Far too many of us just look at our paychecks and blindly accept the amounts withheld for taxes. We just take it on faith, that the amounts are correct without really understanding where our hard-earned tax dollars are going. If you’re comfortable throwing a huge chunk of your earnings into the unknown every week, then by all means, stop reading.
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If you’re like the rest of us, then you probably want to take the mystery out of taxes. This information isn’t exactly secret—although some swear that the IRS website is written in some sort of code that you can only translate after getting a specific and specialized degree. In reality, however, it’s just a matter of knowing where to find it and what it means to you.
It’s amazing how little most people know about something that they’ll be dealing with from the time they enter the workforce until the end of their lives. Taxes are glossed over in high school, and unless you’re studying accounting, they’re non-existent in college as well. It’s not safe to assume that common core math and language arts prepared you for your 1040.
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Fortunately, a little research and a great tax preparation service goes a long way.
Where do Your Taxes Go?
If you’re not a small business owner and you depend on your employer to withhold your portion of taxes each week, then you may see a laundry list of numbers on your paystub. All of which go to the state and federal government.
Aside from your personal insurance costs, child support, garnishments, and any other personal payments, you can expect to lose another chunk of your paycheck to the state. Each state can utilize its taxes at their own discretion to some extent.
They may be used for local government, repairing roadways, and providing you with any amenities offered in your area. The federal government takes its taxes to support a number of different items in the country’s budget.
The largest part of your paycheck will probably go to government health insurance. Even if you don’t receive this insurance, you’re still providing health care for those who are 65 and over and those unable to provide it for themselves.
Social Security falls under a slightly different category but is equally important to our aging population.It can also pay into death benefits and the care of the disabled.
Last but not least is the US defense budget. This covers everything from the housing of our military personnel to the creation of new weapons and military tactics.
Most of us can agree that all these things are necessary, but nobody’s particularly fond of the rising cost of their taxes.If you’re small business owner, expect to pay anywhere from 25-30% of your paycheck into taxes.
When you work for somebody else, they usually pay half of what small business owners pay. Fortunately, if you are a small business owner, you should be able to get a number of deductions and tax cuts to ease the blow.
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How Much Can the IRS Take?
The answer to this question, in a nutshell, is as much as they want. Standard taxes usually take around 15% of your paycheck, but new tax laws push people into different tax brackets. This has created some tax cuts for the poor, but many middle-class families are discovering an increase in what they pay.
Again, this can be minimized by deductions and a number of other tax breaks generated by specified conditions. Most of us have heard things about the earned income credit and the child tax credit. It’s important to talk to your accountant or tax preparation company about this and see what types of benefits you can take advantage of.
A deduction actually lessens the amount of money the IRS is able to tax. The less money there is to tax, the less that they’ll take overall. Some people prefer to take out deductions in the number of dependents throughout the year and receive less when it comes time for a tax refund.
It’s really dependent on what you’re able to claim, and the tax bracket that you fall into. The more money you make, the more money you ultimately pay into taxes. This is kind of a common-sense explanation for the process.
The Basics of Filing
Getting down to brass tacks—filing taxes doesn’t have to be that difficult. If you work for a company that automatically takes taxes out of your paycheck, then you should receive a form called a W-2.
Your W-2 will have all of the information you need to fill out your 1040 tax preparation form. There are different versions of the 1040 that are applicable under different circumstances. The easiest of these forms is applicable for those who made less than $50,000 in taxable income that year; this is the 1040 EZ, and it consists of a single page that’s pretty straightforward.
If you have an IRA or additional holdings, you may need to consider a 1040A form in order to include all of your potential income sources. When all else fails, you may have to fill out a standard 1040 long form that itemizes deductions and requires more in-depth information. This is traditionally used for people who make more than $50,000 in taxable income every year, or who need to be very specific with their deductions and exemptions.
It’s simple to file if all you have is a single W-2 and minimal assets. All you need to do is input the information from your W-2 onto the form, and send it in. Anything more complicated might require the help of a tax preparation professional.
You can use online programs or find a local office that can help. When in doubt, always get help.
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What Happens if I Don’t File?
Forgetting to file taxes or missing the deadline is something that happens more often than we like to admit. You can file for an extension, or, if you don’t owe the IRS any money, you can file anytime within the next three years.
After the cutoff date, you may have to deal with an audit or a loss of your tax refund. It’s always best to file taxes every year even if you don’t feel that you’ll receive a refund or if you’re afraid that you’ll end up owing money.
You can’t hide from the IRS, and eventually they will collect what’s owed. The more straightforward you are, the less likely they are to freeze your assets and attach an IRS wage garnishment. There are a number of ways to fix tax mistakes and to settle outstanding debt.
Again, don’t be afraid to speak to a professional if you feel like you’re in over your head. The IRS is something that every American has to deal with, and, chances are, your problem isn’t as bad as you think it is.
If you need to speak with someone right away, don’t be afraid to contact a local taxpayer advocate. This is a neutral third-party who understands the IRS into can communicate with them on your behalf.
Filing your taxes shouldn’t fill you with dread or seem like some financial mystery. Once you start to understand why taxes exist and how much you should be paying, you can take control of your situation. It’s always helpful to speak with a professional, and to do as much independent research as possible.
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