5 Things Your Parents Never Taught You About Filing Taxes -- but Should Have
Hopefully, your parents taught you a lot of life skills: how to drive, how to make a few basic meals, how to budget. However, even in the best circumstances, they likely didn’t teach you one essential part of adult life — how to file taxes. Without this knowledge, you might be more likely to miss opportunities to save money or risk incurring penalties.
Read More: 7 Ways You're Accidentally Committing Tax Fraud
For You: Start Growing Your Net Worth With Smarter Tracking
MoneyLion can’t use a time machine to make your parents teach you about taxes. But we can connect you with experts who are happy to play "in loco parentis" and share the tax lessons your folks should have taught you.
1. You Don’t Always Want a Big Refund
Olivier Wagner, founder of 1040 Abroad, knows that most people believe that getting a big tax refund is a big deal. Their parents probably talked about the family vacation they’d take once that refund came in.
Well, Wagner’s got news that your parents probably could have benefited from as well: That big refund is actually just your own money — returned to you after you gave Uncle Sam an interest-free loan.
He’d rather you adjust your withholdings so you receive a smaller refund — or none at all — and take home more money in each paycheck.
“This money was yours throughout the year. It is not an incentive; it is a correction,” he said. “Repositioning your withholding puts that money into your monthly paycheck, where you can use it.”
2. Deductions and Credits Aren’t the Same
The terms “deduction” and “credit” can be used interchangeably by people who aren’t especially fluent in tax law — including many well-meaning parents, unless they happened to be CPAs. But Wagner cautions that “the two are not similar in the way they work.”
A tax deduction lowers your tax bill by reducing your taxable income, while a tax credit provides a dollar-for-dollar reduction of the income tax you owe.
His experience working with expats and self-employed Americans has made Wagner all too aware that people will often overlook potential credits because they think a deduction offers the same benefit. In many cases, it doesn’t.
3. You Should File Taxes Every Year — Even if You Think You Don’t Need To
If Julian Brault, founder of MooseMoney, could encourage American parents to teach their kids one lesson about taxes, it would be this: You should file a tax return every year, even if your income was low.
“A lot of younger filers are surprised to learn that filing a tax return isn’t only about paying taxes,” he said. “It’s actually how you access a lot of government benefits.”
Brault frequently encounters people in their early 20s who assume they don’t need to file taxes because they made so little money. In reality, filing often isn’t optional — and it can even be to their benefit.
“Many young people assume that if their income is low or they worked part time, they don’t need to file,” he said. “But filing is often what unlocks benefits and credits that can actually put money in their pocket.”
4. Moving Into a Higher Tax Bracket Doesn’t Mean All Your Income Is Taxed More
Could getting a raise ever be a bad thing? Some people worry it might be if it pushes them into a higher tax bracket. After all, doesn’t that mean all of their income will be taxed at the higher rate?
Brault wishes more people’s parents taught them not to fear that moving into a higher tax bracket will immediately lead to such severe tax woes that a raise is hardly worth it.
“I often hear people worry about earning a raise because they think it will push them into a higher bracket and leave them with less money, which simply isn’t how the system works,” he said.
Here’s the truth: The U.S. uses a marginal tax system, which means that only the portion of your income that falls above a certain threshold is taxed at the higher rate. The rest of your income continues to be taxed at lower rates.
In other words, a raise won’t shrink your paycheck — it will grow it.
5. You Need To Pay Attention to Your Withholding
Even parents who stress the importance of filing taxes every year may skip discussions about withholding. Brault says that determining how much to withhold isn’t a one-size-fits-all situation, “especially for people with side income, contract work or multiple jobs.”
Without the right knowledge, people may just keep the same withholding rate, even as their financial circumstances change.
“It’s not necessarily a penalty situation, but it can catch people off guard if they’re expecting a refund instead,” he said. “That’s why understanding how your income is taxed and adjusting withholdings when needed can prevent unpleasant surprises at tax time.”
The Bottom Line
Your parents meant well. They likely taught you many of the skills you need to succeed as an adult. Unfortunately, filing taxes often wasn’t one of them.
While our tax experts may not have taught you to ride a bike, they can at least help fill in the gaps and give you the tax-filing knowledge your parents never passed down.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal, or tax advice.
More From MoneyLion: