Your Money_ The Missing Manual - J. D. Roth [117]
After you calculate your taxable income, you check to see how much tax you're liable for (the box on Know what you owe explains how tax rates work).
You can reduce your tax liability through certain tax credits, which you qualify for by doing things like adopting a child or buying your first home. (The government usually gives tax credits for actions it wants to encourage.)
The final step is to calculate how much you owe, if any. Because you pay taxes throughout the year (through paycheck withholding, for instance), you have to subtract what you've already paid from your tax liability. If you've paid more than your liability, you get a refund; if not, you owe the difference.
When you get hired for a job, you fill out a Form W-4, which tells your employer how much tax to withhold from your paychecks. In theory, the money withheld should be enough to cover your income-tax liability, but this isn't always the case.
Maybe you made a mistake on your W-4 or have other sources of income (like a side business or a capital gain from selling stocks). Or say you got a big bonus in one paycheck and your company withheld too much. Whatever the case, it's unlikely that, at the end of the year, you'll find that your employer took out exactly the right amount of taxes. If you paid too much, the government owes you a refund. If you paid too little, you owe the government the difference between what you should have paid and what you've already paid.
Nobody likes to pay taxes, and some people get upset when they find they have taxes due. But your tax bill shouldn't come as a surprise—you can (and should) keep track of your tax liability throughout the year. If you're blindsided by a big tax bill at the end of the year, it's because you didn't think ahead. Advance planning is the best way to avoid such tax trauma.
Tax-Trimming Tips
You don't have to like taxes, but you do have to pay them. Fortunately, there are a few ways to legally trim your tax bill. One is to take all the deductions (How Income Tax Works) you're entitled to. The following sections explain other ways to pay Uncle Sam a little less.
Tip
The best way to arm yourself for dealing with taxes is to get educated. That doesn't mean you have to become a tax professional, but try to get a basic understanding of tax laws. Go to the library and borrow a book on preparing your own taxes, and spend a couple of hours reading it. This may be boring, but it'll pay off in the long run.
Know what you owe
To many people, taxes are a sort of black box: They don't know how taxes are calculated, so they have too much or too little withheld from their paychecks. Having too much withheld usually isn't a problem—it just means you get a big refund. But people can get awfully get upset when they owe more than they were expecting at the end of the year; they feel like the government is doing something sneaky and is tricking them out of their money.
You don't need to be surprised by what you owe come tax time. Most of the tax info is available at the start of the year—you just have to find it.
For instance, it's worth taking a little time to look at your tax situation at the beginning of the year so you can get your withholding amount right. To figure out how much your employer should withhold from each paycheck, you can use an online calculator like those at http://tinyurl.com/IRS-calc or http://tinyurl.com/PCC-calc. If you discover that your employer is withholding too much or too little, file a revised Form W-4 to adjust the amount.
Tip
You can download great, free income-tax planning spreadsheets