Financial Literacy

The mere mention of tax season often triggers a collective groan, evoking images of endless paperwork and complex calculations. Yet, it's an inevitable part of life that doesn't have to be a daunting ordeal. 

Recognizing the challenges and uncertainties newcomers and seasoned filers face, we're embarking on a mission to demystify the tax filing process this week. From breaking down jargon to navigating tax forms and avoiding common pitfalls, our seven-part series aims to introduce you to the knowledge needed to tackle tax season head-on.

Whether you're filing for the first time, seeking to maximize your refunds, or navigating the intricacies of gig economy taxes, we've got you covered, making this tax season a journey of empowerment rather than dread. And if you're a first-time filer, we will walk you through the basics of submitting a tax form while providing some tips to make the process as painless as possible. If you're worried about making a mistake, we'll also walk you through ten of the most common tax errors people make.

Millions of Americans depend on various tax credits to help them stay afloat financially, so we will guide you through some of the most significant and relevant credits available.

Gig workers have a particularly tough challenge regarding tax preparation. There is no payroll department to fall back on and no one to help you understand how to use the tax code to your benefit. We'll help you learn how to save enough money to meet your tax obligation while ensuring you get everything you're entitled to.

Filing and paying late can raise the ire of the IRS, so we'll also review when it makes sense to request an extension and what to do if you can't pay.

Finally, receiving a tax refund is a significant financial opportunity. You can set yourself up for greater success by making intelligent decisions with your money.

This week's goal is to equip you with the necessary skills to navigate tax season with ease and a sense of positive anticipation. While tax season may never be the highlight of your year, it certainly doesn't have to be a source of stress. With the proper knowledge and strategies, you can transform it into an opportunity for financial betterment and personal growth.

For next-level information, tips, and strategies, consider signing up for our Income Tax Basics course.

It's natural to feel a bit of trepidation when doing anything of consequence for the first time - and filing your taxes is no exception. Given the tax code's complexity, it's easy for beginners to question their aptitude.

Yet the truth is that there is very little to fear. Even first-time filers can painlessly complete their taxes if they're equipped with relevant facts and information.

To help you confidently approach this task, let's review some key tips for new filers.

Channel Your Inner Scout: Be Prepared

"Be prepared" is a motto that applies equally as well to tax preparation as it does to scouting activities. Having the appropriate documentation is a critically important aspect of doing your taxes.

When we talk about documentation, we're referring to forms and documents such as:

• W2s (the document issued by your employer to track your tax withholding)
• 1099-MISCs (a document issued to contractors or the self-employed that tracks payments)
• Copies of deductible expenses (receipts that can back up any expenditures you may claim)
• Other documents tracking income and expenses earned or incurred over the year
• By tracking and saving these documents as you go along, you'll be better prepared to file your taxes without worrying about bumping up against the April deadline.

Decide How You're Going to File

A generation or two ago, most people filed with pen and paper. Then, the IRS allowed taxpayers to file via telephone. Now, the process has been made even simpler through the use of approved tax filing software.

If your return is basic (no dependents, no stock portfolio, etc.), filing a paper form is the path of least resistance. It's inexpensive and only takes a few minutes to complete the necessary form. Also, if your Adjusted Gross Income is $79,000 or less, you can use the IRS Free File service to file online at no cost - a great option with built-in tools for tracking the status of a potential tax refund. 

If you plan on taking extensive deductions or have a more complex financial situation, using do-it-yourself tax software or the services of a professional might be worth the fee you'll have to pay.

Suppose you're going to file a paper form on your own. In that case, the 1040EZ is the go-to form for those with no dependents and basic tax situations - a description that fits many first-time filers. You'll need no dependents and a taxable income of less than $100,000 to qualify.

