Taxes play an outsized role in the mental wellbeing of Americans. We cannot stop complaining about them. We’re made to feel like taxation is a cardinal sin, then bombarded with dread at the apparent burden of filing an annual tax return.
In reality, taxation is how we pay for a society. And 75% of filers get a refund, so filing should feel less like a burden and more like a delightful request for a surprise check for most of us.
Taxation in the U.S. is fraught with problems that need to be fixed, and I’m glad people are working to fix them. But in the meantime, this process shouldn’t be such a source of stress in anyone’s life.
Here are a few small lessons to unmask the tax bogieman and reframe tax filing, plus easy steps and tips from tax pros to file your taxes this year and prepare for low-stress filing in the future.
Healthy Rich is a platform for inclusive, budget-free financial education. Become a free or paid subscriber to support our work.
Take the stress out of taxes
The first step to taking on taxes with ease is to remove the fear.
We literally compare taxes to death in our society, and that’s a terrible comparison. We hold taxes up as inevitable, then see a process that seems designed to trip us up and hear warnings we’ll be taken to jail for making a mistake. No wonder we’re all stressed out this time of year.
But we don’t have to be.
While tax fraud can be penalized as a felony, honest errors on your tax returns aren’t likely to bring on legal action, and neither is overdue tax debt. As convoluted as our tax system is, the government has processes in place to address everything you might be afraid of:
You can request an extension to file later than the deadline.
You can file a correction if you made an error or forgot something.
If you owe money, you can set up a payment plan or delay the due date.
You can even submit corrections after being audited to set the record straight.
Remove the mantle of fear you’ve cloaked taxes in. They’re one more bureaucratic process to contend with each year — just paperwork. Even if you find yourself owing money after filing a return, that’s just debt, and you get to decide how you’ll deal with it. Like any other debt, know your options and the consequences of each, and choose what makes sense for you.
Why we file taxes the way we do in the U.S.
I’ll also remind you that our tax processes are intentionally designed to be complex because tax preparation companies like H&R Block and the owners of TurboTax lobby to keep the IRS from simplifying them. (Catch up through this segment from On the Media if you want to get angry.)
If you feel intimidated, that’s by design and you’re not alone.
The IRS and state tax agencies already have most of the information they need from us to handle our taxes each year. Employers submit earnings reports for employees (and self-employed workers for themselves). Companies even submit reports for contractor payments. That’s what W-2s and 1099s are. Most of those forms you receive are copies of forms already submitted to state and federal governments. And, of course, they know what you’ve already paid in through payroll or estimated payments.
As Deitra Redd, a senior tax specialist at H&R Block, points out, if you’re filling out a tax return and can’t find a record of your income, “you can retrieve them from the IRS website.”
So. You could get information from the IRS, so you can file that information properly with the IRS…?
In countries with similar tax systems to the U.S., On the Media reports, tax agencies use that information to create returns and send them to taxpayers each year. It lets the taxpayer know what they owe or what they’ll get as a refund. They can make a change or dispute the information if something is missing or incorrect — but, otherwise, they can just enjoy the rest of their April (or whenever taxes are filed in those countries…).
U.S. tax agencies could do the same. They just don’t. Tax preparation companies have struck an agreement with Congress that the IRS can’t create a free online filing option or other easy alternative, as long as those companies agree to offer a free option for people who earn below a certain income — $73,000 for tax year 2022. But, as I reported for The Penny Hoarder when I first became enraged by this information, tax companies don’t advertise their free options, and less than 2% of eligible filers actually use them.
So we’re enduring an unnecessarily complex system that has us literally fearing a felony conviction, and many of us are paying fees to do it that we’re legally entitled to avoid.
(By the way, that free file agreement is with the federal government only; that’s why you might get through your free online filing program and still have to pay a fee to file with your state.)
Knowing this doesn’t make this year’s filing process any easier. But maybe you could channel your frustration into trying to influence change? We might not have the resources of corporate lobbyists, but we can always ask our lawmakers to change the processes in favor of the people.
See the positive side of paying taxes
If you find tax time frustrating because you don’t like the prospect of paying taxes in general, I always recommend Anne Helen Petersen’s article paying for civilization to adjust that mindset. She makes a wonderful argument for reframing the American attitude toward taxes (as a necessary evil smart people avoid as much as possible):
“I’m not dumb, and I take deductions like everyone else. But I’ve also made a conscious decision to think of paying taxes not as a burden to get out of, but as a willingly performed obligation, a way of being a citizen in my community.”
I agree with Anne wholeheartedly… and I understand this is a Pollyanna view toward taxes in the U.S. Our tax dollars do pay for wonderful things like national parks, safe highways, public schools and libraries — and also, the way our government allocates money is influenced by corporate interests and often harms the people more than it helps us. That’s how we get things like military bloat and why we can’t get things like free health care for all. (John Stewart reports this well in an episode of The Problem, if, again, you want to be angry.)
