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How Do I Know How Much To Pay In Taxes?

How Do I Know How Much To Pay In Taxes?

I’ve thought about writing a book called Everything You Need to Know about Income Tax, but it turns out, someone already did. It’s called the tax code, and it consists of rules, explanations, formulas, and opinions on all things related to the federal income tax. You won’t believe how many pages it is.

73,954 – That’s bigger than a Harry Potter book!

Yes, seriously. And get this. Remember how Einstein said the hardest thing in the world to understand is income tax? Well, when he died, the tax code was “only” about 15,000 pages. What would he say now?

So what do we know so far about income taxes?

1.) We have to pay the tax or we go to jail.

2.)  It’s very difficult to determine how much tax we have to pay. Nothing like setting us up for failure!

So how do we figure out how much we owe?

Remember back in math class where the teacher would bark, “Show your work?” Think of the IRS as your cranky, old math teacher. We have to show our work on a form the IRS provides where we enter how much money we made and a few other things, and then we can figure out how much tax we owe. Not only that, but we have to do this every year.

The IRS tax form is called your income tax return.

There are actually a couple of different kinds of these forms, but the most common is called the 1040. Why is it called the 1040 and not the 1041 or maybe something a little less nerdy like “The IRS Income Tax Form”? Laziness, really. When the government created the form way back in 1913, the government already used Form 1038, 1039, and the next available forms control number was, you guessed it, 1040.

Anyway, this 1040 is only two pages long, but it’s a big deal. It’s like when your girlfriend or wife says, “We need to talk.” On the surface, it seems pretty harmless and simple, but underneath, there is a lot going on. It starts off pretty simple with name and contact information and then gets into more details.

What do you need to know about the 1040?

The takeaway for now is that the federal government, through the IRS, requires us to pay tax on the money we make. Figuring out how much we owe can be quite complex. The IRS makes us show our work using a two-page form called a 1040. On this form, we tell them how much we made and other things and then how much we owe. Oh, and we have to complete this form and send it in every single year.

The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.

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About the Independent Financial Advisor

Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.

Reach us at (949) 305-0500