Familiarize Yourself With Essential Tax Concepts

Before navigating the filing process, you must understand the fundamental terms and concepts you'll encounter. Here is a short glossary:

• Adjusted gross income: all the income you receive over 12 months.
• Standard deduction: the amount of money the IRS allows you to deduct from your taxable income.
• Itemized deduction: if you don't take the standard deduction, you can list and then claim all your tax deductions - things like home mortgage interest and charitable gifts.
• Taxable income: what's left after deductions and adjustments are subtracted from your adjusted gross income.

Once you're familiar with the basic concepts and terminology related to tax filing, you'll be able to navigate the process with greater confidence.

The Takeaway

Filing your taxes for the first time doesn't have to fill you with anxiety. By understanding the basic ideas outlined above, you'll be able to complete the process quickly and painlessly and keep all the money you're entitled to.

In the rapidly expanding gig economy, the freedom of freelancing comes with its unique set of financial responsibilities — especially when tax season rolls around. For many gig workers, managing taxes can seem like navigating a maze without a map.

While moving from gig to gig certainly has benefits, simplified tax preparation isn't one of them. Most self-employed workers will attest that dealing with taxes is one of the most challenging aspects of foregoing traditional employment (or supplementing it with a part-time job).

If you have self-employment income, here are a few essential tax tips to remember.

Save Enough Money to Pay Your Tax Bill

Gig workers face a more complex tax situation than traditional employees. Without a payroll department to withhold taxes from each paycheck, it's up to you to manage your tax obligations. This includes making quarterly estimated tax payments to cover your expected tax obligations.

Since paying estimated taxes may be unfamiliar to those getting started in the gig economy, it's critical to note that estimated tax payments are required. If they're not made, the entire bill - plus penalties - will be due all at once. And while the IRS does offer installment plans, you'll pay interest on the money you owe.

Remember Self-Employment Taxes

As a gig worker, you're considered self-employed, which means you're responsible for paying self-employment taxes. These taxes cover Social Security and Medicare, essential components of your future safety net. Unlike traditional employees, where these contributions are split between the worker and the employer, self-employed individuals bear the full responsibility. 

Self-employment taxes are comprised of two main components: Social Security and Medicare. For 2025, the combined rate is 15.3%, with 12.4% going toward Social Security on the first $176,100 of your net earnings and 2.9% allocated to Medicare, with no income limit.

The 15.3% rate might seem steep, but it's important to remember that if you were an employee, you would only pay half of this (7.65%), and your employer would cover the other half. As a self-employed individual, you're considered both the employee and the employer, hence the total rate - though half of self-employment taxes are deductible from your income.

Include estimated self-employment taxes with your quarterly estimated tax payment.

Additional Tax Forms to Complete

If you're a gig worker, the days of spending 15 minutes filing a simple 1040EZ are over. Instead, you'll deal with documents like the 1099-MISC, full 1040, and Schedule C. 

The 1099-MISC is a document you'll typically receive in January that lists all the income paid to you by a client or gig-economy employer. Remember that you're still responsible for paying taxes on each source of income, even if you don't receive the form in the mail. And the Schedule C is a tax form used by the self-employed that details business income and expenses related to the operation of your business.

Maximize Deductions by Keeping Records

Deductions can significantly reduce your taxable income, but knowing what you can deduct is critical. Common deductions include home office expenses, travel costs, and necessary equipment or supplies. For example, if you use your car for both personal and gig work, you can deduct the portion of expenses related to your work. Remember, meticulous record-keeping is essential to back up your claims in the event of an audit.

When tracking business expenses for tax purposes, the IRS requires taxpayers to keep documentary evidence to support deductions. This evidence can come in various forms, including paper receipts, bank statements, and credit card statements. However, the type of documentation required can depend on the nature of the expense and the amount.

Paper receipts are often considered the gold standard for documenting business expenses because they provide detailed information about each purchase, including the expense's date, place, amount, and essential nature. 

