Benjamin Franklin is credited with one of the best quotes of all time:
“…in this world, nothing is certain except death and taxes.”
That wisdom rings true today. The thing is that the tax code is way more complex now than it was when Benjamin Franklin was around.
The tax code stands at over 75,000 pages of legalese that taxpayers are forced to wade through each year.
You don’t need to memorize the whole thing, but you should know how to do taxes for yourself. After all, if there’s an error, you’ll be held responsible for it.
Read on to know how you can do taxes for yourself and take control.
Gather Your Income Statements
The first step in doing taxes is to determine how much money you made over the course of the year. If you work for someone else, that will be easy. You’ll get a W-2 from your employer by the end of January.
You’ll be able to see what your total earnings were from your job and the state, federal, and local taxes that were withheld.
Did you earn other income that was more than $600 during the year? If so, you have to report that as well.
More people have side gigs now than ever before, and you need to make sure that this income is reported correctly on your tax return. It’ll will pay off later on as you deduct your expenses.
Other income isn’t necessarily from hours worked. Investments, cashing out a 401(k) and gambling winnings over $600 are all taxable. Taxpayers tend to forget this and don’t report this income or put money aside for taxes.
Do you remember when Oprah gave everyone in her audience a car? While it was one of the most memorable TV moments ever that produced a ton of gifs, her audience members weren’t so lucky.
Those cars were considered to be other income by the IRS. The audience members were stuck with an additional $6000 to $7000 in taxes.
Claim Your Deductions
Once you know what your income is, you need to figure out your tax deductions. This will be different for everyone. You can take the standard deduction or you can itemize them.
In 2017, the passage of the Tax Cuts and Jobs Act raised the standard deduction to $12,000. This was intended to limit the need to itemize deductions.
You may still be able to claim other deductions, such as student loan interest paid or by being eligible for the Earned Income Tax Credit.
If you have a small business, you will be able to deduct all qualifying business expenses. These include supplies, equipment, mileage, business meals, and marketing expenses.
You want to have detailed receipts handy for all of your business expenses. If you get audited, the IRS will expect to see these receipts and not just your bank statements.
Did You Have Health Coverage Through Healthcare.gov?
The Affordable Care Act enabled millions of Americans get healthcare that they may not have been able to get through an employer or your spouse’s employer.
If you did get healthcare through the Health Exchange, you should have received Form 1095-A. This will detail the coverage that you received, along with the tax credits you were eligible for and paid out by the government to your insurance company.
This is where things get a little messy for taxpayers. When you first apply for insurance through the exchange, you need to give an income estimate for the upcoming year. Based on that number, you will know what plans you’re eligible for and how much you can get in tax credits.
If you wind up making more than you thought you would, you could pay more in taxes.
Let’s say that you got an insurance plan that is $600 a month. The You have a tax credit of $400 a month and you apply the whole thing to your insurance, making your insurance payment about $200 a month.
If you made a substantial amount more than you estimated, you will have to pay a portion of your tax credit back on your taxes.
If you made less money or you decided to apply a portion of the tax credit to the monthly payments, you’re likely to get a refund.
Preparing and Filing Taxes
Once you know your income and deductions, you need to prepare and file your taxes. There are a few ways to do this. You can buy software, do it yourself on paper, or hire a professional.
It’s not advised to do your taxes on paper. Taxpayers are much more likely to make a mistake on their taxes than people who use the software.
Request an Extension
If you can’t get your taxes filed by the April 15 deadline, you’ll need to file for an extension. That will give you until October 15 to file your taxes.
That doesn’t mean that you don’t have to pay your taxes if you owe money. If that’s the case, then you will need to pay your taxes by the April deadline. If you file taxes until October but don’t pay until then, you will owe penalties and interest for the late payment.
What Happens if You Don’t Pay Taxes?
Are you in a situation where you owe more than you thought you would? Maybe this is your first year self-employed and had no idea how self-employment taxes work.
You do have options available. The IRS isn’t going to come and take you to jail. However, if you ignore the matter, they could levy your earnings or bank accounts.
You can do things like set up an installment agreement with the IRS, where you can pay your back taxes over time. Follow these tips to know the best ways to handle your overdue tax payments.
Learn How to Do Taxes
There’s so much to know when you’re trying to understand how to do taxes. You have to know your income, what the IRS considers income (just about everything), and the deductions you are eligible for.
The most important thing to do is to pay your taxes on time. If you can’t so that, then you can work with the IRS to pay your taxes.
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