There are countless lessons and life skills that my dad taught my sister and me over the course of our lives. From learning how to drive a boat and pull a trailer (still working on this one) to managing bank accounts and checking the air pressure in my tires. When there’s a topic I need a little 101 on, he’s my encyclopedia.
So when this time of year rolls around, Dad is on my mind. I know what you’re thinking – Father’s Day isn’t until June. I’m talking about tax season. The dreaded “file your tax return” time of year. Filing tax returns is linked with things in the “chore” category, and many people don’t know what they’re doing, and worse – they don’t care to figure it out. They usually hand the task over to someone else, like an outside service. And that costs money…ugh!
So here’s your task: Stop thinking about tax returns as a nuisance and look for an opportunity to learn something new and feel empowered. (Just work with me here…) Knowing the language of taxes and returns will make you feel smarter and will in turn make the process less painful. It’ll be one more thing in your life that you’re in control of, and that’s why Dad taught my sister and me years ago to file our own tax returns. Trust me on this one … my dad’s a Certified Public Accountant. And here’s what he had to say.
Steph: Why exactly do we do tax returns, Dad?
Dad: Filing tax returns is required by law as long as you have taxable income to report or if you have a refund that you want to claim. The bottom line is if you’re employed, your employer has an obligation to withhold taxes from your paycheck. The amount could be more or less than what you owe the Internal Revenue Service. It’s up to you, with your filing at the end of the year, to say if your income was not enough, such that your employer took too much out of each paycheck and you need that refunded from the IRS. Or you need to file it to pay the taxes that you would owe as your legal obligation as a citizen of this country. It’s to correct the amount that you owe the government.
What commonly-used tax terms should we know?
Your filing status. The answer could be single; married; head of household; married filing joint. Also be aware of the terms adjusted gross income, or AGI, and taxable income.
What’s the difference between a 1099 and W2?
A 1099 is a form to report the income of a contractor to the IRS. A W2 is a form to report the income of an employee to the IRS. Both are the obligation of the employer. A 1040 is your individual obligation to file to the IRS. The difference between 1040A and 1040 long form is if you have lots of interest and dividends, or deductions like a home mortgage or interest, file the long form. Someone with no mortgage or interest deductions will file the 1040A.
Why did you want me to learn how to do my own taxes over the years?
I didn’t want you to spend money on something you are capable of doing on your own. The government designed its tax code so that anybody can get a tax form from the post office and do it themselves. Someone who doesn’t want to do the research it takes to figure out how to do some of the complex situations should maybe get assistance.
How much time should a person set aside if they plan to file their own tax returns?
Assuming you have no capital, real estate or investment gains and losses, business income, that sort of thing – if you have a simple, straight “I’m an employee” situation, then that should take you about an hour every year. Just fill out the form. It’s a small price to pay for most people who get a refund.