11 Things You’re Embarrassed to Ask About Taxes
You really shouldn’t be embarrassed about not understanding taxes, because really, who does?
Exemptions, filing status and freelance taxes—if any of these have you scratching your head, we can help. We talked to LearnVest Planning Services certified financial planner Samantha Vient for answers to all your (really, not that embarrassing) questions.
1. Are there any benefits to filing early? And what happens if I file after the deadline?
The main benefit of filing before April is getting your tax refund back sooner. But filing really close to the deadline could also cost you money. “If you’re working with a CPA and you dump your tax stuff on them two weeks before April 15th,” Vient says, “most people will charge you a premium.” And doing your taxes earlier will mean that if you hit a snag like a missing form or needing to resolve a big question, you have more time to solve it.
As for filing late, you can easily ask for an automatic extension if you think you won’t be able to file on time. But if you were just being absent-minded, didn’t ask for an extension and filed after the April 15th deadline, you’ll owe the I.R.S. fines and interest, which can be a big chunk of cash.
2. What’s the difference between an exemption, credit and deduction?
Exemptions and deductions work the same way. They reduce your taxable income, which lowers your tax bill. For (a grossly simplified) example, if you take a $1,000 deduction, and you’re in the 20% tax bracket, you could save $200 on your taxes. Or if you get a $3,800 exemption, that’s about $760 less in taxes.
The difference between exemptions and deductions lies in what you get and take them for. You can take deductions for a variety of stuff: student loan interest, charitable deductions, tax-preparation fees … the list goes on and on. But exemptions are what you get for people in your family. You get one for being you, one for a spouse, one for each child and one for any other dependents. Read more about exemptions.
Credits work differently. They’re a straight-up discount on your tax bill. So if you get a $1,000 credit, you pay $1,000 less in taxes. You get credits for things like having a low income, buying a plug-in electric car and other stuff. Read more about credits.
3. I’m married but I want to file my taxes as married filing separately, because my spouse and I like to keep our finances separate. Is that OK?
It actually doesn’t matter if you and your spouse have completely separate bank accounts, as long as you are married. If you want to file separately, you can, but you might miss out on some advantages that couples who file jointly get. Jointly filing couples get a bigger standard deduction, can take two exemptions, and can take multiple credits like the Earned Income Tax Credit, the American Opportunity and Lifetime Learning Credits, the exclusion or credit for adoption expenses, and the Child and Dependent Care Credit. And filing separately could even lower how much you’re allowed save tax-free for retirement.
But it’s also possible you would pay less filing separately, perhaps because you want to deduct medical costs—a very big deduction—and filing jointly would mean your combined income is too high to do so.
We could go through all the pros and cons, but it all depends on your specific situation. You can consult a tax preparer, who can give you a definitive answer on which will get you the bigger refund after looking at your situation. Or if both your finances are fairly simple, online tax filing software will compare your refund for filing separately and jointly.
There’s another thing to consider too: Filing jointly puts you on the hook for your spouse’s tax debt if he doesn’t pay, and any misinformation he puts on his return. If this makes you uncomfortable, even if you just know your spouse’s business has complicated taxes, by all means, file separately.