Tax Filing:
Where you guess what you owe and pay penalties if you’re wrong
What makes the early part of every year the most wonderful time of the year? Tax time! That whimsical time of year where everyone gets their tax decorations out of the attic and prepares for the arrival of St. Uncle Sam on April 15th. But why is tax time more stressful than your in-laws coming to visit for a week? Let’s unwrap this present in this week’s edition of Cadence Wealth Weekly.
If the higher life forms from this classic 90’s tv show are having a difficult time figuring out filing, what chance do us mere humans have? And why does this process have to be so difficult?
For starters, the Internal Revenue Code (IRC) is almost 7,000 pages long, much longer than Santa’s nice list. But that’s just the start, representing only the core tax laws. When you include additional tax regulations and IRS guidance, that number balloons to almost 75,000 pages. 85 years ago, that number was 500 pages. 40 years ago, the number was 26,000 pages. Has life gotten that much more complex?
The Forms
The infamous 1040 represents the core of the personal tax return. This is where the confusion starts. With lines that read, “enter the amount from Schedule C, Line 31, minus any amount from Form 8889, Line 4,” it’s like trying to decode a message from Cousin Eddie after he’s had too much eggnog
And don’t forget the supporting cast: Schedules A, B, C, D, and the ever-elusive Schedule E.
Deductions
We’ve already dedicated one blog post to deductions here, but it’s worth discussing again. From mortgage interest to charitable donations and medical expenses, deductions are like finding little gifts under the tree. But did you know you might be able to deduct your pet llama’s vet bills if you can prove it’s an emotional-support animal? (Okay, that’s a bit of a stretch, but you get the idea.)
And then there’s the standard deduction versus itemizing dilemma. Should you take the straightforward route or the adventurous route? Sometimes the decision is about as clear as trying to see through a snowstorm.
Credits
Deductions are great, but tax credits are like finding that one extra present under the tree when you thought they were all unwrapped. That Official Red Rider Carbine-Action 200-shot Range Model Air Rifle that dad hid behind the couch. There are several of them and some are more difficult to qualify for, but they are a dollar-for-dollar reduction of the actual tax amount you owe, not a deduction from your income.
Ex. If your final tax bill for the year after all calculations is $20,000, but you qualify for the Child Tax Credit of $2,000. You only owe Uncle Sam $18,000. Tax credits are the best!
Audits
What happens if you get it wrong? Sometimes nothing. Sometimes, you get a visit from the Grinch in the form of an IRS audit. Now you’ve got to explain why you don’t deserve to be on the naughty list and justify why you claimed your dog as a dependent. If they like your answer, you’re fine. If not, you could join Wesley Snipes in jail for tax fraud (this is an extreme example in satire. Most often the penalties are fines and payment of back taxes owed).
Wrapping it Up
So, the next time this festive season rolls around, try to laugh at the absurdity of it instead of getting frustrated and angry. Find a CPA you trust. Like any profession, not all are created equal. If you don’t have one, we can refer to some that we have personally vetted. After filing, it’s worth having a tax return review party. We do ours in May, but any time of the year is fine. And, although it is a few months away, and we just started a sentence with ‘and’, Happy filing!
