As they say, there are only two things certain in this life: death and taxes. Though both unpleasant, the former is at least a one-and-done deal (the latter is obviously not). Taxes will hound you every year for the rest of your life. So, it pays (sometimes literally) to have all your ducks in a row. And let’s be honest: We would all love to lower our tax bill. That’s why we checked in with CPA Dria Carter for the three things she thinks all tax-paying individuals (so, um, most adults) need to know when tax season rolls around.
3 Things a Tax Accountant Says Everyone Gets Wrong
Meet the Expert
Dria Carter, CPA, is the owner of Carter Financial, which provides tax, accounting and consulting services. She is based in Houston, Texas.
1. Getting Divorced Before January 1
In the eyes of the tax code, married people have the best advantages—they reap double what a single person would in terms of deductions and credits, because if one partner qualifies, it applies to both. However, that all disappears should you divorce. If you and your spouse are planning on divorcing toward the end of the year, it’s best from a financial standpoint to wait until the new year if possible, so you can still reap the benefits of the partnership at tax time.
“Say you're married but then December 30 you're like, ‘I'm done with this, I'm finalizing my divorce .’ Starting the next tax season, you're considered single,” Carter explains. “Even though you were married January 1 to December 30 , if you're single on the last day of the year, you’re considered single for the entire year. The same goes with marriage…timing is super important.”
2. Going for Deductions Instead of Credits
There are two ways to reduce your tax liability: Deductions and credits. Examples of deductions include student loan interest, teacher educational expenses, Health Savings Accounts (HSA) and investments, while you can claim credit for things like the purchase of an electric vehicle, retirement savings, adoption and dependent care. Carter explains that a credit is preferable because, while a deduction reduces your taxable income, a credit is applied to your final bill, dollar for dollar, so it gives you more of a break.
3. Not Investing Enough to Lower Your Taxable Income
Even if you’re single with no dependents and only a W-2—which Carter says is the worst place to be in terms of tax status— one way to reduce your tax bill is to make sure you’re contributing the maximum for your Individual Retirement Account (IRA) or 401k. Carter says that the maximums have been increased this year due to inflation, from $20,500 to $22,500 for 401ks and $6,000 (for those under 50)/$7,000 (over 50) to $6,500 and $7,500, respectively.