In some cases, checking account and credit card statements suffice for expense documentation, particularly when they clearly itemize purchases and are used in conjunction with other documentation. For example, a credit card statement might show a purchase at a supply store, which, when paired with a log entry detailing the business purpose of the supplies, could adequately document the expense. However, more than statements alone might be needed to provide sufficient detail for all expenses, especially those requiring a breakdown of goods or services purchased.

Health Insurance Premiums and Retirement Contributions May Lower Your Bill

Incorporating health insurance premiums and retirement contributions into your tax strategy requires careful planning. Still, these deductions and credits can provide meaningful tax relief and financial benefits for many self-employed individuals.

As long as you purchase health and dental insurance through your business, your premiums may be tax deductible. To qualify for this deduction, you must not be eligible to participate in an employer-sponsored health plan (either through your own business if you have employees and offer a plan or through your spouse's employer).

You can also explore tax deductions (and sometimes even a credit) to offset retirement account contributions. Common options for the self-employed include the Solo 401(k), SEP IRA, and SIMPLE IRA. Each account has its contribution limits and rules.

Leveraging Technology to Keep You on Track

If staying on top of projected tax debts, income streams, deductions, expenses, credits, and receipts sounds like a Herculean task, consider leveraging the power of technology.

Tax preparation software designed specifically for the self-employed and small business owners can simplify the process and ensure you take advantage of all deductions. This includes not only filing taxes at the end of the year but also tracking expenses and estimated taxes along the way.

The Takeaway

Gig workers may enjoy advantages such as working from home or being their own boss. Still, when it comes to tax filing, however, it's typically more challenging to be self-employed. If in doubt, consult a professional to help you navigate the process.

Imagine the relief of clicking 'submit' on your tax return, confident you've maximized your refund or minimized your payment. Now, picture the stress and frustration of discovering an error that throws a wrench into your financial plans. Whether it's a missed deduction, an incorrect Social Security number, or a simple math mistake, such errors can delay your refund, result in unexpected penalties, or lead to an audit.

But fear not! Below, we've compiled a list of ten of the most common errors filers make. If you can avoid these errors, you'll be on track to file your taxes successfully.

Calculation Errors

Tax forms feature a lot of numbers and some basic arithmetic, so errors crop up frequently. Even one incorrect digit can trigger a cascade of faulty calculations. Using a calculator and rigorously double-checking every number you enter is the best way to avoid math and other numerical mistakes. 

Solution: Beyond using a calculator, consider tax preparation software that automatically calculates your tax obligations based on your input information.

These programs often include error checks that flag common mistakes before submission. For more complex situations (or if you have doubts about how to file), hiring a tax professional can ensure accuracy and compliance with tax laws, plus peace of mind.

Biographical Data Errors

Failure to enter the correct Social Security Number - or failure to have your number match your name - is a surefire way to get the IRS to reject your tax return. 

Solution: Double-check all personal information against official documents. Consider using tax software that saves your information year over year, reducing the chance of typos in subsequent filings.

Direct Deposit Mistakes

The IRS offers direct deposited tax refunds to help you get your money back faster. While convenient, you must enter the correct bank account and routing number to ensure a timely refund.

Solution: Verify your bank account and routing numbers by checking them against your bank statements or directly with your banking institution. Enter these details carefully if you're using tax software and review them before final submission. 

Choosing the Wrong Filing Status

Are you single? Married filing jointly? Married filing separately? Head of household? It's important to get your filing status right - because failure to do so may draw the ire of the IRS and possibly increase your tax bill.

Solution: Use the IRS's Interactive Tax Assistant on their website to determine the correct filing status based on your circumstances. Tax software often includes a questionnaire that guides you to the proper filing status based on your answers about your life events over the tax year.

Not Including All Income

If you draw all your income from one job, you shouldn't need to worry about missing additional sources. On the other hand, people who have multiple income streams (self-employed contractors, for example) need to ensure every payment is accounted for - otherwise, you may be liable for interest and penalties.

