The Easy Guide to Doing Taxes: Simple, Actually!
Simplifying the Tax Process for Beginners.
Taxes can seem daunting, but they don’t have to be.
This isn’t going to be a convoluted, five-hour deep dive into every tax law or a guide on how to transfer your corporation’s intellectual property into an offshore subsidiary where you claim seagulls as dependents.
Instead, let’s focus on how easy taxes really are for most people.
Even if you’re not yet old enough to pay taxes, it’s good to understand the basics, because they don’t teach this in school.
When you get your first summer job as a lifeguard making $5,000 a year, knowing what to do when tax season comes around can save you a lot of stress.
Understanding Taxes Made Simple
Income tax is the money you owe the government on the income you earn each calendar year, from January to December. Typically, around 20% of your income goes to the government, and it’s due by April of the following year. The exact percentage depends on your income level and state.
If you’ve only earned a few hundred dollars from odd jobs like mowing lawns or tutoring, you probably don’t need to file taxes. But if you had a more substantial income, you’re required to pay taxes.
Here’s a step-by-step guide on how to do it.
The Withholding System: Your Employer Helps
If you had a job, your employer likely withheld a portion of your paycheck for taxes throughout the year. This means they estimated your tax rate and sent that money to the government on your behalf.
For example, if you earned $50,000 and your estimated tax rate was 10%, your employer would withhold $5,000, leaving you with $45,000. This system helps you by making sure you’re paying taxes gradually rather than all at once.
Filing Your Tax Return: The Annual Task
Once the year ends, you have until April of the next year to file your tax return. You’ll receive important tax documents, such as W-2 forms from your employers, by January. Keep these documents safe, as you’ll need them to file your taxes.
The goal of a tax return is to report all your income and claim deductions and credits to lower your taxable income.
Deductions can include expenses like medical bills or business expenses. For instance, if your salary was $50,000, but you had $15,000 in deductible expenses, your taxable income would be $35,000. Everyone also gets to claim a standard deduction (around $3,850 for single filers), which simplifies things further.
Calculating Your Taxes
Websites will calculate how much tax you owe based on your taxable income and compare it to what was withheld from your paycheck. If you overpaid, you’ll get a refund. If you underpaid, you’ll need to pay the difference. It’s as simple as that.
Tips for Easier Tax Filing
The hardest part is knowing what deductions and credits you qualify for. However, as long as you upload all your forms and answer the questions accurately, tax filing websites do most of the work for you. These services are often free or very affordable.
Accountants are helpful for complex tax situations, but most people don’t need one. If you’re not dealing with multiple income sources or large investments, filing online is typically sufficient.
Year-Round Tax Tips
Here are some tips to minimize your tax burden legally:
- Retirement Accounts: Contribute to accounts like a 401(k). Money in these accounts grows tax-free until you withdraw it at retirement age.
- Stock Losses: If you lose money on investments, you can deduct those losses from your taxable income.
- Long-Term Investments: Hold onto stocks for more than a year to benefit from lower long-term capital gains tax rates.
- Business Expenses: If you run a small business, reinvest profits back into the business and deduct these expenses.
For Non-Americans
Tax systems vary by country. Some, like India, also require annual tax returns, while others have simpler systems where the government calculates your taxes for you.
Why Is the U.S. Tax System Complicated?
Many believe the complexity benefits companies like TurboTax, but it’s also designed to influence behavior. For example, tax credits for renewable energy encourage green practices, and deductions for home ownership and business investments promote economic growth.
In conclusion, taxes might seem intimidating, but they don’t have to be. With the right tools and knowledge, filing your taxes can be straightforward and manageable.
