TAXES: WHAT YOU NEED TO KNOW

I am not a tax expert and what I am offering is basic knowledge to help you be prepared for filing basic taxes. Please contact a tax professional for your personal needs and financial situations.

Taxes. This is one of those things that you know about slightly, you have heard that you can get into trouble if you don’t do them, and you probably have no expertise in. In school, you probably learned what taxes ARE, or how they were established back in the day, but do you really know why you have to pay taxes, when you have to pay them, and how, if at all, they can benefit you?

This article in NOT going to be about specifically teaching you how to get a refund back, how to claim the most deductions, or how to get out of paying them. There are a LOT Of tax professionals out there to help you with all of that. However, if you are working and have to file a basic tax return, I can guide you through the why and the how.

WHAT ARE TAXES:

Taxes are the money you are legally expected to pay the government to fund governmental programs. We pay taxes on: Income, payroll, property, sales, capital gains, dividends, imports, estates, and gifts. Basically anytime you are given any money, the government thinks they should get their share. The benefit of this, is that your local, state, and federal governments can then use that money to pay for school improvements, road improvements, and social programs, like food stamps. The drawback of this is that you really have no say in how your tax dollars are being spent. The only way you can have a voice is to elect officials who have the same values as you do, although this is no guarantee. This is why so many adults get angry over how their tax dollars are being spent. We have to pay taxes yearly or quarterly depending on how we are making our income. Be aware that if you are self-employed (blogger, babysitter, dogwalker) or are independently contracted (ride share, food delivery, grocery delivery) you may have to pay taxes quarterly or have to pay extra. More on that later!

WHO HAS TO PAY TAXES:

If you have had ANY income, interest payments from Social Security or investments, taken any money out of a retirement account, been given an inheritance or a large monetary gift, you have to fill our a tax return. Let’s look at the different types of income you may have had and the forms you are expected to have for filing your taxes:

  1. EMPLOYED THROUGH EMPLOYER: You have a regular job, with paychecks signed by a company. You probably filled out a W-4 when you first go hired, which told the government how many withholdings you wanted. You may not have understood it, but it basically is a form telling the government that you either want your taxes taken out of your paycheck so that you won’t have to pay when you file your return, or that you want a bigger paycheck now, and will owe the full amount when you file your return. The decision is based on your needs at the time, there is no wrong answer. By the end of January, your employer will send you a W-2. Keep this form! Your W-2 will have 4 sections, all identical. Each one will specify what copy is needed for what return: Federal, State, Local, and your copy. You much send the appropriate form in with your taxes as proof that you filled out the forms correctly.
  2. SELF-EMPLOYED: If you work for yourself, whether it is a business or you do odd jobs, you are legally required to claim that income on your taxes. The best way to doing so, is to keep track of all your earnings as you go. Create a spreadsheet or just keep a notebook and write down all the money you have earned from your job. On a separate sheet, keep track of any expenses you incur for your business, like leashes and treats if you are a dog walker, and keep all your receipts. If you have a job where you drive a lot or far to get there, keep track of your mileage on another sheet (and sometimes your gas and maintenance also). Basically, keep track of EVERYTHING pertaining to your business in case it can be useful later. If you are self-employed, be aware that you are expected to pay your local taxes quarterly. Contact your local tax collector or a tax preparer to find out more and to figure out how much you will owe. Be prepared…you are going to OWE taxes, because nothing is going to be taken out throughout the year. A good rule is to save 20% of your earnings and set it aside every time you get paid, to be able to pay a portion of your taxes.

3. INDEPENDENT CONTRACTOR: If you work for a company as an independent contractor, that means that you are considered self-employed for the company. No taxes will be taken out as you go, so you will be expected, as above, to keep track of your income, expenses, and how much you owe in taxes. If you make more than $600, your company must send you a 1099-MISC which is proof of your income. Even though they are keeping track of your earnings, I would also advise you keep track of your own information to make sure theirs is accurate.

