Tax Day will come only once a year but staying on top of the taxes is a year-round job. Professionals, self-employed individuals, and business owners need to file their taxes on time. Whether you use a tax professional or file on your own, there are some things you need to be aware of. These choices can affect the bottom line and also the amount of money that you pay as taxes. Here are the 8 things you absolutely must know about taxes.
1. Get the filing status right
If you can get only one thing right, make sure that it is the filling status. It is important because it will decide how much you save or pay in taxes. If it is not right, it will stick you with an audit. The filing status represents how you wish to be treated by the IRS and it will decide on the credits and deductions you are allowed to take. Hence, when you file the return, you need to double-check the filing status.
2. You should e-file
When you e-file, you can save money, time, and trees. If you use the software, the forms will be present right in and if you are owed a refund, you will get it sooner. It is best to e-file the return but if you need to file a paper return, you will have to check out the forms and identify which ones you need for your tax situation. Then read the instructions and file the return. The tax refunds might be delayed by an extra week or so.
3. Understand the adjusted gross income
Whenever you do the taxes, you will see a lot of instructions about the AGI. The magic number is the adjusted gross income. You report the income and then the government reduces certain expenses from it. This will help determine the adjusted gross income. This particular number will decide what deductions and credits you are eligible for and how big they are. When all the credits, additional deductions, and exemptions are considered, you reach the taxable income.
4. Do not forget the exemptions
Not everyone is aware of the fact that you can get a tax discount for the fact that you contribute to society, are married or have children. Also known as exemptions, they reduce the income amount you will be taxed on. You need to be aware of all the exemptions and when you can take them. If you find it overwhelming to do the taxes yourself, you can seek IRS tax help and ensure that everything is correctly reported in the return.
5. Credit= Savings
Credit and exemptions are two different things. An exemption will reduce the amount of income that you are taxed on and a credit will directly reduce the amount of taxes you owe. Hence, a credit of $500 means $500 in savings. It is simple and efficient.
6. Itemize the deductions to save money
When it comes to deductions, you need to consider two things. You can either take a standard deduction or opt for itemizing them. If the taxes are simple, you can use the standard deductions which are very much like exemptions. They reduce the amount of income you will be taxed on. The other option is itemizing the deductions where you list out each deduction you qualify for. When the sum of all the deductions is higher than the standard amount, you should opt for itemizing. It will save hundreds or thousands of dollars in taxes.
7. Audits are not always trouble
Audits can be tedious and frustrating but it is not the end of the world. To process millions of tax returns, the IRS has certain flags that trigger an audit. It does not mean that something is wrong but it means that there is something in the return where you are trying to defraud the IRS. It could even be a simple math mistake somewhere. In case you think that you did everything correctly, you should be able to prove that. If you made a mistake, you might have to pay more in interest, penalty, or taxes.
8. There is an extension for paperwork but not the payment
The IRS will understand if you cannot file the taxes on time. You can ask for an extension for the paperwork. If you get the extension, you cannot put off paying the taxes. You need to pay what you owe and if you do not have cash, you need to set up a payment plan.
Keep these eight things in mind when you start to prepare your tax return or seek the assistance of a professional for the same. It is important to always file the return on time and make the payment when it is due.
