Taxes

I've always heard Americans complaining about taxes, and there's numerous quotes comparing them negatively, so it was with good reason that I embarked on my first ever tax return with some trepidation. It's seems like such a strange system after living in the UK, where unless you mess up your tax code by moving job or being unemployed, your only dealing with the tax man is your P60 (W-2 over here) as all your tax is taken at source in your pay check. The same happens here, which is why I was initially confused about why you need to file tax returns as we were already paying federal taxes through our pay checks.

However, after a lot of online reading and working my way through the system with the help of Turbo Tax ($35 and I couldn't have been happier with the help and guidance provided!), I now have a better idea of the system and why the returns happen in the way they do here. Here is how I understand things:

- You get paid by your employer, who withholds a certain amount of money each month to cover your federal tax, social security and Medicare contributions (which I compare to National Insurance). At the end of the year (which helpfully runs 1st Jan to 31st Dec!) you get sent a statement of what you got paid and how much they withheld. 

- Your total earnings put you into a tax bracket, whereby you pay a base rate plus a certain percentage of everything over that base rate. This is how much tax you owe each year.

- You can claim deductions against your tax, including child tax credits, childcare expenses, health care expenses and others. 

- If your tax owed is more than your deductions, you pay the IRS. If your deductions are more than your tax bill, you get paid the difference as a tax refund. 

I know this is a simplified version, but it's helpful to me now (and probably will be next year!) to have my understanding of it written down. The yearly returns replace the different benefits and credits that the UK system offers as different packages. For example, we got a set payment to help with the cost of raising 2 kids, and were able to pay for "childcare vouchers" before tax was applied to help with the cost of childcare. The US government does the same, but has it as all part of the same system, meaning that I only have to deal with one set of paperwork.

I decided to file online as my previous experiences trying to fill in taxes for Kelsey for her earnings abroad confused me greatly. Even though each form comes with a helpful explanation sheet, there's a lot of terminology that I wasn't sure about, and I didn't want to start my dealings with the IRS with a mistake ridden return. Fortunately, the program I chose not only filled in the form for me by using my answers to its questions, but I was able to click on any words or terms that I didn't know and got a succinct and clear explanation of what it meant and how it applied to my situation. It took me about an hour, but I was pleased with the process and came away with a better understanding of the tax system over here.

As for the result? Well, let's just say we are entitled to a bigger tax return that we had anticipated, and that, all things being equal, it should hit our account in 3 weeks. There's a residual wariness of getting money from the taxman, as I've had situations in the UK where I've been sent a tax refund and spent it, only for HMRC to ask for it back a few months later. However, I've been assured that this is a legit process, and the money is ours to spend any way we see fit. I doubt we'll get as much of a return next year, but the idea of having an unexpected windfall each year will help with our travel and home improvement plans greatly!