Taxes - Tax Preparation For Dummies
Tax Preparation for Dummies
Tax preparation iscertainly not something most of us look forward to, especially since incometaxes account for 15 percent to 45 percent of an American family's total annualincome.
Not only areincome taxes expensive, they are also pretty complicated. This hesitation,coupled with confusion translates to late tax preparation and higher taxdeductions- most Americans actually end up paying way more than is required ofthem for unnecessary reasons.
Since there'sreally no escaping the predicament, you might as well get familiar with theprocess so that even if you are obligated to pay income taxeseach year, you at least know enough to get the better end of the deal.
April 15: Save theDate!
Every year, taxday is April 15th, however most people still manage to forget the deadline asif their money wasn't on the line. Oh, and money's on the line.
While you are nota criminal for missing the deadline, you will face penalties for filing lateand the IRS will most certainly make note of your outstanding returns.
The statute oflimitations for filing your return is three years. This means that if youqualified for a refund, after three years, that money is gone.
The IRS isn'tactually as bad as you think they are- they just have a complicated way ofphrasing their generosity. There are actually a lot of credits and deductionsto benefit from if you can just find the right place to sort through thejargon.
Let's look at thedifferent ways you can actually save and sort of gain (refunds) by adequatelypreparing your taxes.
Deductions are aspecific amount removed from your gross taxable income that lower your overalltax liability. For example: You made $40,000 in taxable income and get adeduction of $2,000 for making environment-friendly improvements to your homeand donating to a local Children's Charity. This means that you will only betaxed on $38,0000, which will lower your overall tax dues.
Credits arebasically money that can offset your total tax liability, and they differ fromdeductions and exemptions in the fact that instead of lowering your taxableincome, they lower the actual amount of tax owed.
The value of taxcredits depend on their source and not all tax credits are refundable. Forexample: While non-refundable tax credits can be used to lower your owed taxesto $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 owedamount.
An exemption is adeduction in total tax liability by omission of taxable income. These can comein two forms, personal and dependency.
Exemptionsbasically say that you are not required to be taxed on a certain amount ofincome, for example what you pay for raising your children, which would beconsidered dependents.
This section isfor 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 coupleof ways to figure out paying your taxes as someone whose tax fees aren'twithheld from regular paychecks. First, there's the option of hiring anaccountant to do all the work for you. Then, there's the option of paying taxeson a quarterly basis- that is, letting the IRS track your income and sending inpayments based on that amount.
Filing Your Taxes
Filing your taxesdoes not have to be a stressful event because there are so many different (andfree) services available to help ensure that you file on time and accurately.
If you want (andhave the time) to file your taxes yourself, there are dozens of useful taxpreparation software programs to guide you through the process.
Electronic taxpreparation has an incredibly low (>1%) error rate, so don't fear making anymistakes- these programs were developed to help you and in this case, you areguaranteed quality simply because it is in the interest of everyone involvedthat you file your taxes correctly.
Online filingwebsites have a great reputation for taking the entire tax filing process offyour hands completely and doing so efficiently and in the interest of the taxfiler.
The only issuewithfiling online is that unless you earn below a certain amount, you'll have topay out-of-pocket for the service (or a portion of your refund, if you qualify forone).
What to ExpectWhen You're Expecting
… a refund check.
If you qualify for a refund, patience is the mainthing you should be feeling. The much awaited check has a return period of sixto eight weeks after your tax return is accepted . There are,however, things you can do to speed up the process, for example filingelectronically and opting for a direct deposit rather than a paper check.