a business expense?
4. During the last tax year, did I have grants, fellowships, or work in multiple states as a freelancer?
5. During the last tax year, did I work in the US on a Visa?
6. Do I have big changes on the horizon (marriage, home sale/buy, kid, switching careers) and want to know how this will impact my taxes?
7. Do you have the time, patience, and willingness to take on this task by yourself?

Theresa suggests that these factors can complicate your tax return, so if they apply to you “it might be a good idea to talk to an accountant or tax professional whom you trust.”

Ultimately, the decision to do your taxes yourself or hire a professional depends on your comfort level and the complexity of your financial situation. It's important to weigh the pros and cons and make an informed decision that's right for you.

In a November 2022 news release, the IRS said, “Refunds may be smaller in 2023. Taxpayers will not receive an additional stimulus payment with a 2023 tax refund because there were no economic impact payments for 2022. In addition, taxpayers who don’t itemize and take the standard deduction won’t be able to deduct their charitable contributions.”

Here’s what that means:

In 2021, millions of Americans received a $1,400 stimulus payment. Some folks received direct deposits or checks by mail, while others might have gotten this as a rebate on their 2021 tax return. In 2022, this isn’t happening. So if you got your stimmie as a tax rebate, that’s one reason for a smaller tax refund.

In 2021, an enhanced Child Tax Credit provided $3,000 for children under 18 and $3,600 for children under six. Unfortunately, for the 2022 tax year, this credit has returned to the previous amount of $2,000 for children under 17. This means that the higher amount is no longer available, another reason why refunds could be smaller in 2022.

The American Rescue Plan Act of 2021 generously expanded the tax credit for child and dependent care expenses. This COVID-era tax break is expiring. The credit for child and dependent care expenses reverts from $8,000 in 2021 to the lower limit of $2,100 in 2022. A lower limit reduces credit, which could shrink refunds for folks.

Due to pandemic-related provisions, all taxpayers could deduct up to $300 ($600 for married couples) worth of charitable contributions for the tax year 2021, even if they took the standard deduction. However, this break is not available for the tax year 2022. Reverting to pre-pandemic rules, in 2022, deducting charitable contributions is again typically reserved for the small percentage of taxpayers who itemize deductions. Folks taking the standard deduction are forgoing itemizing charitable contributions, which could result in a smaller return.

Not all students or minors must file taxes. Even if a parent claims their child as a dependent, there are some instances where a minor may still need to file a separate return. A minor who meets any one of these tests must file:

1. If a minor has earned income above $12,950 in 2022, they may be required to file a return. Please note the income threshold varies depending on filing status, age and other factors. Even if the minor doesn’t meet the income threshold, you might still consider filing if you had taxes withheld or qualify for a refund. You may be able to receive a refund by filing a return.

2. If a minor has unearned income, like from interest, dividends, or capital gains, above a certain amount, $1,150 in 2022, they may be required to file a return and may owe taxes.

3. If a minor has unearned and earned income beyond a certain amount, the child must file a return. Unless you love navigating legal language, the guidelines around these rules can be a little tough to navigate. I advise working with a tax professional to help you navigate this.

4. If a minor nets self-employment income that is $400 or more.

If you aren’t sure what your tax obligations are or need help filing, it’s always a good idea to consult a tax professional for guidance.

Federal law requires employers to send W-2s to workers by Jan. 31 each year (or a few days later if the date falls on the weekend). If you haven’t received your W2, talk to your employer and ask them for it. Perhaps they issued you your W2, but had the wrong physical or email address? If that’s the case, that should solve the issue. 

If you can’t get a copy from your employer, you can contact the IRS directly to request one. 

You might be thinking, “Wait, if the IRS has a copy of my W2, does this mean they could make the tax filing process a lot easier?”. The answer is absolutely yes. Keeping tax filings complicated, requiring them to take lots of time and money for each individual taxpayer is a choice. Tax preparation companies have invested lots of time and resources to influence the government in maintaining an unnecessarily complicated tax filing system.

Many other developed countries, like Norway and Finland, have streamlined tax filings that require taxpayers to respond to a simple text message from the government verifying their data, a free tax filing process that can be done in 15 minutes.

Anyway, I wanted you to know that things could be different here. We could have a better system, and maybe the first step we can take is to inform our citizens about what is possible. Returning to the original question: if your employer doesn’t provide you with a W2, you can call the IRS at 800-829-1040 to request yours.

If you missed the tax deadline, don't panic. The good news is, you may be able to avoid penalties (but not interest) if you have a good reason, like a natural disaster or illness. Unfortuantely, not having enough money is not a good enough reason. You can ask for a penalty waiver by explaining why you were late when you file your return.

Here’s some more good news. If you think you're getting money back from the government, you don't have to worry about being penalized for filing late, but you should still take care of it as soon as you can so you can get your refund. Otherwise, you’re letting the government hold on to and use your money for free. They are not as generous if you owe them money. 

If you haven’t filed and paid what you owe, the IRS may charge two different penalties and interest.

The Failure to File Penalty is for filing your return late. It’s five percent of the tax due for each month (or part of a month) that your return is late, up to a maximum of 25 percent. For returns over 60 days late, the minimum penalty is $450 or the balance of the tax owed, whichever is smaller.

Then, there is the Failure to Pay Penalty. This applies if you fail to pay the tax amount stated on your tax return by the original or extended deadline. The penalty for late payment is 0.5 percent of the unpaid balance for each month (or part of a month) that the tax remains unpaid. 

This penalty can increase to one percent ten days after the IRS issues a final notice of intent to seize your property. However, if you're paying through an IRS installment agreement, the penalty rate reduces to 0.25 percent per month. The penalty can go as high as 25 percent of the unpaid tax, so it's best to pay your dues as soon as possible.

The unpaid balance on your tax returns will start accruing interest from April 18, 2023 and will compound on a daily basis until the balance is paid in full. The interest rate on underpayments of tax changes every quarter, and for the first quarter of 2023, it stands at seven percent.

If you're having trouble filing your tax return or paying your taxes, it's important to contact the IRS as soon as possible to discuss your options. They may be able to work with you to set up a payment plan or negotiate a lower amount owed.

The last thing to remember is to not forget about your state tax returns unless you live in a state with no income tax. Check with your state’s agencies to verify deadlines and penalties for missing them.

May your tax season be painless and your bill be minimal,

Paco