1. Pick the right tax software for your situation
Not even the Rosetta Stone can decipher the Internal Revenue Code of the United States. But good news: there are three major players in the tax software arena and they are all willing to take your money to use them. And even better yet, if you have a simple return, each offers a free federal option.
TaxAct — Most affordable for any type of return, least modern, requires good reading comprehension
H&R Block — Middle of the road all the way around — from price to UX — but has the benefit of physical offices if you just can’t grock your tax situation
Turbo Tax — Most expensive for more complicated returns, but most user-friendly, easiest to use
Long story short, you get what you pay for when it comes to tax software, but they each do the job.
2. Take every single deduction or credit you’re due
When I first started filing my taxes I was terrified that I’d get audited. But what’s important to understand is that the government isn’t afraid to tax you at the maximum liability the tax code allows, but only can if you let them.
In turn, you should take full advantage of the tax code as well and only pay what’s absolutely required. That’s all you’re responsible for. Taxes are not a donation or a charitable act. In fact, the Roman Empire only taxed the wealth of its citizens at 1% in times of peace and 3% in times of war.
If that bit of history wasn’t enough to convince you, then know that the overall audit rate in 2012 (last tax season) was just 1% of returns filed.
Some credits/deductions you may forget about include: Student loan interest, car registration fees, business use of your personal vehicle, and business use of your home.
3. Understand how taxes work
In the United States, the tax system is progressive.
A progressive tax system means that your tax rate will increase as your taxable income increases.
Here’s a chart outlining the federal tax brackets and rates for a person with the filing status of single:
10% Up to $8,925
15% $8,926 — $36,250
25% $36,251 — $87,850
28% $87,851 — $183,250
33% $183,251 — $398,350
35% $398,351 — $400,000
39.6% $400,001 or more
Looking at this chart, your gut reaction might be to assume that you’d be better off making $8,925 of taxable income instead of $8,926, since the latter is taxed at 15% versus 10%. That’s not the case. Only income within each bracket is taxed at that rate, which means everyone’s first $8,925 is only taxed at 10%. If you earned $8,925 of taxable income, only that additional dollar is taxed at 15%, a difference of $0.05.
Email me when Joseph P. Wagner publishes or recommends stories