But, again, we can ask our lawmakers to change that. If you want your taxes to support health care, child care, parental leave, and ending childhood poverty — instead of paying for tanks the military didn’t ask for — vote for representatives who promise to fight for it, and stay in touch with them to make sure they do.
How do income taxes work?
How income taxes work feels like the kind of thing we’re all just supposed to know — but, in fact, most people paying taxes are in the dark about the most basic details, because no one teaches this. I won’t dive into the intricacies of the tax code or anything, but here are a few points that often confuse people:
Income tax is just one kind of tax we pay. It’s the amount a worker pays as a percentage of earned income. It’s separate from the taxes we pay into Social Security and Medicare (which also come out of our paychecks), and separate from property tax and the various types of sales tax.
We pay income tax to multiple governments. We pay income tax to the federal government, which is managed by the IRS. In all but nine states, we also pay income tax to the state government, managed by the state’s tax agency (e.g. in Wisconsin, that’s the Department of Revenue). In 17 states, a minority of cities and counties are allowed to collect local income tax. Each of those tax collectors requires a separate payment and a separate return, though you might not notice that if taxes come out of your paycheck and you file through an online program.
For federal and most state taxes, we pay a graduated rate. The rate you pay on income increases as your income increases. Income levels and rates are separated into tax brackets, with a set percentage of tax levied on each bracket. Note that you don’t pay your highest tax rate on your full income! You pay rate A on income up to the max amount in bracket A, then rate B up to the max amount in bracket B, then rate C up to the max amount in bracket C, and so on.
Income tax from paychecks is only an estimate. Employees fill out a W-4 when they’re hired to help an employer estimate how much to withhold from your pay and send to tax agencies throughout the year. Then the employer files a W-2 at tax time to let tax agencies know how much you earned and you file a return to list deductions and determine how much you actually owe. The difference between what you paid throughout the previous year and the amount you owe is your tax refund or debt.
Tax return filing happens after the tax year. You’ll file a return by April 18 this year, summarizing your income and other relevant information from 2022. You’ll file next April for 2023.
You only owe taxes on taxable income — that’s the money you earn, minus any deductions, like retirement account contributions or mortgage interest. Most taxpayers also claim the Standard Deduction, which lops off a chunk of your taxable income without you having to list individual costs.
Deductions reduce your taxable income, while credits put more money in your pocket. You might hear tax credits referred to as a “dollar-for-dollar” reduction in the taxes you owe. A tax deduction, in contrast, cuts down the amount of your taxable income, which is the amount used to determine your tax bracket and the percentage you owe.
Deductions aren’t a hack to evade taxes. Basically, don’t listen to anyone on social media about the “tax breaks” you can claim if you work from home or run your own business. Tax regulations have guardrails in place so you can only deduct money you truly spend toward work or business. Ask a tax professional (a CPA or EA) what you can actually claim in your situation (and don’t take tax advice from TikTok!).
Major life events probably affect your taxes. Redd points out that taxes can get confusing for her clients when they experience a life-altering event, like buying a home, having a baby or starting a business. Check in with a tax pro when your life changes to see how it might impact your taxes.
Make your tax plan for the year
Follow these steps and pro tips to file your taxes with ease this year.
1. Figure out whether you have to file taxes
Start by determining whether you have to file a tax return this year. Most income earners are required to file a return, but you might be exempt if you earned less than the standard deduction ($12,950 for single filers and $19,400 if you file as “head of household,” i.e. you’re a majority income earner with dependents).
You should always file a tax return if:
You had income tax taken out of paychecks.
You work for yourself.
You have kids.
You earn a low income.
If you paid any tax in throughout the year (like from your paychecks), filing lets you see whether it added up to the amount you owe so you can get a refund or bill. If you work for yourself, you probably have a lot of expenses to claim as deductions that won’t be accounted for until you file a return. And if you have kids or earn a low income, you could qualify for the Child Tax Credit and Earned Income Tax Credit, respectively, which could get you a refund even if you didn’t earn enough to pay any taxes.
2. Gather information early
You need the same basic information and documentation to file your taxes every year: a record of your income (W-2s or 1099s), and a record for any deductions and credits you’ll claim. Various sources should start sending you copies of these in January; they’re generally required to get them to you via mail or online by Jan. 31 each year.
If you’re self-employed, you might need more documentation, and a tax preparer can let you know what they need.
Ideally, you’d keep track of all your records throughout 2022 so you’re already set. But if you haven’t done that, the earlier you start preparing to file, the more time you’ll have to dig up any documentation you need so you don’t feel like you’re scrambling in April.
“I always tell my clients to get a new folder at the beginning of each year to store their documents for next tax year even if they do not know [what] will help them,” says Redd.
