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Tax preparation is certainly not something most of us look forward to, especially since income taxes account for 15 percent to 45 percent of an American family's total annual income.
Not only are income taxes expensive, they are also pretty complicated. This hesitation, coupled with confusion translates to late tax preparation and higher tax deductions - most Americans actually end up paying way more than is required of them for unnecessary reasons.
Since there's really no escaping the predicament, you might as well get familiar with the process so that even if you are obligated to pay income taxes each year, you at least know enough to get the better end of the deal.
April 15: Save the Date !
Every year, tax day is April 15th, however most people still manage to forget the deadline as if their money wasn't on the line. Oh, and money's on the line.
While you are not a criminal for missing the deadline, you will face penalties for filing late and the IRS will most certainly make note of your outstanding returns.
The statute of limitations for filing your return is three years. This means that if you qualified for a refund, after three years, that money is gone.
Deductions for Dummies
The IRS isn't actually as bad as you think they are - they just have a complicated way of phrasing their generosity. There are actually a lot of credits and deductions to benefit from if you can just find the right place to sort through the jargon.
Let's look at the different ways you can actually save and sort of gain (refunds) by adequately preparing your taxes.
Deductions are a specific amount removed from your gross taxable income that lower your overall tax liability. For example: You made $40,000 in taxable income and get a deduction of $2,000 for making environment-friendly improvements to your home and donating to a local Children's Charity. This means that you will only be taxed on $38,000 which will lower your overall tax dues.
Credits are basically money that can offset your total tax liability, and they differ from deductions and exemptions in the fact that instead of lowering your tax able income, they lower the actual amount of tax owed.
The value of tax credits depend on their source and not all tax credits are refundable. For example: While non-refundable tax credits can be used to lower your owed taxes to $0.00 (if you have enough of them), you cannot go beyond that point- as in,you cannot receive a refund. On the other hand if you have refundable credits,you can receive a refund if the amount surpasses your owed amount.
An exemption is a deduction in total tax liability by omission of taxable income. These can come in two forms, personal and dependency.
Exemptions basically say that you are not required to be taxed on a certain amount of income, for example what you pay for raising your children, which would be considered dependents.
Estimating Your Taxes
This section is for those who are self-employed, freelance, or are an independent contractor, since the rest of America is automatically taxed via their paychecks.
There are a couple of ways to figure out paying your taxes as someone whose tax fees aren't with held from regular paychecks. First, there's the option of hiring an accountant to do all the work for you. Then, there's the option of paying taxes on a quarterly basis- that is, letting the IRS track your income and sending in payments based on that amount.
Filing Your Taxes
Filing your taxes does not have to be a stressful event because there are so many different (and free) services available to help ensure that you file on time and accurately.
If you want (and have the time) to file your taxes yourself, there are dozens of useful tax preparation software programs to guide you through the process.
Electronic tax preparation has an incredibly low (>1%) error rate, so don't fear making any mistakes- these programs were developed to help you and in this case, you are guaranteed quality simply because it is in the interest of everyone involved that you file your taxes correctly.
Online filing websites have a great reputation for taking the entire tax filing process off your hands completely and doing so efficiently and in the interest of the tax filer.
The only issue with filing online is that unless you earn below a certain amount, you'll have to pay out-of-pocket for the service (or a portion of your refund, if you qualify for one).
What to Expect When You're Expecting … a refund check.
If you qualify for a refund, patience is the main thing you should be feeling. The much awaited check has a return period of six to eight weeks after your tax return is accepted . There are, however, things you can do to speed up the process, for example filing electronically and opting for a direct deposit rather than a paper check.