This article is part of our 52 week journey through Bill’s latest book, The Graduate’s Guide to Life and Money. Each week, a full excerpt from his book will be presented from beginning to end. To get your copy of his book, visit www.TheGraduatesGuide.com.
I had to ask myself, “How could I make a chapter about taxes fun?” I don’t think anybody actually looks forward to paying taxes. That’s not to say we don’t do it, but it just takes away a large part of what we earn. I don’t know if I can really make taxes fun, but I can at least take some of the mystery out of the tax code and make the whole process seem much less scary.
We have many different levels of taxation. The first portion of taxes we notice are the federal taxes that come right off the top of our paychecks. You may also notice your state income taxes (unless you live in one of the states that do not have income taxes), and then there is social security. By the way, your social security taxes are about the same as your state taxes in many cases. Just think, so much of your hard earned tax dollars are right now being fed into some slot machine in Vegas by a retiree. Anyway, all of these are called payroll taxes. We will discus them more deeply in just a moment.
We also pay other taxes, which are called use taxes. When you purchase an item in most states you will pay a sales tax. Sales taxes are essentially use taxes. You pay taxes because you used something. You also pay plenty of taxes on your telephone bill, electric bill, gas bill, and so on. The gasoline that you buy at the pump already has taxes built into the price, so even though it doesn’t seem like you are paying taxes on your gasoline, you are. You have probably heard the expression that the only two sure things are death and taxes. Now you know why. Someone once said, “If you can see it, touch it, feel it, taste it, hear it or even think of it, they can tax it.” Consider it a cost of doing business in the United States.
Understand Your Taxes to Make Them Less Scary
For most people just starting out, taxes are not that complicated. All you have to do is report how much money you make and fill in about four or five other lines on your tax return and pay your taxes. You don’t even have to calculate how much you earned because your employer sends you a statement in the mail at the end of the year that says how much you earned and how much you have already paid in taxes (the form is called your W-2). Now, if you want to learn how to minimize the amount you pay in taxes, that’s where it starts to get a little tricky. Not to worry, because we’ll go through just about every step you need in order to complete your tax return. We will also discuss ways to minimize your tax liability.
The first question most people ask is, “do I have to fill out a tax return.” The answer: “Hopefully.” If you do not need to fill out a tax return, it would be because you did not make enough money that year. How much is enough? Well, that too changes each year to account for inflation, or any tax law changes. Visit www.irs.gov or refer to the “Do You Have to File” section of the Form 1040 Instructions.
The next question people ask is, “Do I have to file a tax return if the government owes me money?” The answer: “Yes.” The IRS is not interested in keeping your money (just their fair share). Regardless of whether you owe tax dollars or if you are eligible for a refund, you have to file your tax return, and you have to file it on time (by April 15th). There are exceptions to filing your return on time, but you have to file an extension (IRS Form 4868). However, even if you are granted an extension, you still have to pay any taxes owed. Your payments are not extended, only the filing of your return. Now, you may ask, “How do I know how much I owe if I haven’t completed my tax return.” The answer: “You don’t.” Kind of funny isn’t it? You should have an estimate and pay accordingly. Your best bet is to over estimate so you won’t pay any interest (or penalties in some cases). In that case, when you do file, you will get back any over payments.
So, when should you file your taxes? Before April 15th. If you are owed a refund, I suggest you file your return as soon as possible. The sooner you get your money back, the better. While you’re at it, you should request a direct deposit so you’ll get your money even faster, within two weeks in some cases. There is space at the bottom of your return to fill in your bank information. You can refer to the sample check in Chapter 4 if you need help with the routing and bank account numbers.
If you owe money, hold off as long as possible before sending any money. If you file electronically, you can file your return whenever it is convenient; yet specify the exact date that the money should come out of your account. In other words, you could file in late January, but not have your money sent to the IRS until April 15th. Just don’t forget to make a note of that in your checkbook. You don’t want the IRS to get an “insufficient funds” notice when they go to get your tax money from your account.
For the record, your employer has until January 31 to send out your W-2. The W-2 is the form that shows how much you made for the year, how much you paid in taxes, how much you put in your retirement account, etc. If you work as an independent contractor, and are not actually an employee of the firm that pays you, they will send you a Form 1099 instead. In most instances, if you are receiving a Form 1099, the firm you worked for was not taking any taxes out of your paycheck (hopefully you were setting money aside or making estimated quarterly payments).
You cannot file your taxes until you have all of this information. Notice that I said they had to send it by the 31st of January. That means you might not receive your W-2 until the second week of February (hopefully it won’t take that long). If you changed jobs at any point during the previous year, you will receive one from each employer. If you have not received your W-2 by the second week of February, you should contact your employer. It is your responsibility to have the information and to file your taxes on time.
While you are waiting, if you have your last pay stub of the year (it may have been received in January) you can see in the “Totals” column how much you made, and how much you paid during the year. If you have contacted the employer at least twice and the April 15th deadline is approaching, use the information from your final pay stub and include a letter to IRS explaining that you contacted the employer on such and such a date (or dates) and they still have not provided your W-2. All of this applies to your bank or brokerage account statements as well. They should have sent something that indicates how much you made in interest or dividends for the year. You will have to include this information on your tax return as well.
Bill Pratt is a former credit card executive turned student-advocate. He is the author of Extra Credit: The 7 Things Every College Student Needs to Know About Credit Debt & Ca$h and The Graduate’s Guide to Life and Money. Bill speaks at colleges to educate and entertain students about real-life issues in money, leadership, and success. His goal is to help students succeed personally and financially so they can improve the lives of those around them. You can learn more at www.ExtraCreditBook.com or www.TheGraduatesGuide.com.