Almost every day, I talk to someone who says something like, “I don’t know how that works,” regarding their federal income taxes. Now, I’m not talking about more complex tax concepts like the Alternative Minimum Tax or the recapture of depreciation taken on rental properties, I’m talking about basic stuff like the standard deduction vs. itemized deduction.
Now, I don’t think that everyone should be a tax specialist. I have an accountant, and I love it, because it is her job to specialize in tax stuff. However, everyone should have a basic understanding of how their taxes work. And I don’t mean, “I do my own taxes. I use Turbo Tax.” I mean being able to look at a tax form and recognize the major blocks and understand how they apply to you.
For most people, this shouldn’t be a huge project. Roughly 30% of tax filers use the 1040EZ or 1040A tax form, which include substantially less information than the 1040 form. Of those who do use the 1040 tax form, many tax payers use less than 10 of the actual informational lines, meaning that they are dealing with less than 10 categories information. Over half of tax-filers do not itemize their deductions. For the majority of Americans filing income tax returns, there isn’t an overwhelming amount of information to understand. It just takes a little bit of time.
It is time well-worth spending. At the broadest level, wouldn’t you like to understand how income taxes work? Even if you don’t really care, there are many reasons why it benefits you to understand how your taxes are calculated, and how your tax situation may be impacted by certain actions that you may take. You’ll be able to make better decisions because you have more information. Lastly, you’ll be able to catch errors or omissions made by tax software, tax preparers, or accountants.
I challenge you. Find out what tax form you filed last year, and print out a hard copy of that form. Maybe even print out a copy of the instructions. Look over the form, line by line, and see what makes sense and what doesn’t make sense. The do a little investigating to learn more about the things that are confusing. Read a book. Ask a friend who likes this sort of thing. Send me an email. Whatever you need to do to learn more.
It’ll be worth it.