Introduction
Everyone pays taxes, but not everything about them is easy to understand. If you don’t know the difference between 1040 and 1099, this episode of the Money Confidential podcast is for you. We kick off the series “Taxes in Ten Minutes” with the story of Teresa (not her real name), who started a new job and discovered at tax time that a mistake in her entry in the system led to no federal or state taxes being withheld, resulting in a large tax bill at the end of the year.
Step One: Double-Check
Some of the biggest tax mistakes can be avoided with very simple steps, like double-checking your paperwork, your checks, and anything filled out or submitted on your behalf.
Income Subject to Tax
You may not realize everything you have to pay taxes on as income. For example, if you received a scholarship that pays you something other than tuition and books, you must pay taxes on that. If you have a shared home on Airbnb and are renting out a room in your home or a second home, you must pay taxes on that income. If you sell your eggs, you must pay taxes on the amount you receive. If you have gambling winnings, you must pay taxes on amounts over a certain threshold. If debts you owe to a credit card company are canceled and forgiven, you may need to pay taxes on part of that amount. And if you receive income from illegal activities, such as bank robbery or theft from someone, the IRS wants you to pay taxes on that too. One really surprising thing is if you find treasure in your backyard, like a large diamond ring, you must pay taxes on that, or if you go scuba diving in the Caribbean and find treasure on a shipwreck, you must pay taxes on that as well.
The Impact of Business Type on Your Tax Status
Your tax status may be affected by the type of work you do. Most employees are of the W2 type, which means your employer withholds taxes for you, so you don’t end up with a large tax bill at the end of the year. However, if you are self-employed (even if on the side), you will receive a 1099 instead, and you will need to pay self-employment tax in addition to the taxes withheld from employees. Meyers recommends setting aside 35 percent of your total self-employment income so you have the funds to pay taxes at the end of the year.
Understanding Tax Deductions
Understanding tax deductions is essential. For many people, it makes sense to take the standard deduction. “The IRS basically says, let’s make it easy,” says Meyers. “You can claim the standard deduction up to $12,550 – you don’t need to itemize every single deduction you will claim. Depending on your tax situation – whether you have kids, if you sold property, if you bought property, if you married – it may make sense for you to itemize those deductions if all the money you want to get back from the government is more than the standard deduction.”
Tax Filing Deadline
And don’t forget that you need to file your taxes by April 18 this year, in order to be on time and avoid any penalties.
Listen to the Podcast
For a comprehensive look at the tax secrets you need to know, be sure to listen to this week’s episode of the Money Confidential Taxes in Ten podcast, “I Don’t Know Anything About Taxes. Where Do I Start?” on Apple Podcasts, Spotify, Amazon, Player.FM, Stitcher, and anywhere you get your favorite podcasts.
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Source: https://www.realsimple.com/money/money-confidential-podcast/how-to-do-your-taxes
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