The Most Important Things to Understand When It Comes to Income Taxes

The Most Important Things to Understand When It Comes to Income Taxes

They say the only sure things in this life are death and taxes. We can’t help you with the former, but when it comes to taxes, being informed is the only way to wield any sort of control. Since paying income taxes is part of life that we really can’t escape, it’s important to understand how to meet our legal obligations without overpaying.

What You Need to Know: Withholdings

The W-4 form you filled out with your employer will determine your tax withholding. This form details your marital status, dependents, and if you have any other jobs. If you’re unsure about your eligibility for certain allowances, or whether your withholdings will match your legal obligations, the IRS provides this helpful calculator.

In addition to federal and state income taxes, the federal government will withhold other amounts from your paycheck, including Social Security and Medicare. Your employer is also responsible to pay a portion of these taxes.

If you’re self-employed or own a business, you’ll need to calculate your own taxes and set them aside. This will include both income and self-employment tax amounts for Social Security and Medicare, and you’ll be responsible for both the employee and employer portions. Since taxes aren’t automatically withheld from your paycheck, you’ll need to pay them according to quarterly deadlines. You may need help from a tax professional here.

Reducing What You Owe

If you’re well-informed, you’ll be able to find plenty of ways to reduce your tax liability. The methods available to you might include:

  • Exclusions – These are pre-tax expenditures such as retirement accounts and flexible-spending for health care. Exclusions can reduce your gross income, thus reducing your tax liability.
  • Deductions – You may deduct things like student loan interest, certain types of retirement account contributions, business costs, charitable donations, and even moving expenses. If you don’t have much in the way of eligible deductions, you can take the standard deduction, which will vary depending on your marital status and other factors. If you’re itemizing deductions, use Schedule A.
  • Credits – The Dependent Care Credit, Earned Income Tax Credit, and Education Credit are examples of this. Unlike deductions which reduce your taxable income, tax credits simply take a certain amount off the taxes you owe. A $500 tax credit is just that — it takes that amount right off the top of your tax bill. There are business and individual credits. Find out if you’re eligible.

When You’re Ready to File

Everyone knows the April 15 deadline, but when you’re ready to file, you have several options.

  1. Use an accountant – If you have several deductions, are self-employed, or are simply unsure of your ability to file accurately, your best bet is to hand your paperwork, receipt, and any other documentation over to an accountant. Especially for complicated returns, your accountant could save you money by finding more deductions.
  2. File online – If you’re confident and have a simple return, you can file via the IRS website. This option is available to all taxpayers.
  3. Software – There are several software options for filing your taxes. These programs can guide you through the process, but will cost you some money upfront.

No matter what your tax status, you’re bound to have questions from time to time. That’s why it’s always a good idea to consult an accountant or tax professional to ensure maximum accuracy and minimum liability.

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