What Are Taxes and Why Do I Have to Pay Them?
One simple fact: Everyone has to pay taxes.
Trying to skip paying taxes or hiding money doesn’t really end well (just Google celebrity tax evasion). Also, 96 percent of Americans believe it’s their civic duty to pay taxes, so the best thing to do is get a basic understanding of taxes so that you can pay them accurately and on time without panicking or getting depressed.
Taxes are contributions made to the city, town, and state you live in, and—most notably—to the federal government. That money is used to pay for things society as a whole needs and uses, but that people can’t pay for individually—things like roads, salaries for police and firefighters, and salaries of elected officials (and, no, it doesn’t matter if you don’t like them or don’t think they’re doing a good job…they were elected and need to be paid).
Why Understanding Taxes Is Important
Understanding your taxes could save you money! You might be surprised to know that research has shown that Americans overpay the government by $945 million every year. Divided evenly, that’s about $400 in overpayment per household. Most people can think of several ways they would rather use that $400, and if you understand how taxes work you can avoid giving too much to Uncle Sam.
Understanding taxes will also save you at work. At your job, understanding how taxes work can help you save hundreds by using pre-tax options on things like transportation and child care costs. In just 10 minutes, you can complete our online Benefits Launch application to see if you’re eligible for tax savings.
Understanding your taxes might also help you budget better. You’ll be able to more accurately plan your monthly and yearly spending if you understand how much you’ll be paying. No one likes to be hit in the face on April 15 with a surprise tax bill, and a little know-how can go a long way to get ahead of the game.
The W-4 Form and the Myth of the Big Refund.
One of the first things you do when you start a job is to fill out a W-4 form (if you’re self-employed this doesn’t apply). The W-4 form collects information called your personal allowances. For example, you will indicate whether you are married or single, have children or other dependents with childcare expenses, and answer if your spouse works. The number of allowances listed on the W-4 form determines how much income tax your employer will withhold from each paycheck.
Why does your company do this? All employers are required by law to set aside income tax from your paycheck and deposit the money in a Federal Reserve Bank. This makes it possible for the federal government to maintain a steady source of income while also drawing interest on your tax dollars. Instead of paying taxes in a huge lump sum once a year in April, you pay them all year long, paycheck to paycheck.
The W-4 form is important because it ensures that you aren’t paying too much or too little in federal income tax throughout the year. Most people look forward to a big refund check when they file their tax return in April, but what that really means is that they paid too much income tax during the year and let the IRS keep their money. Unlike a bank, the IRS does not pay interest on the money you let them borrow. They could have put that money in the bank for you, invested it to earn extra, or bought something useful with it.
By adjusting the number of allowances on the W-4 form, you can decrease or increase the amount withheld from each check. That way, there are no big checks or big bills in April. Check your W-4 annually to make sure the information is up to date.
Most of us are clueless about taxes. Leave it to the experts to make sure you do your taxes the right way and don’t pay too much or make a mistake that could cost you money.
In Summary: Taxes Can Be Confusing and Complicated. But CWF is here to help!
Let’s be honest, does anyone (other than an account) really understand taxes?
For most of us, taxes seem even more complex than rocket science. And truth be told, we don’t understand what that is either unless we’re rocket scientists!
Remember that exciting moment when you got your first paycheck from your first job? In your mind, you probably had big plans for your money already. Then you tore open that paycheck only to discover that a big chunk of what you thought you made was gone. What you didn’t prepare for was the money that would be taken out of your check for taxes.
Preparing your taxes can be confusing and complicated, but qualifying working families and individuals in Southeastern Pennsylvania and Southern New Jersey can get free, professional help.