Does April 15th seem like eons away? Think again. Even Founding Father Ben Franklin knew that only death and taxes were certain, so if you’re panicking about taxes now — or worse, pretending they don’t exist — it’s time to get real. Sticking your head in the sand only makes it easier for the IRS to take your hard-earned cash, so if you’re new to the world of taxes, hopelessly lost in a haze of unfamiliar jargon, or desperate to save money this year, here are five things you need to know.
The IRS Uses a Pay-as-You-Go System
Since we only pay taxes once per year, it’s easy to be conned into believing you only owe taxes once a year. But the income tax is a pay-as-you-go system, which means you owe taxes as soon as you earn money. If you’re employed, you’ll pay in the form of payroll taxes. But if you’re self-employed (even part-time, and even in non-traditional jobs), you have to pay quarterly taxes. Otherwise, you’ll incur the wrath — and massive financial penalties — of the IRS.
You Have to Pay Your Taxes
It’s a myth that you don’t have to pay taxes if you’re paid in cash, or if you’re a nanny, or if you sell things on Ebay, or, or, or…the list of excuses is nearly endless. The truth, though, is almost everyone has to pay taxes. In general, individual taxpayers who make more than $10,150 have to file returns. And if you’re self-employed, that figure plummets to a mere $400. Failing to pay your taxes can land you in hot financial water, and even lead to criminal charges, so don’t try to save a little now only to get creamed by the IRS down the road.
Deductions Can Save You Cash — But Lower Your Income
Tax deductions can save you a ton of money on your taxes, potentially even lowering your income enough to put you in a lower tax bracket. The bad news, though, is these deductions will also reduce your income, potentially making it harder to buy a home, get a loan, or start a business. If you need proof of a solid income, use deductions wisely.
Tax Credits Are the Holy Grail of Tax Season
If you need to save money but can’t afford to reduce your income, ask an accountant about tax credits. These incentives reduce your tax liability without changing your income, and there are credits for everything from childcare to college tuition.
You Have Lots of Payment Options
Overwhelmed by a massive tax bill? Don’t freak out just yet. The IRS is pretty understanding if you stay in touch with them; it’s taxpayers who don’t file, don’t call, and don’t respond to letters who need to worry. You can often work out a payment arrangement with the IRS or seek an extension of a month or two. And if you’re really in over your head, you might want to consider an offer in compromise, which is akin to a settlement of your tax debt.