Crash Course on Individual Taxes
It’s no surprise that tax is not taught in schools however, most need to start filing the second they graduate. Hiring a professional may not be feasible for everyone, especially new taxpayers.
Most individuals will find themselves filing tax returns for the very first time in their late teens, a milestone that can feel both exciting and overwhelming. However, errors with taxes can snowball into adulthood in various ways, often resulting in costly penalties and fees. To help you navigate this intricate landscape, let’s go through some of the most common misconceptions for federal taxes that many people encounter:
My parents claim me as a dependent so I don’t need to file a return - Not quite. Even for those who are claimed as a dependent on someone else’s taxes may still need to file their own return. According to Pub. 929, individuals with a Single tax status must file a tax return if their earned income exceeds $12,550 ( assuming they are not blind, if they are the threshold increases to $14,250)
In simple terms, if you make over $12,550 in W-2 or 1099 income, you most likely still need to file taxes even if a parent or guardian claimed you. You must notate that you are eligible to be claimed when filing your return or this can potentially result in additional tax liability for all parties (you and your guardian)
I only need to fill out all zeroes on my W-4 form - Yes and no. There is a bit more to W-4 forms that may involve additional information beyond claiming no deductions or exemptions. If you have multiple jobs for example, you need to complete Step 2. If the other steps apply to your situation, they need to be completed as well.
In simpler terms, your taxes are deducted based on how you complete this form. Referring to Step 2, if you complete this form as if you only have one job when you have multiple, your taxes deducted will only be in the amount that you make at each respective job instead of what you make overall. This almost always leads to taxes being underpaid.
I got a huge refund. This is great! - Again, yes and no. You can get a refund for a laundry list of reasons. For younger tax payers, this can be in the form of the AOTC (American Opportunity Tax Credit - if you’re in college) or the EITC (Earned Income Tax Credit - if you are eligible) however, it can also be due to filing errors if it was an unintended result.
In simpler terms, if you are getting federal tax refunds above $1,000-$3,000 you may want to review where it came from to see if your withholding needs to be adjusted. Overpaying on your federal taxes in excess can mean that money could have been in your pocket over the year, but this is not always the case. There are also individuals that chose to overpay intentionally as a way of tax planning. The goal is intention with how you are filing and understanding the outcome.
Taxes are very personal and depend on individual situations. A personal tax plan is not a one-size-fits-all solution and shouldn't be viewed or treated that way. Understanding basic individual tax guidelines can make tax season feel less painful. There are different ways to complete your taxes: hiring a professional, using self-preparation software, or using assisted self-preparation software. Regardless of what you ultimately decide for your financial future, feeling knowledgeable and confident about your personal finances is an important and valuable stepping stone into becoming financially literate. Gaining this understanding can empower you to make informed decisions that will positively impact your financial well-being.
This blog is for educational purposes only. Mikaesbooks is not a tax advisor or legal professional. Seek an Enrolled Agent, EA or a Certified Public Accountant, CPA, or other tax professional for more information.
