Around this time of year I hear people talking about taxes – how much you owe, how much you get back, etc. To most people it seems like a crapshoot – how do you know if you’ve got a big refund (and shopping spree) or a big bill coming?
How Much Do I Owe the IRS?
Well, here’s how it works. Every time you fill out a W-4 for your job, you put how many allowances you want. The more you write down, the fewer amount of taxes your employer will withhold from your paycheck. Here’s a sample of the W-4 – you’ll see where it tells you how many allowances to claim.
Awesome right? Well if you choose to withhold too little, then your April 15 tax bill will look like the scariest thing since Kim Kardashian’s vampire facial (remember when that was a thing?) If you withhold too much, then you get a giant refund.
Most people don’t mind a big refund. It feels like FREE MONEY. But it’s not. It’s you giving the IRS an interest-free loan and then rejoicing when they pay you on time. If a friend borrowed money from you for a year, you wouldn’t freak out because they paid you back. That’s what they were supposed to do.
Why You Should Owe the IRS
Instead of getting a big refund, I recommend people receive no refund or owe a bit. The more money you have year-round, the more bills you can pay off or the more you can save. I know too many people who see their tax refund as a reason to splurge. It’s not. Remember, it’s your money.
So how do you get as close to zero as possible? Use the IRS withholding calculator to estimate what your allowances should be. The calculator will take into account what you’ve paid before, whether you’re married or single, have any dependents and other relevant information. I know it’s kind of a clunky calculator and requires you to look at your pay stub (who does that?), but I promise, it’s the only way to figure out your W-4.
How Do I Change My W-4?
Luckily, if you find out that your withholding should be 2 and you’ve written 1, you can change it. Even though most people don’t touch their W-4 after their day of work, you can fix it any time. When I got married, I changed my withholding because I knew that my tax bill would be a bit lighter. Some people change it when they have kids, if they get a big raise, earn more money freelancing, whatever.
Go to your HR or payroll department to fill out a new W-4. They should process changes quickly so you’ll see them by your next payday.
How Do I Do My Taxes?
I get so amped up about taxes because it’s one area of personal finance that still scares people. If you were in a crowded Wal-Mart on Black Friday, you could shout “taxes” at a group of people, and they’d vanish.
Fortunately, taxes don’t have to be hard. I used to be terrified of doing my own taxes. My mom is a CPA and studied tax accounting. I grew up thinking she’d do my taxes every year. After all, why waste her education, right? Just kidding. I’m very grateful to all the help she’s given me.
My first year out of school, she kindly suggested I try doing my taxes by myself. It’d be easy, she told me. My mom knows what I’m capable of. If she thought I could do them, I’d give it a try.
I bought a basic version of Turbotax, a software that walks you through your taxes. You input all the forms you have and answer basic questions. My returns were simple. I had two deductions, for student loan interest and for being a renter.
Turbotax is pretty cheap too. They have a free product if you earn less than a certain amount, but most people need the TurboTax Deluxe Version. That’s what I used up until last year when I finally had to hire an accountant specializing in freelance income.
I love TurboTax. It’s really easy to use. I’ve done taxes for multiple people using TurboTax. It’s almost idiot-proof. I know I seem like a financial wizard, but taxes are not my jam.
Here are some other software programs that are easy to use and have free versions if you have a basic return:
- TaxAct: They have a free version and a basic one for $27, the cheapest price on the market.
- FreeTaxUSA: This is another affordable service that’s gotten great reviews from people.
Here’s why I’m harping on and on about tax software. Too many of my friends go to tax-prep places that charge between $150 and $200 to file a return. THAT’S INSANE. Filing your taxes takes about 30 minutes to an hour. Think about how long it’d take you to drive there and back to a tax prep place. Then add up the time you’d spend there. Then imagine handing over an extra $150 for someone to do your taxes.
Filing your taxes takes about 30 minutes to an hour. Think about how long it’d take you to drive there and back to a tax prep place. Then add up the time you’d spend there. Then imagine handing over an extra $150 for someone to do your taxes.
Doing your taxes isn’t enjoyable, but it’s a skill. It’s not a skill like dentistry or tailoring a three-piece suit. It’s a skill like dog walking. Sure you could pay someone else to do it, but why?
If you have any questions about doing your taxes, most of these places have customer support that you can call. I promise you though, 99% of you are better off doing your taxes yourself.
Do you do your taxes yourself? Have you used tax software? Or do you hire someone else?
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