American Money: Are You Overpaying Your Taxes?
Though Congress staved off potentially disastrous tax hikes in a last-minute fiscal cliff deal, most Americans will still end up paying more in federal taxes this year. This is due to Congress’s failure to prevent the expiration of a Social Security payroll tax reduction.
Households making between $40,000 to $50,000 a year will pay an average of $579 more in taxes in 2013, while households making between $50,000 and $75,000 will face an average increase of $822, according to the Tax Policy Center. The average tax refund last year was $2,913 — meaning the tax increase may eat away as much as one-fifth of your refund, depending on your income.
Although the country continues to make slow recovery from the current recession, it isn’t soon enough for many Americans who continue to feel the pinch of high unemployment rates and a rising cost of living. Given these ongoing financial difficulties, you can make the most of your income by avoiding these common tax pitfalls:
Overlooking the Earned Income Tax Credit
The IRS estimates that one out of every four eligible low-to-moderate income Americans fail to claim the Earned Income Tax Credit (EITC) owed to them by the government. This credit can reduce the amount of tax you owe, or it may even give you a refund. Developed in the 1970s, this credit lifts an estimated 6 million Americans above the poverty line every year. You can visit the IRS website to find out more information about criteria for eligibility.
Getting an Advance on Your Tax Refund
It may be tempting to get quick money through tax refund anticipation checks, but using this service ultimately means paying more and getting less. As with payday loans, many refund anticipation checks come with fees that add up to a staggering APR, or annual percentage rate. For example, according to the National Consumer Law Center and Consumer Federation of America, getting a $1,500 refund anticipation product from tax-preparation chain Jackson Hewitt would cost $61.22, adding up to an APR of 149 percent. This rate is several times worse than any APR you could get from a credit card, which now averages around 15.13 percent. Create a sound budget to cover your bills from month to month so you can invest your full refund in a savings cushion instead.
Not Itemizing Deductions
Depending on your circumstances, it might make more sense to itemize your deductions rather than take a standard deduction. If you’ve spent a significant portion of your income on health care expenses, state and local taxes, home mortgage, charitable donations, gambling losses, job-related education or job-related travel, you may be able to pay less through itemizing. You may also be entitled to large deductions if you’ve taken a financial hit due to theft, vandalism or an act of nature and were not reimbursed.
Finally, if you’re having trouble preparing your taxes, the IRS offers Volunteer Income Tax Assistance (VITA) for people who make $51,000 or less as well as Tax Counseling for the Elderly (TCE). IRS-certified volunteers can give you more information on credits and deductions you may be eligible to take, including the ones described above.
American Money is a weekly column written by Dedrick Muhammad, the senior director of the NAACP Economic Programs. To learn more about preventing foreclosure and personal finance, check out the NAACP Financial Freedom Center Facebook Page or on Twitter @naacpecon.
The opinions expressed here do not necessarily reflect those of BET Networks.
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