Your Sunday Confessions Answered

I have no idea how to fill out a W-2, or wait, is it a W-4?

We get it. Form W-2 and Form W-4 are very similar – in fact, you can’t really have one without the other. Here’s the difference:

• Form W-2: This is your income statement from your employer. It shows the amount of money you made working for that employer throughout the year as well as the amount of taxes withheld from your paycheck. You need this form to file your federal and state tax returns.
• Form W-4: This form helps your employer to know how much should be withheld from your paycheck for federal income taxes. You must complete this form and give it to your employer. Use our W-4 Calculator to determine how much you should have withheld in taxes and to complete a new form.

Should I use a professional tax preparer or file my own tax return?

We know filing your own return may seem daunting, but trust us when we say, it’s not as scary as you may think. In fact, that’s what we’re here to help with. Our suite of products is designed to help you confidently file your return and get your maximum refund guaranteed.

Simply gather your tax documents and choose the TaxAct product that best fits your tax situation. Once you’re ready to get started, the product will guide you through a Q&A interview and provide ProTips that uncover tax deductions or credits that you maybe didn’t realize were available. Before submitting your return, our products also run a quick review of your return to help identify any errors, omissions, or other tax benefits you should be aware of.

Plus, if you’d like additional assistance, you can take advantage of our Xpert Assist offering which gives you direct access to CPAs and other tax experts to get your questions answered.

What are the tax benefits of a Roth IRA?

A Roth IRA is a retirement savings account that allows your money to grow tax-free. It is funded with after-tax dollars, meaning you’ve already paid taxes on the money. But when you go to make a withdrawal in your retirement years, you don’t have to pay taxes on it at that time. Additionally, any money that accrues in the account after its invested also grows tax-free. Every penny once you withdraw it goes directly into your pocket.

This is different than a traditional IRA, which is a retirement savings account that is funded with pre-tax dollars and taxed once you make a withdrawal.

Are there tax advantages to paying my mortgage?

If you’re a homeowner with a mortgage payment, you can take advantage of the mortgage interest deduction on your 2021 tax return. That means you can write off the amount of interest you paid on your mortgage throughout the year. If you purchased a house after Dec. 15, 2017, you can deduct interest on the first $750,000 of your mortgage.

The only caveat is that you must itemize deductions on your return to claim this tax benefit.

My tax refund was low. Is that bad?

Small refunds – or even $0 refunds – aren’t a bad thing. Rather, it likely means you kept more of your money instead of overpaying the IRS in taxes throughout the year.

Getting a tax refund means you loaned the government your money interest-free, which is not the smartest financial plan depending on your lifestyle. That’s especially true if you have credit card debt, student loans, or a negative balance of any kind. Instead of loaning your money to the government, you could make that money work for you by paying down debt or investing it.

Adjusting your withholdings with your employer on Form W-4 is the best way to change the amount of money you pay the government in taxes throughout the year. Use our W-4 Withholding Calculator to determine the right amount of withholdings for your tax situation and complete a new Form W-4.

Can I pay my kids as employees for my business?

If your kids do legitimate work for your business, you can hire them and pay each of them up to $12,000 per year tax-free.

As long as they stay under that $12k limit, they don’t have to file a tax return, which means they don’t pay any income tax on the money. You also get to deduct their wages, which lowers your business’ taxable income.

Are there tax benefits for paying a babysitter?

If you are paying someone – whether it be a daycare or a nanny – to care for your child(ren) while you work, look for work, attend a school or otherwise try to earn income, then you may qualify to claim the Child and Dependent Care Credit on your tax return. There are a variety of qualifying factors to claim this credit, however.

• You must be the qualifying guardian of the child
• The expenses must be for care used while earning money
• Your child or dependent must be 13 years old or younger
• Your filing status must be single, qualifying widow or widower, head of household, or filing jointly.
• Your caregiver cannot be listed as a dependent on your tax return. I.e. paying your 13-year-old child to care for your younger children.

I’m filing my business taxes for the first this year. Where do I start?

We know filing your business taxes is intimidating. But we’ve designed products to help take the stress out of the process. Depending on the structure of your business, TaxAct Self Employed or one of our business products can help organize your filing process and help ensure you’re accurately reporting your income as well as taking advantage of the business credits and deductions available to you.

Whether you’re a freelancer, independent contractor, or use a legal entity such as an LLC or corporation, each type of business requires a different tax form to report your income and expenses. But regardless of the forms needed, the calculations for your taxable business income are generally the same.

