Tax Basics – What All 20 and 30 Somethings Need to Know
Whether you prepare your tax return yourself or hire a professional, there are certain things you should know. Often it is not until a person reaches their mid- to late twenties that tax returns become more complex and they need to be more informed. Below are seven fundamental tax concepts that usually are not taught – but everyone should know:
You might not even need to file
Just because you have income does not mean you need to file a federal income tax return. There are many factors affecting your need to file – from how much you earned to the source of your income, filing status, age, etc. You can try to figure this out yourself, but it is best to check with a tax pro to confirm, especially given the next item discussed below.
You might not need to file – but you probably will want to
While you may not need to file a federal income tax return, you might still want to in order to get the benefit of certain tax breaks and credits. One example is the American Opportunity Credit related to qualified educational expenses, which can yield a refundable credit even if you don’t owe any tax.
Not all deductions require you to itemize
Most taxpayers do not itemize their deductions. This is because itemized deductions only benefit you to the extent that they exceed your standard deduction. Often, people do not have enough deductions to exceed this. But just because you do not itemize deductions doesn’t mean you should ignore deductions altogether. Certain deductions are allowed without itemizing on page one of Form 1040. Examples include student loan interest, IRA contributions and qualified moving expenses, among others.
Can’t pay? File anyway
Different penalties apply for failure to file a return and failure to pay your tax. This means that even if you cannot pay some or all of your tax bill, make sure you still file your return. It also means that you need to make sure you file even if you are getting a refund or breaking even.
Extensions to file are not the same as extensions to pay
If you cannot file in time, you may request an automatic extension for more time to file. To do so, complete and submit Form 4868 Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. As noted above, remember that an extension to file does not mean an extension of time to pay.
Don’t mess with the IRS
If there is one organization you don’t want to mess around with, it is the IRS. This is not meant to scare you, but the IRS has extensive powers to go after taxpayers who fail to file, pay or both. For example, if you owe back taxes, the IRS can take it out of future refunds, garnish your wages or even revoke your passport. However, the agency also understands that sometimes things happen and people have trouble paying. There are various arrangements you can make with the IRS, such as payment plans, etc. The most important thing is to not bury your head and ignore the situation.
There is no substitute for a good tax preparer
It might seem like a good idea to prepare your own taxes in order to save money or because you happen to be the rare breed that enjoys it, but it’s not always the best idea. Using a Certified Public Accountant (CPA) can help ensure that you save time, aggravation and best of all, money. Oftentimes the cost of hiring a professional preparer who stays current with the most recent tax law changes and has the experience of seeing many different situations can save you far more than it ends up costing.