Regardless of which category you fall in, there are many areas and terms within the tax realm that can be confusing. Here are a few such areas that are often misunderstood.
Filing Status
There are five filing statuses to choose from. They are single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child. Your filing status determines the rate at which you are taxed.
So, which one do you choose? Most people pick the one that gives them the highest return, but there are rules in place to prevent people from gaming the system:
- Of course, you can’t file single if you’re married, or vice versa.
- The two married designations exist to help one partner keep their return if the other ends up owing.
- Head of household status means you are not married, responsible for half the household expenses, and a qualifying person lived with you for at least half the year.
- The qualifying widow(er) status is for those who lost their spouses more than a year ago. If your spouse passed away in the past year you can still file married filing jointly. After that, you will have to use the widow(er) status.
Tax Deductions
When figuring out what you owe the IRS, or what they owe you, your deductions play a pivotal role. Deductions are expenses incurred over the year that the government deems necessary to live and/or work, and therefore allow you to lower your income taxes accordingly.
There are two common types of tax deductions, the standard deduction, or itemized deductions. The standard deduction is a pre-selected amount for the average American. For those without significant expenses over the year, this will usually give you a higher deduction.
The itemized deductions are for specific expenses incurred for things like travel, food while traveling, mileage, uniforms, and more. Self-employed people are more likely saving money by filing this way, as is anyone who is financially responsible for expenses related to their job.
Installment Plan vs Offer in Compromise
These are two programs designed to help you pay your tax debt. They are similar in some ways and different in others. If you owe more than you can pay, choosing one of these methods can help.
other valuable tips:
An installment plan allows you to pay in monthly installments. There are short-term and long-term installment plans. Short-term installments must be paid in under 120 days, and long-term plans allow you to go over 120 days. There are fees involved in long-term installment agreements, but the benefit is less financial strain.
An offer in compromise is perhaps the best way to settle your debt if you are in serious financial distress. You create an offer to pay what you can afford and the IRS either accepts it, or counters with another figure.
Filing your taxes can be overwhelming, especially if you owe money. The key is making sure you understand which filing status is right for you, and to know your options for lessening your tax burden.
Image Credit: understand about your taxes by flickr.com
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