You are Only Obligated to Pay the Minimal Amount of Taxes - (W6:D1) Debt Free Millionaire Podcast

Debt-Free Millionaire

Simplified Explanation: The government needs revenue to run itself and govern the country, and decided that income tax was the best way to accomplish this. They are demanding you pay your share of the expense of the government’s existence, by giving them a percentage of your income in each paycheck, and at the end of the year, whether you work full-time, part-time, or in a gig job.

Real Life: How does the government figure out how much you owe? It all depends on your earnings, minus your deductions. Earnings are how much you make from taxable income (salary, side jobs, investments, etc.).

Deductions are things you can write off in your taxes that will be forgiven, if spent a certain way (donations, volunteering, having kids, energy efficient purchases). To figure this amount, you have a form that is given to you by your employer, called the W-4 (provided by the IRS). This will calculate how much you will likely owe the government at the end of the year and your employer will withhold that amount, divided over 12 months, and send it to the IRS each quarter (every three months). In addition to federal taxes, you will owe your state income tax, as well, but this comes out as a flat percentage of what you make (in most states). On the W-4, you will count your potential deductions, including dependents (children), if you are the head of the household, and other deductions the government allows.

IRS Form W-2: At the end of the year your employer will send you a copy of your W-2, which will report to the IRS how much you made, and how much was withheld from your paycheck and sent to the IRS each quarter. This is not the end of reporting your taxes. Everyone in America, whose income exceeds their standard deduction (2020: $12,400), must pay taxes.

IRS Form 1040: You will report your income and W-2 information on a Form 1040 Individual Income Tax Form. Here it will ask you for your personal information, so they can look you up, how many dependents (children) you have, how much you made, and how much you owe them, or they owe you. To decrease how much you owe them and possibly receive a return of what you overpaid, you want to add special deductions, if you have them. If you did not donate much, or make government backed purchases (investments, insurance, etc.) then you will simply take the standardized deduction and decrease your income by that amount, now owing the government less than was originally estimated. For this reason, money would be returned. This money is called a Tax Refund. If you get one, it means you overpaid the government when they originally withdrew it from your paycheck. If this is the case, talk to your HR (Human Resources) manager for your employer, and see if you can adjust your W-4.