Here's how to do your taxes (without going insane)
OK, real talk: Is there anything more confusing than doing your taxes? It’s something we’ve all gotta deal with, but all the forms, the numbers, the terms — it can feel pretty overwhelming. Tax Day is on April 18th, and it’s coming faster than we’d like. . . which is exactly why HelloGiggles compiled our thorniest tax questions and reached out to experts to find out what’s what. With our nine-part tax series, you’ll be *totally* prepared for Tax Day!
First up, let’s go over the basics about taxes and how we pay them:
1. Why are there SOOOO many forms?
1040 EZ, W-9, W-2 — there are so many forms involved, making everything mind-boggling before you even break out a calculator. In an ideal world, they’d name the forms like they do Friends episodes — “The One For Individual Contractors Only” — but nope, they stuck with boring letter-number combos, much to our chagrin.
But why do we even need all these forms? The short answer is something we already knew: Because taxes are complicated. “There are so many forms because each form covers a particular aspect or item, so when everything is filed there is order, and so different divisions can handle different taxpayers [such as] individuals vs. entities,” Stephanie Gruenhagen, Tax Attorney at Davidoff Hutcher & Citron LLP, told HelloGiggles.
For example, an individual person — like you, or your mom, or your grandma — would file personal taxes using a 1040 tax return, but a corporation would use a 1120. . . because each form is routed to a different office that handles that type of return, Gruenhagen explained to us. So, no, there’s not one massive office that handles every kind of taxes, and the forms help to keep them separate.
Simply put, complicated things need a lot of forms. Makes sense. Still would prefer if they were named like Friends episodes, though.
2. What’s the difference between W-2 and a W-9?
The forms we hear about the most often are the W-2 and W-9. These are different forms despite their similar names, and it can be easy to accidentally mix ’em up. However, there’s an easy way to tell the difference: A W-2 is what you need to file your taxes, while a W-9 is what your employer needs from you to file theirs.
“A W-2 is the tax document you receive from your employer that lists your earnings and all deductions from your paycheck,” Gruenhagen told us. “You need your W-2 to file your personal taxes. A W-9 is requested a business or person who is paying you money for services, and they need your Social Security Number so they can report the money they paid to you to receive a deduction on their taxes.”
As Henry J. Grzes, CPA, lead technical manager of Tax Practice & Ethics at the AICPA adds, you probably already completed a W-9 before you started working.
So remember: Two, you; Nine. . . uh, not you.
3. Why does wherever I live determine my taxes?
If you’ve lived in different states throughout your life, you may have noticed your taxes are considerably different. But why? Unsurprisingly, it’s all because of your state’s taxes.
“While your federal income tax is the same no matter where in the continental U.S. you reside, each state (and many cities) impose their own income tax, while others impose none,” Jonathan Horn, CPA, CGMA Lead Technical Manager at AICPA Tax Policy & Advocacy, told HelloGiggles.
He lists Florida and Texas as examples of states that don’t have a personal income tax, while New York City and California have an income tax over 10% — and that’s on top of your federal liability. “You are responsible for income tax to the state where you reside, even if you work in another state,” he explained.
4. What is a deduction versus a credit?
When you’re talkin’ taxes, you may hear the word “deduction” thrown around all over the place, but what exactly is it? It’s a beautiful, beautiful thing, that’s what. “A deduction is a reduction to your taxable income,” Dr. Monica Hubler, DBA, Faculty, Kaplan University’s College of Business and Information Technology, told HelloGiggles.“It helps to lower the amount that will become taxable income.”
This isn’t to be confused with “credit,” though. “A deduction is something that lowers the amount of your taxable income as opposed to a ‘credit’ that lowers the tax you will have to pay,” Gruenhagen added.
So what can you list as deductions on your taxes to help save you some cash? “Every taxpayer can take the standard tax deduction, which is $6,300 for an individual taxpayer in 2015; if you’re married and filing jointly, it’s $12,600,” Jennifer Barrett, chief education officer at Acorns and founding editor of Grow, which aims to help millennials navigate financial decisions, told HelloGiggles. “Aside from the standard deduction, other deductions you may be able to take include student-loan interest, higher education tuition and fees, childcare costs, IRA contributions, moving expenses and alimony.”
5. How can I plan for deductions?
Naturally, you want to knock off as much money off your taxes as possible. So how do you plan for deductions? According to Richard Gartland, senior tax professional at H&R Block, it’s all about having the right documents. “Without documents that substantiate what happened over the year, [you] could end up overpaying or underpaying what [you] actually owe in taxes,” he explained.
Yep — more papers. We know, it’s enough to make you like this:
But don’t fret! If you go to a tax professional, bring the right documents to figure out what you can add as deductions. If you own a home, bring pretty much *all* the paperwork, like mortgage interest statements, receipts for real estate tax paid, and receipts for personal property tax paid, says Gartland. Don’t forget about receipts, like those for charitable donations or health care expenses. If in doubt, bring it. Your wallet will thank you.