I get most of my documents electronically and store them in a Google Drive folder that’s easy to share with my accountant. If I get a paper document, I snap a photo of it and upload it to the Drive folder so I don’t have to hold onto a bunch of paper.
3. See if you can file online for free
If you (together with a spouse if you file jointly) earned less than $73,000 in 2022, you’re entitled to free online filing for federal taxes through that IRS Free File agreement mentioned earlier.
You might also qualify for the IRS’s free tax prep assistance programs if you earned less than $60,000, are disabled, speak or read limited English, or are 60 years old or older.
The free file agreement ensures 70% of taxpayers can file for free, so there’s a good chance you have this option — you just have to know about it!
For online filers, I reviewed a bunch of online tax software for The Penny Hoarder, and TaxSlayer was the only option I found that lets you file both federal and state returns for free (if you qualify).
4. Choose how you’ll file
You can file a tax return by mailing in paper forms yourself, hiring a tax professional to prepare them for you or using tax software to file online.
Free paper forms are usually available at local libraries or other community centers. If your finances are simple (no dependents, home ownership or self-employment), a paper Form 1040 might be the easiest way to file. The equivalent in tax software will run you through a series of questions with the objective to get you to pay for an upgraded service you don’t need.
The drawback of filing on paper is that you have to mail it in, and tax agencies take longer to process those. Since the pandemic started, the IRS has warned filers it could take six months or more to process paper returns. It says most electronic returns are processed within three weeks. If you’re owed a refund, you won’t get it until after your return is processed.
If you have to file anything more than a simple 1040, some tax prep help could be useful (the industry’s lobbying has made sure that’s the case).
Tax prep software almost always costs less than working with a human tax preparer, so go with software if your goal is to spend the least. All of the major tax software comes with the option to upgrade to a level of service that gives you access to human assistance through email, live chat or over the phone in case you run into a sticky question.
I hire a human accountant who lives in Madison, because I want to support a fellow small business owner, and I like that I can just share my folder of documents and let her handle the rest. You can find this kind of hands-off tax prep at various price points: The major companies let you submit your documents to a human tax preparer online, and many brick-and-mortar shops let you drop off your documents in person.
5. See whether you get a refund or owe money
Before you file your return, you should see a calculation for your refund or amount owed. It’s unlikely you paid exactly the right amount throughout last year, so most of the time, you’ll see one or the other.
“If your return states you owe money, I would review for accuracy and ensure that all credits or deductions have been applied to the return,” Redd advises.
If you still owe money after a review, you can pay it along with your return or set up a payment plan with the IRS and/or your state tax agency, which you can usually do online. I owed money after filing last year, and I waited for the bills to come from each agency, then followed the directions in those letters to deal with payments online. I was able to delay the due date for my payment to the IRS until January of this year.
If you expect a refund, you can check the status of your federal refund online through the IRS. Your state probably has a similar system for state refunds; search for “where’s my refund [your state]” to find it.
What if you haven’t filed taxes in several years?
If you’ve been earning income but haven’t filed a tax return in several years, all of the experts recommend filing ASAP. Unless you’re exempt (as mentioned above), you’re legally required to file a tax return, and you’re obligated to pay taxes owed regardless of filing status.
Your goal, explains Enrolled Agent H. Nicole Rosen is, “to get compliant.”
Getting compliant typically means filing returns for the past six years, but that’s not always the case. Requirements could be different depending on your state and financial circumstances.
“I highly recommend people who have not filed in several years to contract with a credentialed expert who works in representation to put together a plan,” says Rosen. “This plan will allow the taxpayer to limit penalties and interest.”
If you were owed refunds, you could claim those for up to the past three years, but you’d forfeit refunds owed to you before that. If you owe tax, the balance will gather penalties and interest just like any other debt as long as you don’t pay. And government agencies tend to have outsized power to seize your money or assets to collect those debts if you don’t agree to a payment plan.
Enrolled Agent Morris Armstrong points out the IRS can only collect back taxes up to 10 years old. But, “If you never file, the clock never has a chance to begin ticking away. So the advice is always file and worry about paying later.”
Prepare now for the next tax season
Use this information as much as you can to take the easiest route possible through your taxes this year. And now that you know what to expect, make tax filing easy for your future self, too!
Armstrong points out, “Great records make tax compliance easier.”
If you pay for any expenses you think could be deductible, save the receipts. If you’re self-employed, track your own income and expenses — all it takes is a free spreadsheet. Ask a tax professional now, rather than later, whether you should itemize deductions or make estimated payments, for example. Automate everything you can; even a quarterly calendar reminder could be enough to lessen the stress of staying on top of your taxes.
Remove the fear and burden of tax payments and filing, and all you’re left with is a simple to-do list. You don’t have to bury your head in the sand until next April. Sit in the sun, and enjoy the ease that comes with preparing one little piece at a time.
And… write, call and visit your representatives to tell them you want this process simplified!
Image by Nataliya Vaitkevich via Pexels