Twenty-six of the greatest lessons I was ever taught.

This is a chapter from The ABCs of Dan M. Wilson.

Every April for the rest of your life you will be signing your name next to an “x” on anywhere from one to dozens of forms. And what are these forms? Tax forms.

“Welcome to the wonderful world of taxes.”

Having been an accountant for the majority of his life, Grandpa Dan was an expert at doing people’s taxes. Now this doesn’t mean that he enjoyed doing them (as they are a “true pain in the ass,” according to the man) but he was very adept at handling them for individuals as well as for businesses.

When I was around your age he sat me down and taught me how to do my own taxes. It is that information that I will now pass onto you.

Just so you know, the IRS considers a tax year to be the same as a calendar year. Therefore it begins on January 1st and ends on December 31st. You will figure your taxes for 2008 in 2009, your 2009 taxes in 2010, etc.

It all starts when you begin working a new job. Your employer will have you fill out a W-4. This is the form that is used to determine just how much of your paycheck will be removed and sent to the IRS. While you are living with your Mom, you are legally claimed by her as a “dependent.” The advice I am giving to you will apply to when you are living on your own and cannot be claimed as a dependent.

Fill the form out as a single person, following the rest of the instructions. If you would like a larger tax refund, add in an amount like $25 on line #6. This will take $25 out of each and every paycheck you receive and sends it to the IRS. Naturally this will be overpaying your tax bill but it’s a simple – albeit inefficient – way to save money that will be returned to you the following year in the form of a tax refund.

Welcome to the wonderful world of taxes.

Companies are legally required to submit to you a form called a W-2 every year before January 31st of each new calendar year. So next year, IHOP will send you a W-2 for tax year 2008. It will arrive sometime between January 1st and January 31st. If you do not receive a W-2 from any employer you have in the future during the month of January, call their Human Resources (HR) department and request one as it is the single most important tax document you will receive all year.

Other tax forms you may or may not receive include:

• 1099-INT – which keeps track of any interest income you’ve earned from your savings account during the calendar year
• 1099-MISC – the form that you would receive if you ever did more than $600 worth of freelance work for a company
• 1099-DIV – this comes to you if you ever earn any dividends from the stock (you may receive this from your credit union)
• 1099-R – this will come your way once you begin to save for your retirement, which you can never do too early

Each year you will fill out a 1040 form. For tax year 2008 you will more than likely fill out a 1040EZ as your taxes will not be that complicated. For subsequent years, your taxes will become more involved and you’ll probably begin filling out a 1040A.

Any time that you receive a tax form, file it away in a place where you will be able to find it come tax time. Taxes are due for both the State you live in, the State you work in (which may or may not be the same state), as well as to the Federal Government on April 15th of each year. For example, this year I had to file tax returns to three different entities – Missouri, the state in which I work; Kansas, the state in which I live; and one to the Feds.

The U.S. tax system is a very complicated and in-depth system. Fortunately there are top-notch software packages that can walk you through all of it – including the latest changes in tax law that affect everyone at some point – but you still need to understand the fundamentals of how to do your taxes so that you don’t get taken advantage of. You wouldn’t believe how many people I know that end up paying in money to the IRS when they should be getting money back from them. It’s ridiculous.

Each tax year you will need to truly concern yourself with the accuracy of three numbers: (1) your adjusted gross income, (2) your tax and deductions, and (3) your refund or amount owed.
Your adjusted gross income is how much money you earned during the course of the year from any and all jobs you worked. This would include tips you received, any interest income received from your savings accounts, etc. These amounts are reported to you via the forms discussed earlier – W-2s, 1099-INTs, etc. It is extremely important that you do not lose these forms when they are mailed to you. I cannot stress how important it is that you put these forms in a safe place where you will not lose them.

Your tax is the amount of money that you have already paid in to the IRS through your paychecks (also reported on your W-2). Deductions are various amounts that you can subtract from your adjusted gross income that will ultimately lessen the amount that you will have to pay taxes on. For example if you donate money to charity, have large medical bills, are a full-time student in college and paying tuition, etc. you may deduct a portion of those expenses from your total income.

Your refund or amount owed is simply the number left over once you subtract the tax from your adjusted gross income.

When it comes time to do your taxes for 2008 in the early part of next year, gather your paperwork and I will personally teach you how to do your taxes by hand. We will then sit down and walk through the software version for filing purposes but I want you to learn how to do your taxes by hand nonetheless.

Key things to remember in the future for taxes:

• Keep any and all tax forms that are mailed to you
• Retain all of your receipts for the following: donations, large purchases (cars, a house, etc.), medical bills, and child care expenses
• You can deduct the fees you pay for licensing your car, so keep that paperwork
• If you ever do any contract or freelance work, keep track of the mileage you drive for business purposes (keep this in a notebook that you leave in your car) as you can deduct it on a per-mile basis
• Also if you do contract/freelance work, keep the receipts for any and all supplies that you purchase for use in the business
• Keep your bank statements from the past three years
• Keep copies of any tax forms you file for up to ten years
• Pay any taxes owed promptly and in full every April 15th

Grandpa Dan’s lessons on how to do my own taxes have proven to be one of the best practical lessons he ever taught me. Tax season is one of the most stressful times of anyone’s life as an adult but if you simply pay attention and learn the basics you will be fine. I actually do the taxes of a number of my friends each year thanks to Grandpa Dan having sat me down when I was around your age and shared his knowledge. Hopefully you will be able to pick up on it as well for your own benefit as well as for your friends.