With the Bush-era tax cuts set to expire at the end of this year and Congress debating how to balance the budget, 2011 may look like a calm tax year before the storm. But many Americans will find that personal and political factors, from moving back home to live with parents to new reporting requirements, make the process more complicated than it first appears. Here are 10 things you should know before filing 2011 taxes:
1. You're probably in for a refund.
Let's start with the good news: About 3 in 4 Americans receive tax refunds each year, and the average refund is around $3,000. According to a TD Ameritrade survey, most taxpayers plan to use the windfall to pay off debt, save, or invest the money. Just 14 percent will use the money to splurge on a luxury item. Knowing that refund is coming might offer some motivation to file early. "If you file early, you get your money early, but if you owe, you do not have to pay early," explains Mark Steber, chief tax officer at tax services provider Jackson Hewitt and chairman of the IRS's Electronic Tax Administration Advisory Committee.
2. Refunds arrive faster for those who file electronically.
While most people opt to file electronically, about 3 in 10 Americans still stick with the old-school paper method, and that can cost them time. Electronic filers receive their refunds faster, usually in less than 10 days, and they can opt for direct deposit into their bank account for even faster access to their money. And thanks to an alliance between tax software companies and the IRS, anyone who earned less than $57,000 in 2011 can use name-brand tax software and electronically file their taxes for free. Visit www.irs.gov/freefile to get started.
3. Major life changes can mean major tax changes.
Anyone who got married, had a baby, got divorced, or experienced any other major lifestyle shake-up that affects the number of people in their household will need to update their taxes accordingly, says Steber, because those types of changes have a major impact on one's tax status. In fact, choosing the wrong tax status can have a major impact on one's tax refund (or liability), and it's not always as easy as it sounds. For example, new parents sometimes make the mistake of forgetting to add their latest addition as a dependent, or married couples living separately might not realize they can still file jointly.
4. If you're supporting a family member, you might be eligible for a tax break.
"If you're taking care of a dependent parent and providing more than one-half of their support, then they may qualify as a dependent, like with a new child," says Steber. As baby boomers age, that situation will likely become increasingly common, he adds. Specific costs, such as medical expenses or home renovations to make room for a live-in parent, could qualify as deductions, too. Parents welcoming home adult children could find themselves in a similar situation; Steber suggests getting customized advice from a tax professional to check on any potential tax benefits.
5. Independent income often means you can deduct business expenses.
Steber notes that many Americans, particularly those who experienced layoffs, have launched their own small businesses. "Tax law is favorable to that," he says, and often miles driven, meals, and other expenses related to the business can be deducted from one's income. Of course, anyone claiming those expenses needs to keep track of receipts.
6. A new tax year means different numbers.