We all know how stressful and complex taxes can be, and no matter how familiar you get with the process, there are always ways to make mistakes. In fact, tax time is often so worrying for people that WebMD has taken the time to assemble a list of ways to manage the stress and keep your blood pressure low while prepping your paperwork.
Despite the negative view that people have about taxes and how concerned some are about audits, tax time doesn’t have to be a nightmare. It all starts with getting informed. That’s why we’ve assembled the 10 most common questions that people have about taxes. By understanding these questions and their answers, you can approach the filing process with more confidence and less anxiety.
Americans’ Top 10 Questions at Tax Time
Taken together, the following 10 questions (and their answers) may be able to set your mind at ease. Naturally, your unique situation may need some extra attention, in which case it can be helpful to speak to a tax professional. First, read on to determine which of your concerns may fall within the scope of this article.
Question 1: Why do I have to file my own taxes if the IRS already has my income information?
Simply put, the IRS has access to your income and tax payments, but to investigate the amount that you owe without your input would take an audit-level of effort. Therefore, the IRS asks Americans to file their own taxes, including supplementary sources of income and deductions. This process allows them to save their efforts for accounts that raise red flags.
Question 2: Should my spouse and I file jointly or separately?
Generally, it’s helpful to file jointly if you’re married and live together. In some specific instances, it may be better to file separately, but you should discuss this with a tax specialist to see if that solution is right for you.
Question 3: Is it better to claim more deductions than I need during the year?
This question comes down to personal spending and investment habits. If you overpay taxes, you’ll get a refund as if you gave the government a 0% interest loan. On the other hand, if you underpay taxes, you have access to that money throughout the year but have to pay a lump sum when you file your taxes. Additionally, the IRS may levy a fine for significant underpayment on your taxes, so it’s generally effective to deduct roughly the amount you’ll owe.
Question 4: What should I do about freelance or contractor income?
Keep track of how much money you’re making and where it’s coming from. If you earn at least $600 from a particular source, you’ll need to file for that with a 1099 form. Although it’s a little more complicated than W-2 income from an employer, the 1099 is simple enough to become familiar with once you’ve filled it out a few times.
Question 5: Do I pay a higher percent of all my income if I cross into the next tax bracket?
No, there’s a misconception that the higher percentage rates for higher tax brackets impact all the money that you’ve earned. Instead, they’re treated as rates for your income as you earn it. For example, if you earn $50,000 in a year as an individual (which puts your income into the 22% tax bracket), the first $11k is taxed at 10%, then the next $33,725 is taxed at 12%, and only the last $5,275 is taxed at 22%.
Question 6: Should I itemize deductions or take the standard deduction?
Usually, W-2 workers can take the standard deduction due to a lack of business expenses. Nevertheless, there may be years during which you have significant deductible expenses that could outpace the standard deduction. For 1099 employees, there’s also a chance that itemized deductions may reduce your tax burden more than the standard deduction would.
Question 7: I don’t have all my receipts, but can I still itemize deductions?
While it’s more secure to have receipts on hand, you can still file for deductions without them. Having a record of transactions protects you in case the IRS decides to audit you, but if your deductions are in line with the standard amount of deductions taken by people with similar employment and living situations, then they may be less likely to raise any red flags. Nevertheless, if you do undergo an audit, missing receipts can result in the IRS denying some of your deductions. Intuit has suggested that you should prioritize receipts, especially for medical care and child care, as these can vary significantly between individuals.
Question 8: How much of my home can I claim as office space?
Both independent contractors and salaried employees may use a significant portion of their home as an office. If this applies to you, you can make a claim based on the space that this office occupies, as well as the frequency with which you do work in this space. Notably, you can also claim storage space, such as a garage, if you have to keep work-related tools or items in your home.
Question 9: What deductions can I take in addition to the standard deduction?
The standard deduction replaces everyday business-related expenses, such as official lunches, office supplies, and rental space for your work. If those don’t amount to much or simply aren’t a factor for you and you’re taking the standard deduction, there are still other sources of deductions that you can add. Several of the most common deductions include property tax on your house, interest payments on student loans, and a credit for moving into another home or buying a car during the tax year.
Question 10: Is it worth paying for a tax-preparation service?
One of the best reasons to hire tax-preparation services is that they can alleviate some stress. Many of these services also have guarantees that protect you in the event of an audit, so you have some professionals in your corner if that situation arises. Further, they generally have expertise with the tax code that helps them optimize your return or reduce the amount you owe. If you have multiple income streams and other potential deduction sources, you may want to consider hiring a tax preparer. If you just have one W-2 job, though, you may be comfortable handling it without issue using one of the available free resources listed by the IRS.
Resource Links
“Which Receipts Should I Keep for Taxes” via Intuit
“IRS Free File: Do Your Taxes for Free” via the IRS
“How to Cope with Tax-Time Stress” via WebMD