Educators often reassure students that in their attempt to understand the subject matter at hand, there are no wrong questions. This principle applies equally to understanding taxes, and the following are some of the most important questions and answers for taxpayers to become familiar with in order to educate and empower themselves.
1. What’s the difference between deductions, exemptions, and credits?
Deductions and exemptions work the same way: by reducing the amount of income on which you owe taxes, which decreases your tax bill. For example, if you took a $1,000 deduction, and you fall into the 20 percent tax bracket, you would save $200 on your taxes. If you received a $1,000 exemption, that’s $200 less you owe in taxes.
Even though deductions and exemptions work the same way, deductions pertain to “stuff” and exemptions pertain to people. For example, deductions apply to student loan interest, home office expenses, charitable donations, and literally hundreds of other variables, while exemptions are what you receive for yourself, your spouse, and any children or other dependents you may claim.
Credits are different from deductions or exemptions. Rather than reducing your taxable income, they directly decrease your tax bill. For example, if you receive a $1,000 credit, you pay $1,000 less in taxes.
For more on this see our article on The Difference Between a Tax Credit and a Tax Deduction.
2. I’m married but my spouse and I want to keep our finances separate and file separately. Is that a problem?
Whether or not this is a problem depends on a number of factorst. Though you and your spouse are welcome to file separately, this will disqualify you from receiving many of the benefits that couples receive when filing jointly.
On other hand, filing jointly renders you responsible for any outstanding debt your spouse incurs, as well as for any misinformation in your spouse’s tax return. If you feel uneasy about this, filing separately might make sense for you.
For more on this see our article on Should a Married Couple File Jointly or Separately?
3. I’m a contract worker, so taxes aren’t taken out of my paycheck. How exactly do I pay them?
When you work for an employertr, it’s their responsibility to ensure that federal and state taxes are being withheld from your paycheck. On the other hand, if you’re self-employed, it’s your responsibility.
If you fall into any of these categories, you’ll need to pay your taxes quarterly to the IRS. (This is very quick and easy to do online through the IRS Direct Pay portal.)
Keep in mind that the tax due dates for quarterly payments can change when the due date falls on a weekend or holiday.
4. I can’t afford to pay my taxes. Now what?
If you can’t afford to pay your tax bill at this time, gthere are options. In many cases the IRS may be willing to uy set up an installment plan to pay your back-owed taxes over a period that’s manageable for you.
There are qualifications that must be met and there are fees associates with installment plans, however, they are far less then fines and penalties that may be otherwise assessed.
For more on this see our article on Different IRS Payment Options here.
The more questions you can ask in order to educate and empower yourself about taxes, the better you’ll be able to understand the tax system to use it to your advantage toward reducing your tax burden.