Two Things Are Certain in Life: Death and Taxes

The deadline for filing your income tax return might have passed two months ago, but the deadline to send in your estimated taxes for the period of April 1st to May 31st is a week from yesterday.  Anyone is required to pay estimated taxes if your employer does not withhold taxes for you (i.e. you work as a short-term consultant/contractor or you are considered self-employed) or if your employer does not withhold enough taxes (i.e. you still owe Uncle Sam more than $1,000 in taxes even after withholdings and credits).  And I hope you take this seriously, because if you underpay the IRS, the IRS has the right to penalize you, even if you are entitled to a tax refund when you file your income tax return.

Read Publication 505 to figure out whether you are withholding enough taxes and to calculate the estimated taxes you owe the IRS.  If you do need to increase your withholdings, you can contact your HR department to make the changes.  Of course, the optimal plan is to pay just enough.  But I think it is usually better to withhold more and overpay, because this increases the chance that you will be entitled to a tax refund next April.  Even though all or a portion of your refund might have been your own money all along, it still feels like a windfall.  And it’s much better to receive a “windfall” than to come up with money to send the IRS should you fall short. 

Obviously, taxes are a huge topic and we will cover more about it in later posts.  Here are a few tips to get you started:

  1. Start keeping a record of the expenses you have incurred during the year that might translate into tax deductions or credits, such as student loan payments, out-of-pocket medical or prescription costs, contributions to your retirement account, charitable donations, etc.
  2. Try to read through the instructions to the Form 1040 Individual Income Tax Return.  We don’t recommend relying solely on tax software the first time you file your taxes, and we have several reasons for doing this. 
  • The Internal Revenue Code is a deeply complex organism.  It is much too complicated than it needs to be, and most first-time taxpayers are not familiar with the Form 1040/1040A/1040EZ.  Reading through the instructions gives you a chance to see the format of the form and the kind of information it asks for.  You’ll also be able to learn about the deductions and credits you can take and can plan to take advantage of them in the next calendar year.  Once you have read through it, all you have to do to stay updated is read the “What’s New” section at the beginning of the instructions each year. 
  • The tax softwares available are not always 100% accurate and vary in their calculations.  If you don’t believe me, just read Washington Post’s technology columnist Rob Pegoraro’s troubles this past March.  He rants about the same thing year after year.  For simple returns such as ours where we have single-income, little assets, and no children, the tax softwares work without a glitch.  But should you continue to rely on them as you get older, when we have several incomes, mortagage, investments, and dependents, the algorithms become more complex and the various softwares might give you different results as to how much you owe/are owed taxes.  As a result, you should become comfortable with figuring out your taxes on your own, without the aid of a software.

If taxes are the only thing that is certain in life besides death, don’t you think it deserves more than just an afterthought?

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: