Dad tries to simplify taxes for newbies to the tax game
ME: Hey Dad, I’m filing taxes for the first time on my own. The free federal turbotax form is pretty helpful, but I’m afraid I’m missing something. Would you mind going over all the things/documents I’ll need. Will the state forms be different? I don’t want to get stuck in any traps and end up in jail like Al Capone.
DAD: Sure, I can quickly explain taxes to you. Then in the next paragraph I will solve the riddle of the Sphinx, describe the correct way to perform brain surgery and give you the solution to world hunger. Or was that whirled Hungarians?
Part One – Income
As we here in New England like to say, taxes are wicked complicated. The more you make and the more you try to manage your money, the more complicated it gets. Happily, we have the Internal Revenue Service (yes, it’s a service) to help us out.
Remember that tax evasion is a crime – but not tax avoidance. Al Capone was guilty of the former. You should actually try to be guilty of the latter.
It comes down to this, if you made money last year, you have to pay federal, state, and perhaps local income tax on what you made. What you made comes is several forms:
- Your salary or wages
- Your winnings in Vegas
- Gifts of a certain size
- Expenses that were paid in your behalf
- Interest you earned on savings and investments
- Dividends you earned on stocks
- Rent that was paid to you as a slumlord
- Unemployment benefits (figure that one out)
- Social Security benefits (another head scratcher)
- The difference between what you paid for stuff and how much you sold it for (i.e., capital gains).
The Feds aren’t totally heartless though. There are a few categories of things for which they will either reduce your taxes (credits) or reduce the amount of your income on which you have to base your taxes (deductions). These are things like:
- Mortgage interest you paid
- Cost of having dependents (does not include pets or in-laws)
- Charitable contributions you made (your reward for doing what the government won’t do)
- The cost of looking for work
- The cost of running a business
- The cost of excessive medical bills
- The cost of losing something valuable for which you didn’t have insurance (e.g., your prize race horse that lost its head because you won’t give the leading role in your next big war picture to Johnny Fontane.)
All you need to do to work out your income and expenses is fill out the right forms – easy peasy.
In Part Two, I’ll cover some of the forms you will need and some that should be showing up in your mailbox.