Tax Season Primer

2/11/2021

Tax season is here, and you can't avoid paying your taxes. There's no doubt that taxes can sometimes feel confusing and hard to understand. Thankfully, there is a lot of information and help available for tax preparation. If you're unsure how to go about doing your taxes, you can look for a Certified Public Accountant (CPA) or a regular accountant to help you through the process. It's also possible to file your taxes yourself. You have to look at your own financial situation to see which option is best for you. We've put together some of our best tax resources to help you get through this tax season.

Read More: Are You Prepared For Tax Season?

Filling out your W-4

Before you file your taxes, when you start a new, job you'll have to fill out a W-4 form. What is a W-4 and how do you fill it out? The W-4 Form is an IRS form that you complete to let your employer know how much money to withhold from your paycheck for federal taxes. Whenever you get paid, a certain amount of income tax is automatically withdrawn, or withheld, from your paycheck and turned over to the IRS. The number of allowances you claim determines the amount of tax withheld from your pay.

Finding the right number of allowances for your situation is important. If you claim too many allowances you may owe the IRS some money at the end of the tax year. You could also possibly have to pay a penalty for your error. Although, if you take few allowances you will receive that money back as a tax return.

Watch the video below for the specifics on how to fill out your W-4:

 

Preparing for tax season

In our most recent podcast episode, we were joined by Susan Allen, a CPA who specializes in taxes. This year, tax season will be starting on February 12^th, which is a little later than when tax season generally starts. (Usually tax season starts in mid-January, but this year there were some new tax laws that were enacted in late 2020 that need some time to be processed.) The minimum income level required to file taxes if you're a single person under 65 in 2020 is $12,000.

When you're ready to file your taxes, there are documents you'll need to have on hand to do so. Have your Social Security Number, your spouse's social security number, your dependent's information and all of your income information. A great way to keep track of all these documents throughout the year is to have a file that's specifically for tax documents. All of your documents will come in at different times of the year. Rather than just putting the documents on a desk or a shelf where they can get lost, put everything in a file. This will make things much easier when it's time to file your taxes.

You can get more information on preparing for tax season from our podcast episode:

Who is eligible to file their tax as Head of Household?

The Head of Household tax status can be confusing. Head of Household is a tax filing status for single or unmarried taxpayers who keep up a home for a Qualifying Person. Who qualifies for this title? In order to qualify for Head of Household, you must have these qualifiers:

• You have to be unmarried or considered unmarried on the last day of the tax year. The IRS considers you unmarried if you're single, divorced, or legally separated. It's important to note that a temporary separation won't count towards Head of Household status.
• You need to have been paid more than half the costs of keeping up a home for the year. This includes all aspects of running a home, so both fixed and variable expenses.
• You need to have a qualifying dependent living in the home with you for more than half a year. This dependent is usually a child and needs to be under the age of 19, or under the age of 24 if a full-time student.

You can learn more about The Head of Household here.

The Earned Income Tax Credit

The Earned Income Tax Credit is a refundable tax credit for low-to moderate-income working individuals and couples, particularly those with children. The credit equals a fixed percentage of earnings from the first dollar of earnings until the credit reaches its maximum. The maximum credit is paid until earnings reach a specific level, after which it declines with each additional dollar of income until no credit is available.

The amount of Earned Income Tax Credit benefit that you may receive depends on your income and number of children you have, if any. You can view the guidelines for qualifying income amounts here. To claim the Earned Income Tax Credit, you must file a tax return. You, your spouse, and your children must all have their own social security numbers as well.

Watch the video below to learn more about the Earned Income Tax Credit:

Your tax refund

After you've filed your taxes, you might receive a tax refund. A tax refund is a reimbursement to a taxpayer for any excess amount paid to the federal government or a state government. Taxpayers sometimes look at a refund as a bonus or some kind of luck, but it most often represents an interest-free loan that the taxpayer made to the government by overpaying taxes throughout the year.

Receiving a tax refund from the government is a great bonus for the year, but it's important to plan for this as expected income and not just blow it on one big spending spree. When thinking about your tax refund, think about ways this money can impact your financial life for the better. Take some time to think about your current financial situation as well as your short term financial needs and wants. Ask yourself these questions when considering how to spend your tax refund.

How to handle your tax debt

Life happens, and sometimes you can't afford to pay your taxes when they're due. There are options available if you acquire an insurmountable tax debt. The first option would be to pay your debt in full if you can.

If you're struggling to pay off your tax debt, you may consider a payment plan. You can select a short term payment plan or a long term payment plan. The short term payment plan entails being able to pay off the full amount within 120 days. It's important to note that interest and some penalties will apply. If you can't pay off your tax debt in 120 days, you can opt for the long-term payment plan. You can contact the IRS for an installment plan that will take longer than 120 days to complete. Like the short term payment plan, interest and fees will still apply.

You can watch the video below for more options for paying off your tax debt:

There is nothing more certain in life than death and taxes, and tax season can seem daunting. From filling out your W-4, to planning for your tax refund, all aspects of taxes are important. Taxes are due every year on April 15^th.  Right now, it might seem like that date is far away and you have plenty of time to file your taxes. It's important to not wait until last minute to gather your documents and file your taxes; in case anything goes wrong or there are any errors. If you don't think you can handle your taxes on your own, reach out to a CPA and let them help you through it. Don't be daunted by tax season, take control of your taxes this year by starting early and using the resources available here!

 

 

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