Solution: Keep a comprehensive record of all income sources throughout the year, including freelance or gig work. Use a spreadsheet or financial tracking app to log income as earned. Review all documents received, such as W-2s and 1099s, for accuracy and completeness.

Missing the Deadline

Most years, your taxes are due by April 15 (if that date happens to fall on the weekend, you'll have an extra day or two to pay). If you want to avoid paying added penalties, you can request a six-month extension - though you'll have to pay interest on any taxes not paid in full by the April deadline.

Solution: Set reminders for yourself well before the tax deadline, including a reminder to assemble required documents in advance. If you use digital calendars, set multiple alerts.

Failing to Account for All Deductions

If you plan on itemizing your deductions, familiarize yourself with the lengthy list of items that may be deducted. After all, if you need to know what's eligible as a deduction, how will you determine which is best for you - taking the standard deduction or itemizing?

Solution: Make a checklist of potential deductions at the beginning of the year and add to it as you incur eligible expenses. Tax software can also help identify deductions based on your financial and personal situation.

Lack of Evidence for Your Expenses

It's a bad feeling knowing you spent hundreds or thousands of tax-deductible dollars and can't prove it in the event of an audit.

Solution: Develop a filing system (digital or physical) for receipts and documents related to tax-deductible expenses. Apps that scan and categorize receipts can simplify this process, ensuring you have digital evidence of all deductions claimed.

Not Planning for an Unexpected Bill

Ending up with a tax bill you weren't expecting is painful for just about anyone. That's why you must ensure your tax withholding is sufficient to cover your bill.

Solution: Use the IRS's tax withholding estimator tool to gauge if you're withholding enough taxes from your income. Adjust your W-4 with your employer if necessary. For those with variable income, quarterly estimated payments may need recalculations as earnings change.

Forgetting to Sign Your Return

Believe it or not, plenty of people fail to sign their return every year - and have to wait weeks or even months longer to get their return. 

Solution: Before submitting your tax return, create a final review checklist that includes verifying your signature. Better yet, tax software will only let you file after completing the signature step, adding an extra layer of error prevention.

The Takeaway

The path to a stress-free filing involves preparation, attention to detail, and a proactive approach to understanding tax obligations. Since even a tiny error can have significant repercussions, remember these tips to maximize a successful filing.

Tax credits are often more valuable than tax deductions because they reduce the amount of tax you owe on a dollar-for-dollar basis. For example, if you have a $1,000 tax credit, your tax bill will be reduced by $1,000. But suppose you have a $1,000 tax deduction. In that case, your tax bill is reduced by the amount of the deduction multiplied by your tax bracket – so if you're in the 22% tax bracket, the $1,000 deduction would reduce your bill by $220. Quite a difference!

There are two types of tax credits: non-refundable and refundable. Non-refundable tax credits reduce your tax liability to zero, but you won't receive a refund if the credit exceeds the amount of tax you owe. For example, suppose you owe $500 in taxes and have a $1,000 non-refundable tax credit. In that case, your tax liability will be reduced to zero, but you won't receive the extra $500 as a refund.

On the other hand, refundable tax credits can reduce your tax liability to zero, and you may receive the remaining credit amount as a refund. For example, suppose you owe $500 in taxes and have a $1,000 refundable tax credit. In that case, your tax liability will be reduced to zero, and you'll receive the extra $500 as a refund.

Some common tax credits include:

American Opportunity Tax Credit (AOTC)

The AOTC is a credit for higher education expenses that can provide a credit of up to $2,500 per eligible student per year for the first four years of college. To qualify for the AOTC, you must have paid qualified education expenses for yourself, your spouse, or your dependents. However, the credit begins to phase out for higher-income taxpayers, starting at $80,000 of modified adjusted gross income for single filers and $160,000 for joint filers.

The Child and Dependent Care Tax Credit (CDCTC)

The CDCTC is a tax credit designed to help working parents or guardians pay for the care of a child under 13 or a qualifying dependent while they work or look for work. The credit can be applied to expenses related to daycare, summer camp, before and after-school care, and similar services. 

