Category: First Time Tax Payer

2022 IRS Scams and How to Stay Safe

11/30/2022

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The Battle Between the 401(K) and the Pension

2/13/2020

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Tax season is here, and for many of our clients, as you grow professionally and through your financial years, you come to discover more and more things finding their way onto your tax documents that you have to pay for. One of the most expensive things that you will depend on later in life is your retirement fund. Are you prepared to retire and are you aware of what you may or may not have to pay taxes on once you do?

February is here, and we are one day closer into tax season here in Goose Creek. We are here to provide the best tax preparation services to all of our current and new clients, so please don't hesitate to contact us this tax season! We are in full swing, and are prepared for what is going to be a very busy but very exciting tax season! With that being said, we are here to offer our clients at many stages of their lives help with their taxes. For those filing for the first time, for those filing for the first time as a married couple, and those filing for the first time after retiring. Just as you change through the stages of your life, how you pay your taxes will also change along with you.

Planning for your retirement is one of the most important things you can start doing once you start working in the professional world. You'll be paying for your retirement your whole professional career, and it will most likely be one of the most expensive things you'll ever pay for. There are no loans, no short cuts, so you will have to save and work for it. As overwhelming and difficult as this can be at times, the sooner you can start, the better your years of retirement will be. In honor of that, we will be dedicating this two-part blog to the pros and cons of having a 401(k) versus a Pension, and what that will mean come tax season once you are thinking of retiring and once you do retire!

The days of working for a company for 40 plus years and retiring with an amazing pension, health benefits, and security are becoming things of the past. Today, the 401(k) is dominating the world of the retirement plan. A 401(k) is a plan that was specifically designed to help you save for retirement and was created almost by accident! The 401(k) that we know today started its journey in 1978 with the creation of the Revenue Act passed by Congress that year. This Act was added to the Internal Revenue Code, Section 401(k), and it allowed employees to avoid paying taxes on deferred compensation. in 1980, a gentleman by the name of Ted Benna, benefits consultant of the Johnson Companies, was trying to come up with a way to have a more tax-friendly option for companies to provide retirement programs based on this new 401(k) idea. He came up with the incredible idea that allowed employees to save pre-taxed money in a retirement plan that the employer would then match and put back into the plan as well. This was the birth of the modern-day 401(K) plan, and The Johnson Companies were one of the first to provide these new benefits to their employees.

In the very beginning, the original section of the 401(K) in the Internal Revenue Code, did not allow stand-alone accounts to be created and to be funded by salary reductions. Mr. Benna pushed the IRS to change this idea, and they followed through. Those employees who now decided to partake in a 401(k) could now use their deferred income to make investments and not be taxed on any gains. By 1982, 401(k)s were being offered by thousands of companies, and they are commonplace for most companies today.

There are many benefits 401(k) programs give to business owners and employers, and many of these benefits are why pensions are becoming an endangered species.

The amount that the employer contributes to its employees 401(k) is tax-deductible for the employer or company.
There is huge flexibility available in plan options that an employer and company can offer to their employees.
Offering a strong retirement plan like a 401(k) can be very attractive to outstanding employees and can keep them at a company for many years. This can prevent constant turn over and save a company money on training new employees.

The benefits a 401(k) can offer to the employee are also very positive.

You can carry your 401(k) from one company to the next (with some exceptions).
It allows small contributions over time to grow into large sums for retirement.
The amount of money in your 401(k) is not taxed until you begin taking money out of the account.
The amount of money put into your 401(k) from the company you work for can lower the amount of taxes on your income.
It is very easy to pay into a 401(k)
Traditional 401(k) plans are tax-deferred

Right away in just these two short lists (they could be much longer, this is just an overview), you can see how a 401(k) can be such a relief on your taxes now, and it won't be an issue on your taxes or even something you have to worry about until you start pulling money out of it. But even though there are some wonderful benefits to a 401(k) there are still some cons.

Depending on if you have a larger income when you retire compared to when you were paying into your 401(k) you could be put into a different tax bracket and will have to pay a large fee in taxes once you begin taking money out of the account.
You might have fewer investment options and you might run into high account fees.
If you do withdraw from your 401(k) before you are 59, you will be faced with a penalty charge. This happens most often when someone runs into some kind of financial hardship, and they need the money. Even in these desperate circumstances, the account owner will be facing a 10% penalty.

Don't be overwhelmed with these cons. When deciding on your future, especially your financial future that could affect your taxes, you need to be aware of both sides of the coin. It is good to remember that what you pay into your 401(k) can help reduce the liability rate on your taxes every year and can help with tax withholding during every one of your pay periods.

