When it comes to taxes, it often seems that paying through the nose is a necessary evil and customary right of passage for adulthood. However, there are some clever tricks of the trade to help you avoid getting punked by The Man. Here are a few tips to help you understand the ABCs of taxes, and perhaps help you hang on to more of your cash.
Time to Pay Up
If you work, it’s time to start filing taxes with the federal government and the state in which you reside. There are a few ifs, ands and buts regarding your status, so you need to know your options.
In general, once you have the following gross income, the law requires you to file a federal tax return with the IRS:
◦ Single: $10,300
◦ Head of Household: $13,250
◦ Married Filing Jointly: $20,600
◦ Married Filing Separately: $4,000
So Many Forms, So Little Time
There are tons of forms out there, but the first two you need are the W-2 Wage & Tax Statement and W-4 Employees Withholding Allowance Certificate. You fill out a W-4 upon being hired. This form will ask for your social security number and number of exemptions you want to claim. You should receive a W-2 form from your employer no later than February 2nd, summarizing your annual income. W-2s are necessary to complete your taxes. If you do not receive a W-2, contact your employer before contacting the IRS.
If Mom and Dad or another legal guardian still pays more than fifty percent of your living expenses, then they can claim you as a dependent on their taxes.
This lack of legitimate lodging isn’t all bad. Based on annual income, a young person can either claim exempt or zero withholdings on their W-4. This means one of two things: taxes won’t be owed at all or they will be fully refunded. Try filing this way for as long as possible because the real world can make a person real poor, real fast.
Get creative: If you let your parents claim you as a dependent, have them pay you the amount you’d have received if you’d filed independently. Chances are, they’ll save more by claiming you as a dependent than you would get as an independent, and everyone wins.
Don’t Be Late
The next tax deadline falls on Monday, April 17th for 2016 filing. If late on your taxes, you must sign a blood contract with the Insidious Reaper of Souls (IRS) and forfeit your first-born, also known as penalties and interest. The Federal government may not be good at balancing their own budget, but they always seem to know how much you owe them, down to the last penny. Pay on time and avoid getting thrown under the bus of federal animosity.
However, if lady luck is on your side, the government will offer an amnesty period by filing an extension (Form 4868) on time. This is basically the “get out of jail free” card in the real-life game of Monopoly. The penalties and interest won’t be assessed if you pay the amount you owe.
If you don’t file your taxes, the government will find you, and the repercussions are not great. After a series of letters, the IRS will approximate the amount due based on your last return and will set a time period to come clean and cough up the dough. Finally, they will garnish your wages, which is a fancy term meaning they are taking what you owe them in installments from your regular paycheck with penalties and fees factored into the mix. As you can imagine, this is an enormous inconvenience.
Ironically, the Feds sometimes resemble a fun-loving HBO family business. They will give you a way out before they break both your legs for non-payment. They will usually agree on a payment plan if you make a voluntary effort to rectify the debt. Avoiding this situation can save your checkbook, your ego and your reputation.
Always take the high road. You can’t hide money and come out ahead. A few extra bucks in your pocket today will not offset the headache that a federal audit will cause in the future. Report as accurately as possible.
Cover Your Assets
Keep records and receipts of all financial transactions in one box or file folder. If a federal bean counter questions your return, you have proof explaining why the trip to Tahoe or lunch at Luigi’s are business expenses.
Paying taxes is a necessary evil, like taking out the trash. It avoids living in a pile of trouble and keeps your governmental relations smelling sweet. Hopefully these tax tips can shed light on the path of integrity. You will be fortunate to never find yourself face to face with the grim reaper of the government, the federal accountant. Good luck and happy filing!