The 35% credit applies to up to $4,000 of expenses for one child or dependent and up to $8,000 for two or more dependents. However, the percentage of allowable expenses decreases for higher-income earners, reducing credit value. Additionally, payments made through tax-advantaged programs such as a dependent-care flexible spending account at work may lower the amount of the credit.

Child Tax Credit (CTC)

The CTC is a tax credit available to eligible taxpayers with a qualifying child. You could receive up to $2,000 per qualifying child, and in some cases, you could even receive a refund of up to $1,500 - even if you don't owe taxes. 

To be eligible for the credit, the child must be under the age of 17, claimed as a dependent on your tax return, be related to you, live with you for at least half of the year, and be a U.S. citizen, U.S. national, or U.S. resident alien. You must also provide at least half of their financial support. The CTC is phased out for taxpayers with higher incomes.

Earned Income Tax Credit (EITC)

You may be eligible for the EITC if you are a low-to-moderate-income taxpayer. The credit is based on your earned income and the number of qualifying children in your household. The maximum benefit is up to over $8,000 in 2025 for families with three or more children. 

The EITC is refundable, which means that if the credit exceeds the tax owed, you will receive a refund for the excess amount. To be eligible for the EITC, you must have earned income during the tax year and meet specific income requirements, which vary depending on your filing status and the number of qualifying children you have.

Electric Vehicle Tax Credit (EVTC)

The EVTC is a credit of up to $7,500 on purchasing new electric vehicles. However, significant limitations include the maximum vehicle cost, your income, and the location of the vehicle's final assembly.
Lifetime Learning Credit (LLC)

The LLC is another credit for higher education expenses that provides a credit of up to $2,000 per tax return. Unlike the AOTC, the LLC has no limit on how many years it can be claimed and can be used for graduate-level courses or job-skills training. Like the American Opportunity Tax Credit, the credit begins to phase out for higher-income taxpayers, starting at $80,000 of modified adjusted gross income for single filers and $160,000 for joint filers.

Residential Energy Credits

Taxpayers who make energy-efficient home improvements, such as adding insulation, energy-efficient windows, or installing solar panels, may be eligible for a residential energy credit. The credit is worth up to 30% of the cost of qualifying improvements.

Retirement Savings Contributions Credit (Saver's Credit)

The Saver's Credit is a credit for taxpayers contributing to a qualified retirement account, such as an IRA or 401(k). The credit is worth up to $1,000 for individuals and $2,000 for couples filing jointly, based on the amount contributed and income. Eligibility is limited based on income.

The Takeaway

Whether it's reducing educational expenses, supporting child and dependent care, encouraging sustainable energy use, or saving for retirement, each credit offers a unique avenue to improve your tax situation and, by extension, your financial health.

Filing taxes can be stressful, and it can feel like a race against time, especially with the looming April 15th deadline. Even if we plan ahead, unexpected events like a sudden surge in workload, personal emergencies, or procrastination can leave us scrambling as the deadline approaches. It's essential to understand your options in these moments, particularly when it becomes apparent that meeting the traditional filing deadline is not possible.

One of the most common solutions to this problem is an IRS-approved extension. It's not a perfect solution, however, and there are some essential variables to consider before asking for your deadline to be extended.

To help you understand this issue more clearly, let's walk through the pros and cons of seeking a tax filing extension.

Asking for an Extension

The mechanics of getting a tax extension are straightforward: file Form 4868. Approval is automatic, giving you exactly six months to get your financial house in order.

However, it's important to realize that the IRS is merely approving a late filing - they still want you to pay the money you owe on time. You'll need to estimate your total tax debt at the time of your request and send in that estimated amount. If that payment proves to be too low once you file in October, you'll have to pay interest on the difference. That interest rate is around eight percent annually (compounded daily), which can add up quickly.