Simply collect your records, find the right TaxAct product for your business, and let us help you quickly complete the right forms and get your returns filed by the business tax filing deadline of March 15.

What should I do with my tax refund?

What you choose to do with your tax refund money should be solely dependent upon your full financial picture and your lifestyle. If you don’t need the money for essentials, putting some of it toward long-term money goals is important. For example, you could use it to:

• Buy financial freedom by paying down your debt
• Get some more peace of mind by building your emergency savings or retirement savings accounts
• Build your future by investing and letting compound interest do its thing to earn you even more money

I received the advance CTC monthly payments in 2021. What will my tax refund look like?

Families who received all six of the monthly Child Tax Credit payments that started in July of 2021, technically, should have received half of the credit amount they qualify to receive. Those families then should plan to claim the remaining portion of the CTC on their 2021 tax return when they file.

That said, how much of the remaining portion you will receive is dependent upon your 2021 tax situation. And there are situations where you may have already pocketed more than you qualify to receive. For more specifics on how the advanced payments of the CTC could impact your tax return, check out: How the Child Tax Credit Payments Could Impact Your 2021 Tax Return

Is there a maximum I can contribute to my retirement account each year?

Yes – there is a maximum dollar amount that you can put toward every retirement account each year. Here’s a look at those limits for 2021:

• 401(k), 403(b), 457 plans, thrift plans – $19,500
• Traditional IRA – $6,000
• Roth IRA – $6,000

I’m 30. How much money should I have saved?

The answer to this question is entirely dependent on when you plan to retire and the type of lifestyle you want to have in retirement. There are a few guidelines, however, that you can follow for every age.

The general rule of thumb is to save 10 times your income if you want to retire by age 67. If you want to retire earlier, you’ll then need to adjust that number appropriately to account for the additional years of needed income. Here’s a general guideline of how much cash you should have saved at every age:

• Age 30: the equivalent of your annual salary
• Age 40: three times your income
• Age 50: six times your income
• Age 60: eight times your income
• Age 67: ten times your income

These savings amounts should include anything you have in a retirement account, like a 401(k) and Traditional or Roth IRA, as well as any investments, such as index funds or money invested through a robo-advisor.

How can I decrease my money anxiety around the holidays?

It’s the most wonderful time of the year…so they say. But the truth is, the holidays can be a major source of concern for many when it comes to purchasing gifts and creating holiday cheer.

Two tips to help reduce some of that anxiety are to start saving early and stick to a budget. Begin by setting a budget at the start of the year for how much money you are comfortable spending on gifts. Then, start stashing away money each month. Even if it’s just $5 or $10, that money will add up quickly and allow you to feel more financially secure when it comes time to buy for your loved ones. Some financial institutions even offer Holiday Savings Accounts to help you separate your holiday savings from the rest of your money – out of sight, out of mind so to speak.

Saving early can help reduce the stress you might feel when it comes time to purchase gifts because you’ve already put some money aside to help you do it. But the next tip is often the hardest to follow and that’s to actually stick to your budget. The holidays are a joyous season, but it’s never a good idea to put yourself in a financial bind just to get in the spirit. And it certainly won’t make that eggnog taste any better!

Be comfortable setting boundaries around your finances and sticking to your budget.

I got a bonus! What now?

Congrats! It’s awesome to get a monetary reward for a job well done. If you’re wondering how to best put those extra dollars to good use, here are four financially smart ideas:

1. Pay off high-interest debt
2. Contribute to a Roth IRA
3. Pad your emergency savings (Experts typically recommend having anywhere from 3 – 12 months of money set aside in your emergency fund.)
4. Invest it into the market

Should I get a financial planner to help with my budgeting and saving?

A financial advisor takes inventory of your finances and works to create a plan for you that helps you reach your financial goals. If your money situation is rather simple, you likely can manage it appropriately on your own. But the more complex your financial situation is, the more likely you’d benefit from working with an advisor that best suits your needs.

Financial planners can provide an objective perspective and provide expertise on money decisions where you otherwise might not be as knowledgeable. For example, they can help with determining your financial priorities, how to best invest your money and the type of insurance coverage or other protections you should have.

If you’re going through a life change like getting married, divorced, or welcoming a child into your family, a financial advisor can be particularly helpful to navigate those situations from a financial perspective.