Live and Learn

Personal finance topics with a real world touch... 
and puns, because they make everything more amusing.

A taxing situation


Remember that surprise upon getting your first paycheck and wondering where on earth all the money went? "But I worked so hard at the concession stand at the neighborhood pool!" Well, we learned real fast that governments all want money for the services that they provide. One major tax that (most) states and the federal government levy is on the money you earn. (Those who don’t earn enough in income aren’t required by law to file a federal tax return, but you may want to file anyway because you may be eligible for a refundable credit.) Here are a few key areas to be aware of regarding taxes.


Timeliness

Even if you think you can't afford to pay the full amount, you need to file your return by the deadline. April 15 is the common deadline for most taxpayers. If you owe the IRS, there's a late-filing penalty of 5% per month, up to 25% of your unpaid taxes. The IRS allows payment plans if you can't pay everything you owe immediately. They don't mess around. Do not screw with the IRS.


Deductions

Deductions reduce the amount of income you have to pay taxes on. (That's what people are talking about when they say "write it off" on your taxes.) If you qualify, you can get tax deductions for student loan interest or medical or dental expenses. Even if you don't have things to deduct, just being you gives a tax break. Recently this "standard deduction" was increased so many people don't bother to track all of their tax deductions. An accountant will be able to give you assessment of your unique situation.


Withholding

The W-4 form from your employer calculates how much federal tax to withhold from your paycheck which dictates your federal refund size. (States also have a similar form.) If you withhold too little, you will owe when you file your tax return. If you withhold too much, you will get a refund, but you'll have to live on less of your paycheck during the year. The IRS offers a calculator to help you figure out how much to withhold. A lot of people like to get a large refund back to spend at the end of the year. Sure, that is one way to force yourself to save. But I want us all to be smart with our money, not try to outsmart our bad habits. Maybe start working towards saving that money yourself so you have control of it and avoid giving the government an interest free loan. It's your money, let it work for you instead.


I'm not an accountant, so if you have more questions please check with someone trained and certified to assist you. If you'd like to figure out how to save money on your own instead of using a tax refund as your savings account, I'd love to work with you.