Episode #6 of the course Personal financial literacy: Take control of your future by Riley Burger
Welcome back! Today we are talking about taxes!
You know the saying: April showers bring tax season. When tax time comes, the key is to work smarter, not harder. Generally, people will fit into one of these two groups, and can use the below resources to make tax season easy every year:
Group One. If you:
• Work for one or more employers, and receive W-2 forms from each employer during tax season.
• Have basic expenses, such as mortgage or rent, childcare, student loans, and utilities.
• Use a free online tax prep service! There are many companies that will now help you do your taxes completely online, for free. You can often even save your data in the system to make next year even easier.
• Use a free, in-person tax preparation service in your area! Many nonprofits offer free tax prep services throughout the US. This option is especially great for people with low income, multiple employers, or unsteady income streams. These services can also help you identify tax credits or deductions that you qualify for.
Group Two. If you:
• Own your own business or are otherwise self-employed.
• Have capital gains income on investments, income from gambling, or other nontraditional income.
• Have write-off opportunities like charitable donations.
• Have any unique situation, such as being a nonresident alien.
• Use either service from the first group—both offer assistance for more complex tax issues. If you use a free online tax service, their customer support can help walk you through itemizing expenses, identifying deductions and credits you qualify for, and more. If you use an in-person volunteer tax prep service, all volunteers are trained in the IRS’s VITA tax prep program to be able to walk you through your unique situation.
• If needed, consult a tax advisor! While it may cost money, tax advisors can help you save in the long run. This is especially useful for people who own their own businesses.
The FAQs of Doing Your Taxes
What is the difference between a tax credit and a tax deduction?
A tax credit directly reduces the tax amount you will owe the IRS, while a tax deduction reduces the amount of taxable income that will be considered for the year.
A tax credit can be either nonrefundable or refundable. Nonrefundable tax credits can reduce your tax liability to zero, while refundable tax credits can push your tax liability below zero so that you could receive a refund from the IRS.
What documents do I need to do my taxes?
If you have an employer, you will receive a W-2 form, which you’ll need to fill out the income portion of your taxes. You’ll also need your social security or tax ID number, along with those numbers for your spouse and any dependents. Those are the basics. Beyond that, H&R Block has a fantastic tax document checklist for every unique situation.
Should I ever pay someone to do my taxes?
I recommend many people with simple income and expense situations to give free, online tax prep a try before paying a professional. However, if you have a complicated income or expense situation, there are qualified professionals who are happy to help. The IRS has a fantastic database of licensed “tax pros” in the US.
When I get a W-4 from a new employer, how should I fill it out?
A W-4 form tells your employer how much they should withhold from your paycheck to contribute to your federal taxes. The 2020 updated version of the W-4 does away with the “allowances” section and instead walks you through the monetary value of each allowance and each optional deduction.
At the end of the day, it’s alright to be unsure while filling out the W-4. If you withhold too little, you will end up owing the IRS come tax season. If you withhold too much, you will get a refund. The W-4 can help you and your employer get as close as possible to an accurate withholding so that April goes smoothly.
Congrats, the bland lesson is out of the way! Our next lesson is on planning your golden years.
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