DROP THAT ZERO

A Short Primer on Personal Income Taxes

Most of us are taxed on a percentage of our income. When we “do our taxes.” we adjust the amount of income and pre-pay some of the taxes. When we take deductions, we are reducing the amount of income that will be taxed. Some examples of deductions are medical expenses, educational expenses and gifts to charities. When we take a credit, we pay part of the taxes we owe ahead of time. Some examples of tax credits are the Earned Income Credit, dependent child credit, tuition credit and disaster relief credit. Make sure to read the instruction booklet carefully. New deductions and credits are available every year.  Also look for new deductions and credits are when a new President is sworn in or re-elected.

After taking care of the deductions and credits, the income amount left over is used to determine how much tax we have to pay. There is usually a chart in the instruction booklet where you can use this “new” income amount to determine how much tax you have to pay. If you’ve paid more than the chart says you owe, they have to give you your money back, a refund. If you’ve paid less, you owe the money to the government.

Why You Shouldn’t File Zero on Your W-4
The W-4 is the form you fill out with your employer when you start working at that job. Many people claim “0” allowances so that they can get a large tax return check in February when they file their taxes.

What happens when you file “0” is that the government has no idea how many dependents you actually have. As a result, it taxes you at the highest possible rate. Each paycheck is taxed at the highest rate, so your paycheck is smaller. At the end of the year, when you file taxes and inform the government of your actual amount of allowances, it has to give you that money back. The government has been holding your money, all year, without paying you interest! This is large tax return check many people receive in February.

However, if you claim the correct amount of allowances on your W-4 to begin with, the government taxes you at the correct amount. Your tax return at the end of the year will be smaller. However, each paycheck is larger. If you’ve been filing “0” all along, filing 2 or 3 will feel like a raise! You can find the suggested amount of allowances in the instruction section on the W-4 form. You can change your W-4 at any time.

When tax time comes, all the deductions and credits normally available to you will still be available if you file a number higher than “0.” If you are a parent, head of household, or eligible for the Earned Income Credit, you will likely still receive a return, it just may be smaller.

Back Taxes
These are two words that you never want to see together! However, there are several steps you can take if you owe back taxes.

• Take advantage of tax amnesty programs which may be available in your area.
• Call the government tax agency directly and make a payment plan. This may not seem like a good idea. But the tax agencies actually have affordable repayment plans.
• Visit a tax professional. They will be able to help with the current back taxes. But they may also be able to help you re-file prior years’ taxes and find credits or refunds you may have missed. You can use these funds to offset your current tax bill

If you put your head in the sand and decide to do nothing about your back taxes, the government will contact you by mail. Open all of your mail. But definitely open all of your mail from the government. The letters usually ask you to make a payment plan. However, if you ignore these notices, the government can “attach” or “put a lien on” (take part of) your property or future tax return check. Please consider getting ahead of any tax issues before they get ahead of you!

Let's Be Careful Out There.