Sunday, April 17, 2011

From the tax desk

Seven months ago, I knew absolutely nothing about income tax.  The annual trip to the tax office was like a game of roulette:  would I owe?  would I get a refund? how much was this tax preparation going to cost me?

But in order to be gainfully employed after January 21, I took the H&R Block income tax course, a grueling 9-week program, 9 hours a week for a total of 84 hours, followed by 33 hours of skills training and tax updates.  Three months and 115 (!) tax returns later, I’ve learned a lot about taxes, our government, and human nature.

I frequently have to explain to clients why they are not getting a huge refund, or worse, why they have a balance due.  Most of it depends on how you fill out your W-4 forms when you start a new job.  Unless you are married with children, you should always claim “Single”and “0” (on your state forms too!).  We all like a little extra money in our pocket come payday, but here’s the thing: the government wants its cut when you get paid and how you fill out those confusing W-4s pretty much determines whether you’re going to owe or get a refund at the end of the tax year.  Taking out too much (withholding at a higher, single rate) practically ensures a refund.  Withholding more than you owe also may cover other tax liability from other income (investments, self-employment, early retirement distributions).  If you’re working two jobs, you should have extra money withheld from each paycheck.  By withholding too little, you’re going to owe.  If you end up owing more than $1000 in tax at the end of the year, you’ll probably end up with a penalty.

Yep, your government is sneaky that way.  And get this:  The deadline to file is April 18, because April 15 was Emancipation Day in Washington DC this year.  But if you file after April 18 and you owe, your government can charge you interest back to April 15.  As I said, sneaky!

Now about human nature… I didn’t find it surprising that people don’t understand their taxes or retirement any better than I did seven months ago.  What did surprise me is the number of people who know exactly how to defraud the government.  Not that it is in their best interest, financially or legally, but someone has told them “this is how you get over” and, by gosh, they are going to try it.  Probably the most heartbreaking case this tax season was a 21 year old kid who worked in fast food all year.  He came in trying to claim his little sister as a dependent.  As soon as I started asking questions, mom came around the corner and took over the tax interview.  Turns out they were trying to claim two head of household exemptions for one family, when the parents were married (!!) and paid all expenses for four children.  When the kid realized that his parents had made him file a fraudulent tax return last year, that he could be audited by the IRS and forced to pay back his ill-gotten gain, he started crying.  We filed his taxes legally and encouraged mom and dad to come back in and let us do their taxes the way they should be done (honestly, they probably would have come out ahead!).  But they had been told that this was the way to “stick it to the man” and we never saw them again. 

Personally, I wouldn’t want to mess with the IRS.  After all, Al Capone was never convicted of murder – the feds got him on tax evasion!

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