You have a lot on your plate right now when it comes to tax season, so for those who aren't taking money out of their 401(k) this year, it's one less thing you have to worry about when filing. For those who are just starting to use their 401(k) plan as retirement or in a situation based on need, this tax season might be a little different for you. But don't worry, we are here to help. We hope this information has enlightened you a little more on 401(k) plans, and one of the many options available to you for retirement. In our next blog, we will be exploring pension's and what kind of taxes you may or may not be facing with those. Until then, we are Hood's Tax and Accounting Service, here to help you with all of your tax needs in Goose Creek, SC!

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Common Mistakes for the First Time Tax Payer

10/16/2019

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Preparing and paying your taxes for the very first time is a terrifying rite of passage into adulthood. But for a first-time taxpayer, it's easy to scare yourself into making very simple and easy mistakes. Take the time to take a deep breath, check your work, and understand what you're doing!

The very first time you pay your taxes is scary. It's scarier than this Halloween season. For most of us, our first tax experience comes with our first job while we are still in high school and living under our parent's roof. But once the safety blanket of Mom and Dad helping you file your taxes or taking you to their tax accountant goes away, things can get pretty dicey. You're out in the world for the very first time worrying about some huge adult things. Where are you going to live, how are you going to get around, how will you pay your bills, can you feed yourself, what will your job be? Those are huge learning curves, and we all go through them. And just like those learning curves, taxes have their curve too.

Most first-time taxpayers are just afraid they'll do it wrong. Afraid they'll miss a signature, not understand the paperwork, or not provide the correct paperwork to prove write-offs or prove their source of income. Sadly, this will happen for most first-time taxpayers. These mistakes can cause your return to be delayed or you can receive a terrifying official letter from the IRS. The letter will point out the mistakes you made, and you will have to correct them all before seeing your tax return. Take a deep breath, we are here to help you solve those issues.

In this blog, we will be discussing some of the most common mistakes made by first-time taxpayers and how to prevent them from happening!

The Basics

It all starts with filing, right? One of the first mistakes made is hearing that you can pick up your official tax forms from the library or download them off the IRS website and print them off. These are all true statements, but you'll be stuck with a pile of papers you might not understand. You might even grab the wrong set of forms. For a first-time taxpayer, the best way to start off and even continue paying your taxes through the years is by investing in a tax preparation software - like Quickbooks. It comes with an impeccable FAQ, an easy how-to guide, and the software guides you through the proper paperwork to correctly file your taxes. It also helps determine what you can write off, what documents you need to complete these write-offs, and what paperwork you will need to save for future tax seasons. It also has an option to store all of this information for you in its database, so you can learn to upload and save everything you need right away and not have a huge stack of important papers, receipts, and documents just lying around waiting to get thrown away on accident. Also good to know, if your gross income is $66,000 or less the IRS offers free file software, too! It might be a pain to pay them every year - but at least they're being helpful about it!

The Numbers

Believe it or not, one of the most common mistakes when filing your taxes is entering the wrong social security number. We get it, you're nervous and overwhelmed. But take the time to take a deep breath and to dig out your social security card and keep it handy while you're filing your taxes. Once you're finished, take the time to check your work. Take a little walk down memory lane and make all of your math teachers happy by checking your work. Entering the wrong SSN can lead to the delay in processing your return and it can also lead to the IRS rejecting exemptions for dependents.

The Side Jobs

It's very common today, especially for younger taxpayers, to have multiple sources of income. This is very true when you're an independent contractor or self-employed. Learning all the finite details of filing multiple w2s or I9s is very tricky, and can become even more difficult if you've worked in multiple states during that tax year. Each state will have its own little different tax laws on how to file these forms. Often in these situations, the young taxpayer fails to include all sources of income. Many decide just to put down the ballpark number of their yearly income. When you receive a 1099 or any other similar tax document, the IRS receives one too. It's their job to compare all of your documents with the ones they've already received and to catch any mistakes. This kind of mistake can increase the chance of being audited, and that is not what you want.

Tax season might still be a few months off, but we wanted to put any worried first-time taxpayers at ease. If you're a parent, family member or friend of a first-time taxpayer, share this with them! We are sure you remember how hard it was the first time you paid your taxes. Remember, we also offer the best Quickbooks training and Quickbooks services in Goose Creek, and are happy to help you and your family whenever you need it. Please don't hesitate to reach out!

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Hoods Tax &
Accounting Blog

2022 IRS Scams and How to Stay Safe

The Battle Between the 401(K) and the Pension

Common Mistakes for the First Time Tax Payer

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​Hoods Tax &Accounting Blog

2022 IRS Scams and How to Stay Safe

The Battle Between the 401(K) and the Pension

Common Mistakes for the First Time Tax Payer

Author

Archives

Categories

Hoods Tax &
Accounting Blog