WHAT FORMS DO I USE TO FILE TAXES:

First of all, if you are ever unsure what to do, you should contact a tax professional. Tax preparers are available all year long, it is better to ask for advice BEFORE it is time to fill out paperwork, in case you were supposed to file earlier (for example, your quarterly taxes).

Your basic form is the 1040 or 1040EZ. You can usually find a paper copy online at irs.gov and fill it out for free. If you are good at following directions and filling out paperwork neatly, then you could go this route. If you all you have is a W-2, then you just fill out the boxes accordingly, do the math, and then follow the directions if you owe or if you will get a refund. This seems easy, but it could delay any refund for quite a while.

If you choose to use an online tax preparer, it is usually very straight forward and easy. Just make sure you understand upfront what fees you are paying and why. Don’t pay for stuff that you don’t need. Using an online tax preparer will give you the peace of mind that the information is accurate and that you filled out everything you were supposed to. You can also save the information if you realize you are still waiting on any forms.

If you choose a tax preparer in person, you will need to gather all of your paperwork, bring more than you think you need, and help them sort through it all. The benefit of doing this is the personal experience of someone asking you if certain situations apply to you, finding you the best deductions, and possibly guaranteeing you against an audit, if the service does that.

A 1040 may not be enough. If you are self-employed or get a 1099-MISC, you will have to file a schedule C along with your 1040. This is just a form that breaks down your income and expenses to get you the same numbers needed on the 1040. If you use an online tax service, it will automatically do this for you, but there will probably be an upcharge.

HOW MUCH WILL I OWE/GET BACK?

How much you will owe is dependent on what you have paid in taxes throughout the year. If you are self-employed and have paid quarterly taxes, you will owe very little or may even get money back if you over paid. If you work through an employer, certain taxes like Medicare were already taken out. But it isn’t as simple as calculating what you owe based on what you earned. There are other factors to consider. Factors that can benefit you:

  1. DEDUCTIONS: Deductions reduce your taxable income. You can take a standard deduction, which is most common and the easiest, or you can itemize, which benefits you if you have a large medical expense, home mortgage points, interest expenses, charitable contributions, business use of home or car, business travel, work related education expenses, casualty disaster and theft losses. If these totals add up to more than the standard deduction, then choose this option. If you have any of these, you must have paperwork to show proof and file a Schedule A. If you are unsure, make sure you talk to a tax professional.
  2. EXEMPTIONS: This is money that is subtracted from your Adjusted Gross Income. This can be based on tax filing status, number of dependents, how much you have earned. There are exemptions meant to help lower income filers pay less in taxes so as not to be a financial hardship. There are limitations, so you will have to check your own situation.
  3. CREDITS: Usually offered to middle class and low wage earners, credits are used to offset a tax liability or to reduce what you owe. Earned Income Tax Credit is offered to lower incomes, American Opportunity Tax Credit and Lifetime Learning Credit are for full time college students, and the Childcare and Dependent Care Credit offsets the cost of day care or care for an elderly family member.

All of these are examples of how to lower your taxes. Some of these can be used only on your federal taxes, some can be used on State as well. Local taxes are pretty straightforward. Your local tax preparer will send you a form to fill out or an address to go online, but it is just a straight percentage of what you earned.

DO I HAVE TO DO ALL THIS?

YES! It is ILLEGAL to not file your taxes! The annual deadline is April 15 of each year, so once you get your paperwork in January, or once you prepare your own statements, you can begin to file your tax return. If you are like a lot of first time workers, chances are you are going to get a nice refund, so you might want to get a jumpstart on filing mid January! Filing online usually gets you the quickest refunds. If you owe, you should still figure out how much you owe to each branch early on so that you can save and be able to pay on April 15th. If you aren’t able to pay your taxes, the best thing you can do is ask for an extension. This will come with a small interest penalty, but it is the legal way to asking for more time.

Paying taxes is a MAJOR party of being grown up! You might not need to understand all the ins and outs, (that is why we pay tax professionals!) but it is necessary to know why and how to pay our taxes.

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