Introduction
As crucial as it is, tax as a whole is a complex topic among masses. Working Americans cannot avoid taxes, and hence, it becomes vital to have an understanding of the same. There have been many amendments to the tax system, and it is important to know how you fit into this system. This article gives you 20 income tax facts and will help you gain a better understanding to plan your taxes.
20 Facts you might not know about tax
1. Length of the tax code is more than 74,000 pages
In 1913, the code of tax was just 400 pages long. But now, as amendments are made, it could take even a fast reader more than 1,200 hours to understand it all. Hence, we get an idea about why most people pay professionals to prepare their taxes.
2. More than 4,500 changes are done in the tax code
The reason why tax code is extremely vast is that it continuously undergoes changes. Reports say that since 2001, there have been more than 4,500 adjustments in the tax code. Some of these even work out in favor of taxpayers as the introduction of new credits.
3. By not filing returns, you can suffer a loss of millions
According to reports, in April 2016, taxpayers officially gave up $950 million in refunds from the 2012 tax year. Many people are unaware of the fact that past the filing deadline, you have up to 3 years to claim a refund from an unfiled tax return. For example, the Earned Income Tax Credit, offers up to a $6,318 refund for folks who don’t owe taxes, yet an estimated 20% of eligible filers fail to take advantage of it.
4. Strictly record all your donations
Ensure that you track and maintain a record of all your non-cash donations that you make for goodwill as this adds up at tax time. There are many mobile applications available in the market which help you do the same.
5. In case you get audited, never handle it alone
It is advised to take the help of a tax attorney or hire an accountantwho has some experience with the IRS. Sometimes, the situation can be as simple as providing additional documents, but it is always beneficial to handle such situations with someone who knows exactly what they are doing.
6. Federal income tax is not paid by approximately 44% of Americans
This is because the IRS provides a number of tax breaks to lower earners, and hence, many of them wipe out their tax liabilities completely.
7. Very few tax returns get audited
Reports say that less than 1% of tax returns get audited, and 75% of those that are audited are done via email. Hence, there is a very faint chance of you facing the in-person IRS inspections. Also, high earners have more probability of getting audited as compared to the middle-income tax filers.
8. If you live in New Mexico and turn 100, you can stop paying income tax
Yes, that is correct! You also cannot be claimed as a dependent by anyone else.
9. Owning an ‘exceptional’ tree can get you a tax deduction in Hawaii
There is an Exceptional Tree Act in Hawaii since 1975, which allows a tax deduction of up to $3,000 per tree for its maintenance expenditures. Some exceptional trees include banyan, monkeypod tree, and baobab.
10. Many tax evasion cases have been observed in babysitting
Reports say that 95% of people who employ housekeepers, babysitters, or other home aids are not very upfront about it as they should be.
11. New York City has the world’s highest corporate income tax
The figure, from a 2009 Forbes report, was 46.2%. That’s followed by Illinois (42.3%) and then Japan (41%). Compare that to the lowest, a miserly 10%, paid in Bulgaria, Cyprus, and Macedonia.
12. Tax savings for teachers
Often teachers have to reach into their own pocket to provide for the classroom supplies. The IRS takes that into consideration as it allows qualified K-12 educators to deduct up to $250 for materials.
13. Credit for lifetime learning
In an effort to encourage your education, the Lifetime Learning credit provides up to $2,000 per year, taking off 20 percent of the first $10,000 you spend for education after high school. Hence, there are no age restrictions when it comes to this education credit.
14. Searching for a job
Things get difficult once you lose your job and the cost of searching for a new job is high. You can deduct any qualifying expenses above a certain threshold for tax years prior to 2018 if you are looking for a job in the same field, and these expenses exceed 2% of your adjusted gross income.
15. Working parents
Working parents who have employed a caregiver are eligible for a tax credit to cover the costs of daycare, babysitter, nursery school, or preschool. The percentage of this credit is however limited, including limitations on the age of the child.
16. Recovery from natural disasters
If your property has been affected by a natural catastrophe for which federal aid has been provided, you may be entitled to recover unpaid expenses that you spent to get your life back together.
17. Home-office can be advantageous
The self-employed are qualified for a broad range of tax deductions which other employees are not. You can subtract a portion of the costs of facilities, or even leases for your home office and publications that you sign up to.
18. Moving to a new state
Found a new job, but in some other state? Tax can be a help as you can deduct your packing and travel expenses and also some costs for transportation, insurance, storage, and lodging concerning the move. This deduction is not limited unless your new job is at least 50 miles farther from your home as compared to your old job.
19. Charity deductions
You must be aware of the fact that you can deduct the contributions you make for charity. However, the cost of transportation to a charitable event can also be deducted. You can keep a record of the mileage and make the deductions when the tax time comes.
20. More than one-fifth of paper tax returns contain errors
Erroneous tax returns can be rejected or audited, so it is advisable to file the same carefully. The IRS reports that while the error rate for electronically filed returns is less than 1%, paper filers are 21 times more likely to make a mistake. Hence, prefer filing your returns electronically, which is free for everyone earning less than $64,000 a year.
Conclusion and CTA
The structure of tax is always in constant flux, and hence, it isn’t very easy to know it all. However, one must try to get as much understanding of it as possible, provided it is very crucial for working Americans. If you are having trouble managing your tax-related tasks like tax preparation, consider outsourcing the same.
Tracy Watson works as an Accounting Expert at Accounting To Taxes, a renowned company offering Accounting, Financial, and Tax Outsourcing Services. She is passionate about writing about finance & accounting, small business growth, and entrepreneurship. She is continuously contributing her skills, knowledge, and experience in assisting people with finance and accounting matters.