Understanding Taxes from an Expert View

Tamsen Butler
Mark Steber
Tax Expert Mark Steber

Understanding taxes may seem like an impossible task, but with the right education and advice, taxes can seem downright understandable. LoveToKnow recently interviewed Mark Steber, Chief Tax Officer of Jackson Hewitt Tax Service to find out the basics of what you really need to know about your taxes.

Fair but Complex

LoveToKnow (LTK): Why are so many people confused by taxes?

Mark Steber (MS): Taxes are an important topic, but they're also complex. The price of fairness is complexity. It's the largest financial transaction people take part in during the year outside of buying a house or a car. Taxes aren't something you deal with all the time. Anything you do only once a year that has a huge impact on your financial status is bound to make someone nervous.

Filing Status

LTK: What do tax payers need to know about selecting a filing status?

MS: Your filing status is based on marital status and is used to determine which tax rates and which standard deduction amounts apply to your tax return. Choosing an incorrect filing status can impact whether a taxpayer is eligible for certain tax credits and deductions, ultimately affecting the amount of a tax refund or tax liability due. If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.

  • Single People - If a taxpayer is married as of midnight December 31, that means they are not considered single for that full year for tax purposes. This is true even if the individuals got married on December 31.
    • Head of Household - Unmarried taxpayers who provide more than half the cost of maintaining the main home for themselves and a dependent. Dependents include:
      • Children
      • Parents (note: parents do not have to live in the same house as the taxpayer to qualify for this filing status)
      • Other relatives
      • Non-related individuals who lived with them for a full year and whose relationship does not violate local laws
  • Single - Taxpayers who are not married and do not qualify for, or choose to file as Head of Household
  • Married People - Married taxpayers have the option to file either jointly, separately, or, if they meet all the special requirements, as Head of Household
    • Married filing jointly - All income received between January 1 and December 31 of the year for both taxpayers is included on the tax return. Married couples can still file a joint return, even if only one spouse worked,. All deductions from each taxpayer can be included on the tax return when choosing this filing status. Married filing separately - Only the income and deductions for the taxpayer filing the return is included. Each spouse will need to file a separate return; spouses are never considered "dependents" for one another on a tax return.. However, this filing status often has the highest taxes and disallows most credits and some of the common deductions.
    • Qualified widow/widower - Taxpayers who were able to file a joint return the year the spouse died and have dependent children may choose this option
    • Head of Household - Taxpayers who have not lived with their spouse since June 30 of that tax year and have dependent children who live with them

Exemptions

LTK: Many tax payers are confused by exemptions. What is a simple way to look at exemptions to make them understandable?

MS: Personal exemptions can be claimed by the taxpayer and his or her spouse. Dependent exemptions are for the taxpayer's children, relatives, foster children, and other individuals, and if the individual's income is less than $3,700 (for 2011) for the year.

Here are a couple of examples:

  • Sally's parents live in a home 15 miles from Sally. Sally pays all of the expenses for the house and her parents' living expenses (i.e. groceries, medicine, medical costs, etc.) Her mother receives no income and her father has a small pension of $3,600 a year. Sally can claim each of her parents as a dependent.
  • Jenna has lived with her friend Sara since 2009. Jenna is elderly and unable to work so she has no income. Sara pays more than half of Jenna's support throughout the year. Jenna is therefore the dependent of Sara.

Top Tips for Complex Tax Situations

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LTK: What advice do you have for self-employed individuals?

MS: Self-employed taxpayers often have more difficult income situations and need to be aware of what is allowed as a reduction in self-employment income versus what may be claimed as a credit or deduction, including deductions for self-employment income such as:

  • Supplies
  • Advertising
  • Business related properties deductions (equipment, vehicle, building, etc.)
  • Business start-up cost deductions
  • Self-employed health insurance deductions
  • One half of self-employed taxes deduction
  • Estimated taxes

LTK: What are some tax tips for unemployed individuals?

MS: Taxpayers who were unemployed during the tax year may qualify for more credits and deductions but must also remember to claim all income received:

  • Wages from multiple sources
  • Retirement/IRA distributions and 10 percent additional taxes
  • Unemployment compensation
  • Capital gains
  • eBay sales
  • Moving expenses
  • Job hunting

LTK: Are there any specific tax tips for senior tax payers?

MS: Senior taxpayers should remember to claim the following items:

  • Retirement and IRA distributions
  • Taxable and nontaxable interest
  • Capital gains
  • Social Security benefits
  • Estimated taxes

Important Tax Knowledge

LTK: Should tax payers utilize a CPA or other tax professional instead of doing their taxes on their own?

MS: Not everyone needs a CPA, but self-preparation comes with a certain amount of risk. The benefit is determined by how much time a person wants to put into their taxes compared to paying someone to do your taxes. The most important aspect is the actual taxpayer; you have to be prepared. You have to arm yourself with information and then talk with a professional.

LTK: What is the last piece of tax advice you would like to give to LoveToKnow readers?

MS: Always file on time and pay what you can, and then extend if you have to do so. The penalties for ignoring the deadline far outweigh any other options like using a high interest credit card or a short term loan to pay your tax obligation. Do not ignore IRS notices; responding with a plan is better than ignoring deadlines.

Understanding Taxes from an Expert View