For a typical wage earner or solopreneur, taxes aren’t particularly difficult. So why the dread and fear? Understanding taxes is a palatable alternative to the common fear of them.
The math isn’t complicated. Taxes rely mainly on addition and subtraction, and most software programs even remove that burden.
The overall chance of being audited by the IRS stands at less than one percent, so for most people, that falls into the not-in-my-lifetime category. Yet tax anxiety remains real and prevalent. Understanding your taxes is one step in reducing your anxiety.
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It can also help reduce your tax burden. A win-win for sure. Here are three important things to consider:
1. Understanding Taxes Isn't Difficult
Not for most of us. We don’t need to understand thousands of pages of laws, opinions, and case history. What we need to understand are the basics. For example, what is reportable income? What are deductible expenses? Why are they deductible?
If you understand why an expense is deductible, you’ll have a big leg up. It helps you see what else you might also be able to deduct.
Especially for business owners and the self-employed, you begin to see how taxes are a factor in your decision-making process. You think about what expenses might be considered reasonable and necessary because you know how they are evaluated.
2. Understanding Taxes Helps You Avoid Mistakes
Have you ever found yourself saying, “I should have known better”? Perhaps not in relation to taxes, but it can certainly apply to them.
Many people of good intent end up dealing with tax problems due to errors of ignorance. They weren’t trying to cheat, but they nevertheless committed a faux pas simply because they didn’t know what they were doing. Understanding your taxes greatly reduces the likelihood of making mistakes of ignorance.
Plus, having a good basic knowledge helps you not only to avoid difficulties, but also to avoid missing deductions.
For example, did you know that taxpayers can deduct up to $2,500 in student loan interest? In some cases, that can mean significant savings.
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3. Understanding Taxes Helps With Record Keeping
This may seem intuitive, but if you don’t know what you can and can’t claim on your taxes, then you won’t know what records you need to keep. Sure, your CPA can do it for you, but only if you’re willing to pay a CPA’s rates to have your receipts organized and categorized.
Substantiating various incomes and expenses is fairly easy. But you need to know what records to keep and what not to bother with. If you understand the basics of your taxes, it’s easy to determine that — as well as what other information you need, such as noting the business purpose of a deductible business lunch. (After all, it’s only a business lunch if it has a business purpose!)
Simple things like that help you keep accurate records and not miss important information that could cost you in the long run.
A Final Thought
Maybe you aren’t ready to really embrace understanding your taxes. For many people, it’s a tough idea to latch onto. But if you’re willing to work in that direction you will find that you’ll do a better job of making decisions based on after-tax results; do a better job of keeping records; and — perhaps most importantly — have less anxiety about taxes.