Tax Time: Be Smart, Pay Less

April 2021 marks 45 years since I declared my first financial emergency.

I’d been moonlighting for the National Hockey League’s New York Islanders in an administrative role and was enjoying the casual simplicity of handwritten paychecks. Without payroll deductions, I figured all that cash was mine to keep. Then I got my W-2s and totaled my 1975 taxes. I owed more than $1,000! After borrowing most of that and settling with the IRS, I vowed never to be that stupid about money again.

Having too little or too much withheld from paychecks is a common mistake. The goal should be to break even. In my case, filing estimated taxes (Form 1040-ES) quarterly or increasing payroll deductions through my day job would have kept me in good standing with the government.

Some of you have the opposite problem: You withhold too much. Don’t do that; you’re just floating the feds an interest-free loan. Instead, use those funds all year by submitting a revised W-4 form to your employer.

How much to withhold is just one complex issue wage earners face. Seek help from a tax pro if you wish, but don’t assume any third party knows or cares as much about your finances as you do. Get involved. Think of tax preparation as an ongoing exercise—like staying current in EMS. By knowing what you make and owe, you’ll be better equipped to keep what’s yours at tax time.

Here are a few basics worth considering, even if someone files your return for you:

• Know the differences between employees and contractors. You’re the latter whenever you collect fees for professional services—teaching, for example, or consulting. Contractors have to pay the employee’s and employer’s share of Social Security and Medicare on self-employed revenue. The news isn’t all bad for business owners, though; they get to deduct expenses related to the production of income and could end up owing little or no tax on those earnings. For more guidance see the IRS’s Tax Guide for Small Business (For Individuals Who Use Schedule C) at www.irs.gov/pub/irs-pdf/p334.pdf.
• Filing taxes is partly based on the honor system, but not when it comes to most wages, fees, and investments. The feds know what you’re making by way of W-2 and 1099 statements. You’re probably already familiar with W-2s, and 1099s are similar; they report business and investment income to both you and Uncle Sam. If you track revenue throughout the year, you’ll find it easier to check the accuracy of 1099s—something you should do before you file.
• If you’re single but care for others, you’ll likely pay lower taxes as “head of household.” Also, married couples with one primary earner usually do better filing jointly instead of separately. Feel free to test both.
• All earnings are not treated equally by the IRS. I can think of four broad categories:
  • Wages, salaries, and professional fees are taxable. So is most investment income.
  • Some interest is tax-exempt, as are economic recovery (stimulus) payments, gifts up to $15,000, most inheritances, and at least part of Social Security benefits.
  • Earnings on U.S. savings bonds are tax-deferred until you withdraw them. So are contributions to conventional IRAs (not Roth) and interest paid on them.
  • Long-term capital gains and some dividends are tax-advantaged, meaning earnings are taxed at lower rates than ordinary income.
• Tax deductions changed a lot in 2017. Specifically, standard deductions were doubled, while personal exemptions and many itemized deductions were eliminated. Gone are the days of automatically subtracting mortgage interest, local taxes, and unreimbursed employee expenses from income. Many of you will come out ahead by taking the much-larger standard deduction (see www.irs.gov/help/ita/how-much-is-my-standard-deduction), but that depends on the size of your family, the state you live in, and how much debt you’re carrying.
• If you have time for only one piece of advice, let it be this: Get all the tax credits you’re due (see www.irs.gov/credits-deductions-for-individuals). I’m talking about major savings. The forms may look scary, but take your time and see if you qualify for any of these:
  • Earned income credit—The IRS estimates 20% of taxpayers entitled to the EIC don’t take it.
  • Child tax credit—Who wouldn’t want an extra $2,000 per child?
  • Premium tax credit—If you bought health insurance through Obamacare, the Treasury may owe you a rebate for some of the premiums you paid.
  • Economic recovery credit—If you’re still missing either of the 2020 stimulus checks, you can apply for them with your return.
• Consider filing electronically. You’ll get refunds and future stimulus payments faster. See if you qualify for free software at www.irs.gov/filing/e-file-options. If not, there are plenty of commercial packages available.

If you do your own taxes, an excellent reference is J.K. Lasser’s Your Income Tax. It’s updated annually and easier to understand than many of the government’s publications.

You have until May 17th to submit your 2020 return. Use that extra month to make sure you have all your W-2s, 1099s, and receipts. Then find every deduction and credit you’re owed. Be smart. Pay less.

Mike Rubin is a paramedic in Nashville and a member of EMS World’s editorial advisory board. Contact him at mgr22@prodigy.net.