3. Income Subject to Taxation
For most of us, making more money is a good goal to have. Income taxes are one of the main sources of income for federal and state governments and can be particularly confusing. It isn’t easy to figure out how much we owe. When we arrive at what we think we owe, it can seem like too much! And, we have to file a tax return twice: one for the federal government and one for our state government! Fortunately, we use information from our federal form to complete our state tax form.
Understanding the basic outline of what the government’s definition of income is, what deductions can be taken from that income, how to use exemptions and tax credits can go a long way to minimizing what we owe in taxes to the government. See www.irs.gov for more information on federal taxes or call the IRS hotline at 1-800-829-4933. Information about state taxes can usually be found on that state’s Department of Revenue website. In Colorado, that is www.colorado.gov/revenue or 303-238-SERV (7378).
Most of us work for someone else. When we have a job, several kinds of taxes are taken directly out of our paychecks before we even see the money. The Income Course of Education Cents helps you understand deductions from your paycheck and how they affect take-home pay.
Sometimes we find that more money has been taken out than what we owe in taxes when we file our tax return. When that happens we get a tax refund after filing our federal and state income taxes. While it can seem like a nice bonus to get money back from the government, we should remember that this was our money in the first place. We loaned it to the government, interest free. With a better understanding of how taxes work, we might be able to find better uses for our money than an interest-free loan to the government.
For those of us who are self-employed or get income from investments, we have even more responsibility to pay attention to our tax situation. There are a great many more deductions we may take because it costs money to produce our income, but we have a greater burden with self-employment tax. Also, we don’t want to end up in a situation where we owe large amounts of money to the government. The government will charge us interest and penalties for underpayment of our taxes or failing to make estimated tax payments.