Let Me Clarify
If tax time is stressful for you, you’re not alone. Being sure that you have all the necessary documents, having to write a check to Uncle Sam, or having to switch preparers can all be overwhelming. In my experience, it seems that some of the stress may come from a misunderstanding of how taxes work in general.
Let me clarify.
Throughout my career, I’ve encountered many individuals who have been upset with their tax preparer or overall tax situation; sometimes justified, sometimes not. While there is quite a bit that you can control throughout the year, I want to debunk some of the more common “tax myths” out there. Hopefully this will help reduce some of the stress you have and avoid mistakes you might be making as a result.
“I pay taxes twice; in my paycheck and then when I file my taxes” – Your overall tax situation is not figured out until you prepare to file. At that time, all your tax information is used to determine how much tax is due, based on your income situation from the previous year. Throughout the year, money is withheld from your paycheck or other income sources toward your year-end tax liability. This means that if you withheld more throughout the year than was necessary, the excess is refunded to you; and if you did not withhold enough throughout the year, then you owe the difference at that time. Rest assured that you are not being double taxed.
“My tax preparer is great! I got a huge refund this year.” – Piggybacking off the previous idea, whether you received a refund or not, it is unlikely related to whomever is filing your taxes. Taxes are basically one big formula that requires the input of accurate information. If done correctly (by yourself, a volunteer, or tax preparer) the result should always be the same. Just like every other profession, tax preparers can make mistakes. But before you blame (or praise) your preparer, you should know there are no “tricks” to filing taxes. It boils down to whether they are done correctly of not. So, before you get in the habit of changing professionals every time you don’t receive the result you want, remember that it is likely your situation or even tax laws have simply changed over the years.
“Upset about not being able to itemize?” – Taxes should be calculated two ways: based on the standard deduction amount or based on the expenses that you can itemize. The larger deduction (most beneficial to you) is the amount that is used. There were some taxpayers whose ability to itemize was negatively impacted by recent tax law changes, but if you end up taking the standard deduction, it means you are receiving a larger deduction than you would otherwise receive. That’s not a bad thing.
“I give to charity to lower my taxes at the end of the year.” – Charitable deductions are one of the most common deductions for those who can itemize. Don’t get me wrong, donating to charity is a great thing! But, if you are charitably inclined, be sure that you are doing it for the moral benefits and not just taxes. If you itemize, every additional dollar that you donate only saves you your tax rate (for example, if you are in the 22% tax bracket, then every $1.00 donated saves you $0.22 in taxes). So, if you are donating purely for the tax benefit, it is like giving up a bonus, just because you must pay taxes on it.
“It’s great to get a large refund.” – Everybody likes receiving money. But, receiving a substantially large refund isn’t always the best idea. If you remember from a few paragraphs ago, a large refund mainly means you had more money withheld throughout the year than was necessary. This means your refund was essentially giving the government an interest-free loan to get your own money back at the end of the year. While this can be viewed as a kind of “forced savings”, it also means that you could have been receiving additional money in your paychecks throughout the year. That additional amount could also have been used for paying down debt, increasing savings, or improving your overall cash flow situation.
If you found yourself relating to any of the scenarios above, don’t feel bad! And if you have additional questions, then you should talk with a professional. There are many reasons that individuals devote their lifelong education and careers to this field. As with any professional that you seek advice from, trust is important in the relationship. Taxes can be extremely confusing, and that it is why it is important to have at least a basic understanding to be sure that you are making the most of your situation.
As we embark on this clarifying journey together, I encourage you to submit any ideas, topics, or questions to firstname.lastname@example.org. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. “Let Me Clarify” is a weekly blog containing Chad Baxter’s insights and thoughts about a variety of topics. To learn more about Chad, click here
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