If you miss your extended October deadline, you'll likely be assessed a late filing penalty of an additional eight percent of the total tax liability. It should be noted that there are a couple of ways to extend your filing date automatically:

• If you've worked outside the U.S., you qualify for a two-month delay.
• You can get up to six months of added time if you're a deployed military member.
• If you're affected by hurricanes, floods, or other natural disasters.

Sometimes, you may also wish to appeal to the IRS directly without opting for an official extension. If you've lost a loved one, suffered severe health issues, or been the victim of a crime, the IRS may choose to let you file late without penalty. The IRS also offers a one-time penalty abatement waiver for those without a record of late payment or filing.

What If I Can't Pay?

Your best bet is an installment plan if you can't pay your taxes. The government will work with you to come up with monthly payments you can afford and, in most cases, will give you up to several years to repay your debt.

There is a caveat, however: unless you can pay all taxes within 180 days, the IRS charges you up to $225 to enroll in a payment plan. Additionally, you'll keep paying interest on your debt until it is repaid in full.

The Takeaway

Filing an extension is an easy process, but it's critical to understand the pros and cons. By exploring the issues raised above, you can determine which course of action is best for you. And if you are having trouble making your tax payments, seek the advice of a qualified professional.

For many people, an income tax refund is the largest lump sum they'll receive all year. The average tax refund is nearly $3,000 – a significant amount for almost anyone. While it can be tempting to spend this money immediately, taking a strategic approach to your tax refund can help you make the best financial decisions for your future.

Here are some ideas for making the most of your tax refund:

Pay Off High-Interest Debt

If you have high-interest debt, such as credit card debt, using your tax refund to pay it off can be an intelligent financial decision. With less debt, you can save on interest charges and free up more of your income for saving or other expenses. Reducing debt can also improve your credit score – helping you save money when you need to borrow in the future.

Build Up Your Emergency Fund

An emergency fund is a financial safety net that can help you weather unexpected expenses or a sudden loss of income. It provides a safety net in unforeseen situations, such as a medical emergency or job loss - an essential part of any financial plan. If you don't already have an emergency fund, consider using your tax refund to start one. And if you do have an emergency fund, your tax refund can help it grow. Most experts suggested saving enough in your emergency fund to cover three to six months' living expenses.

Invest in Your Retirement

Investing in your retirement is one of the best financial decisions you can make. Consider using your tax refund to contribute to your retirement account, such as a 401(k) or IRA. Even a small contribution can add up over time, thanks to the power of compound interest, and your retirement account contribution may even be tax deductible. For example, a $3,000 lump sum invested in a mutual fund at an average return of 8% per year could be worth over $30,000 in 30 years.

Education: Invest in Yourself

Investing in yourself through education is another way to use your tax refund. Could taking a course to learn a new skill or investing in a certification program help you advance in your career? Investing in yourself can potentially increase your pay, enjoy greater job security, and improve your financial situation over the long term.

Make Home Improvements

Using your tax refund to make improvements can be a wise financial decision if you own a home. Upgrades such as energy-efficient windows, a new HVAC system, or a new roof can increase your home's value and save you money on utility bills. Some home improvements may even qualify for a tax deduction or credit.

Save for a Goal

If you have a specific financial goal, such as saving for a down payment on a house or a new car, your tax refund can be used to turbocharge your progress. Setting aside your refund can help you reach your goal faster and make it more achievable.

Donate to Charity

Using your tax refund to donate to a charity or nonprofit organization can be a great way to give back and positively impact your community. Plus, if you itemize your deductions, charitable donations can be tax-deductible, meaning you can potentially receive a tax benefit next year.

The Takeaway

While spending your tax refund on something fun or frivolous may be tempting, a strategic approach can help you make solid financial decisions for your future. Whether you pay off debt, invest in your retirement, or save for a goal, using your tax refund wisely can lead to lasting benefits - turning a momentary windfall into a key part of your overall financial plan.