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Now May Be the Year to Reduce Your Tax Refund

October 18, 2017

Internal Revenue Service statistics show that many taxpayers intentionally overpay payroll taxes so they will receive a tax refund when they file their income tax returns. It is their way of creating a savings account to be used for whatever they decide. But considering the increased potential for identity theft after the Equifax breach, and the anticipated increase in the filing of fraudulent tax returns, overpaying taxes in 2017 to create a tax refund in 2018 may not be the best action to be taken. Instead, 2017 may be the year to modify this behavior to put more cash in your pocket now, rather than waiting until 2018.

Refund Delayed, But Not Lost
If your identity is stolen and used to fraudulently file an income tax return claiming a refund before you do, you won’t lose any refund you claim when you file your return. However, it will significantly delay the timing of when you receive your refund. 

If your electronic return is rejected because someone has already filed a return using your social security number, the IRS will have you submit a paper return and file Form 14039 Identity Theft Affidavit. The IRS will use your Form 14039 information, and other available information, to help them sort out the correct return. This investigation process can take anywhere from 6 to 12 months, sometimes up to 18 months to complete. Unfortunately, during this investigation process you will not receive your refund.

The IRS is now requiring more verification items to prevent someone other than the real taxpayer from filing a return, but what can you do to help avoid this hassle? You can start with reducing your refund.

Time to Take Control
To start the process of capturing any tax refund savings in 2017, rather than waiting until 2018, do a quick analysis of your estimated 2017 taxable income and refund potential by projecting income and expense items through December 31, 2017. It doesn’t need to be an exact number, just a good reference point to determine if you have an estimated refund and the amount. 

Refund Position? What Then?
If you are in a refund position, the first thing to do is check your payroll withholding exemptions and consider lowering them throughout the remainder of the year. This action should lower your refund on your return when filed, but put more current cash into your pocket. With a little discipline, the savings can be placed into a special fund for use at a later time, just like you would have done in the past with any tax refund. 

Other things to consider that have the potential to decrease a tax refund to be received in 2018, but will increase current 2017 cash available are:

  • Don’t make extra tax deductible payments at year-end. An example would be an extra mortgage payment to get an additional interest deduction.
  • Save special charitable deductions until January 2, 2018.
  • Pay only the required amount of real estate taxes, rather than paying all in 2017.

There are other ideas that can be used depending on your particular tax situation. However, you may need to enlist the help of a qualified tax professional depending on your individual circumstances, as the alternative minimum tax and other specialized tax provisions can lead to some unexpected results.

Other Tax Planning
And, while you’re in this refund protection process, it’s a great time to think about tax planning in general. Rather than just making sure that some identity thief doesn’t get your tax refund, finding ways to actually decrease your overall tax liability can be an exhilarating experience and a potential cash boost to your lifestyle.  Why not give it a try? 

Contact your Eide Bailly tax professional with questions.