As Tax Day approaches, many individuals find themselves dealing with their annual tax obligations. This year, notable trends have emerged due to past inflation spikes and pandemic-related adjustments. One significant observation is the increase in tax refunds. Preliminary data indicates that refunds are trending about 6% higher than last year.
This increase is not driven by new legislative changes but by the annual inflation adjustments made to various parts of the tax code. During the intense inflationary period of the previous years, the IRS adjusted tax codes such as the standard deduction and tax brackets by about 7%. For many, wages have not kept pace with these adjustments, leading to larger refunds. Essentially, if your raise wasn’t around 7%, your taxes have effectively decreased relative to your income, resulting in a higher refund.
This scenario has mixed implications. On the one hand, receiving a bigger refund might seem beneficial. However, the underlying reason—a wage increase that did not keep pace with inflation—is less positive. It highlights broader economic challenges, particularly for the middle class, which may not have seen significant wage gains compared to lower income brackets.
Let’s explore more of this in our today’s blog:
1. The New IRS Free File System
2024 introduces an IRS Free File system available in a dozen states, directly challenging other tax preparation services. This new system is designed to be straightforward and fast, aiming to simplify the tax filing process for all users. Feedback from early users suggests that the system is efficient, with some completing their federal returns in as little as 15 minutes.
However, some criticisms focus on the redundancy of inputting information the IRS already possesses, such as income figures from W-2 forms. This aspect may improve as the system evolves, and its continuation will likely depend on user interest and administrative decisions post-presidential elections.
2. The Impact of Inflation on Refunds
In recent years, high inflation and pandemic payouts were major discussion points during the tax season. Although no new tax laws have been introduced this year that would impact refunds, the inflation adjustments to the tax code have moved higher than the wage increases for many. This discrepancy means that while people might enjoy a larger refund, it comes at the cost of their wages not keeping up with inflation.
3. Final Opportunity for Pandemic Stimulus Claims
This tax season also marks the last opportunity for individuals to claim any missed stimulus payments from the pandemic era. The IRS requires filing a tax return for the respective year to claim any remaining stimulus funds, a process termed the Recovery Rebate Credit. An estimated 940,000 households are yet to claim refunds, which could include unclaimed pandemic payments.
DIY Financial Management Tips
For those not in the millionaire bracket, paying for financial planning services might not be cost-effective. Instead, managing your finances independently can be both empowering and economically prudent.
a. Accessing Free Financial Advice
- Employer and Brokerage Resources: Many 401(k) plans include free consultations, which can provide valuable financial insights without the hefty price tag of personal financial advisors.
- Online Tools and Calculators: The internet is full of resources that can help you plan your finances, from budgeting tools to investment calculators.
b. Creating a Personal Financial Plan
Building a financial plan doesn’t have to be complicated. It can start with understanding your current financial status, setting clear goals, and mapping out a strategy to achieve them. Here are a few steps to consider:
- Assess your current financial situation: Know your income, expenses, debts, and investments.
- Set realistic financial goals: Whether it’s saving for retirement, a new home, or college tuition.
- Plan your investment strategy: Decide how you will allocate your savings to meet your goals, understanding the types of investments that fit your timeline and risk tolerance.
c. The Bucket Strategy
Using a ‘bucket strategy’ can be an effective way to manage your finances. This involves dividing your money into categories based on time frames or goals. For instance:
- Short-term bucket: For immediate expenses and emergency funds.
- Medium-term bucket: For goals that are 5-10 years away, like buying a home.
- Long-term bucket: Primarily for retirement savings.
The Value of Financial Literacy
Understanding and managing your finances is a crucial skill that benefits everyone, regardless of income level. Engaging with financial literacy initiatives, utilising free resources provided by employers and financial institutions, and learning to manage personal finances can significantly enhance your financial stability.
Keeping Informed Through Trusted Sources
While it’s beneficial to seek advice from financial experts, it’s also essential to use reliable sources and tools to get accurate and practical financial information. Websites like MarketWatch offer articles and tips that can help in planning and managing finances effectively.
Final Thoughts
As we navigate tax obligations and manage our finances, it’s essential to stay informed and utilize available resources effectively. Whether it’s maximising tax refunds, understanding new IRS filing options, or developing a DIY approach to financial planning, the right knowledge and tools can lead to more secure and successful financial management. Remember, it’s not just about having resources; it’s about using them wisely to meet your financial goals.
Frequently Asked Questions
Ques. 1. What is the filing deadline for Tax Day 2024?
Ans. The filing deadline for federal tax returns in 2024 is 11:59 p.m. on Monday, April 15, 2024. However, residents of Maine and Massachusetts have until April 17, due to state holidays. If you need personalised help, consider reaching out to our expert for a consultation.
Ques 2. What should I do if I receive a larger tax refund this year?
Ans. A larger refund might indicate that your withholdings were higher relative to your tax liability, possibly due to inflation adjustments outpacing your wage increase. To better understand your specific situation and possibly adjust future withholdings, consulting our tax experts like John Geantasion could be beneficial.
Ques 3. Can I still claim pandemic stimulus payments?
Ans. Yes, the deadline to claim any missed stimulus payments from the pandemic is generally around Tax Day. You must file a tax return for the year you are claiming to receive these funds. For assistance in filing or to understand more about your eligibility, John Geantasion is available for a free consultation.
Ques 4. Do I really need a financial planner if I am not a millionaire?
Ans. Most people do not need a financial planner unless they have a substantial amount of assets. There are many resources and tools available that can help you manage your finances effectively on your own. However, for complex situations or large investments, professional advice might be warranted.
Ques. 5. How can I file my taxes for free?
Ans. The IRS offers a Free File program for those who qualify based on income thresholds. Additionally, some states have introduced their own free filing systems. Check the IRS website or consult with our expert, John Geantasion, to find the best free filing options for you.
Ques. 6. What are some DIY money management tips?
Ans. Start by taking inventory of your current financial situation. Create a budget, track your expenses, and set financial goals. Utilize free financial planning tools offered by your workplace or financial institutions. For more tailored advice, John Geantasion can provide guidance based on your personal finances.
Ques. 7. How do inflation adjustments affect my tax returns?
Ans. Inflation adjustments increase certain parts of the tax code, such as the standard deduction and tax brackets, which could lead to larger refunds if your income increases haven’t kept pace with inflation.
Ques. 8. Is it better to file taxes early?
Ans. Filing taxes early can prevent last-minute stress, reduce the risk of identity theft, and usually means you’ll receive any refund due sooner. However, if you have complex tax situations, taking additional time to gather and verify all information can be beneficial.
Ques. 9. What should I do if I can’t afford a financial planner?
Ans. Explore alternative resources such as financial planning webinars, free consultations through your employer, or online financial management tools. These resources can provide substantial guidance without the high cost of a traditional financial planner.
Ques. 10. How can I make sure I am saving enough for retirement?
Ans. Start by calculating your expected retirement needs and compare them to your current savings rate. Utilize retirement calculators available online to project your savings growth over time.
Also Read –
2024 Income Tax Brackets: Federal Tax Rates and What They Mean for You
Tax Saving Tips: Strategic Account Withdrawals for Best Returns