[Millennial Money Tips] Why Do I Owe Taxes?
“Why do I owe taxes?” It’s one of those questions that you already know the answer to—because.
Taxes are one of two basic truths in life. You know, the whole death and taxes thing — it’s inevitable.
As a working member of society, you have a right to know where your money is going and why. So let’s start with the basics:
What Are Taxes?
You know when you buy something at a store that is $2.99, but you fully expect to pay more than $2.99 for it? That’s a tax — a sales tax to be specific — but it’s not the only kind of tax you might have to pay. The big one is income tax, which is the chunk of change taken out of your paycheck each pay period.
Why Do I Have To Pay Taxes?
Taxes are part of being an American citizen, and they are used by the federal and state government to finance various public services, such as transportation and infrastructure (think highway maintenance) and Social Security among other social programs. Federal taxes are collected by the U.S. government, while state taxes are collected and used by the specific state in which you earn income and live. In essence, taxes help support the country and communities we live in. Without them, the government wouldn’t be able to provide the services it does.
If I Pay Taxes, What is Tax Day All About?
Remember that income tax bit we mentioned? Tax Day is the last day to report to the government how much money you made that year from your job and other income sources like investments or property, as well as how much tax was withheld from your paycheck throughout the year.. If you paid less tax than required during the year, you will owe the government money. If you paid more than needed, you will receive a refund check. The amount of taxes you end up paying is determined based on a number factors, including the level and type of your income, your family status, and numerous other situations.
How Do I Make Sure I Do Not Owe Taxes?
When you start a job, you are required to fill out a Form W-4. This form allows you to determine how much is withheld from your salary by indicating how many allowances you are claiming—which basically determines how much the your employer will withhold. The more allowances claimed, the less tax is withheld from your paycheck. This means more money every time you get paid but potentially a higher bill come tax time. If you claim less allowances and opt to withhold more taxes, you’re playing it safe but not necessarily smart.
Yes, you’ll get a nice refund check in the mail, but in theory, you’re giving the government an interest-free loan all year. The choice is up to you, but it should ease your mind knowing you can adjust your W-4 at any time. Ideally, you’d like to pay the smallest amount of tax over the course of a year that doesn’t result in you owing any money. If you are a salaried employee, you know how much you’ll make annually and can deduce the amounts needed to be withheld to achieve this magic number. If you’re self-employed, it’s a little more difficult to estimate how much you could earn. (Using a tax calculator will help you zero in on a number that works for you.)
You are now equipped with basic tax knowledge. If you have more specific questions about taxes and the implications on your money, you can always make an appointment with a tax professional to talk through your questions, and your tax situation, in more detail.