Since I work as an accountant, I am frequently asked income tax questions by friends and family. Here is the latest from a college student:
"Ms. Colere, could you please review my 2006 federal income tax return, my tax preparer calculated that I owe money this year. I don't understand how this could possibly be correct. Last year, I got a refund. I didn’t work any more hours this year or change my tax withholdings." Upon further review, I discovered this particular college student owned a taxable mutual fund account in her name that had incurred a large capital gain distribution in 2006. The tax-withholdings withheld from her part-time job earnings did not cover her tax bill once she included the capital gain distribution into the tax calculation resulting in money owed.
This scenario led to my conclusion that as part of a financial literacy program everyone should be able to complete a 1040EZ tax return and have a basic understanding of the Federal Income Tax code. This is important even if you hire an accountant to do your taxes. It could save money on taxes; not to mention interest and penalties for unreported income or unallowable deductions, lead to better investment decisions and save money on tax preparation fees.
“The hardest thing in the world to understand is the income tax.” — Albert Einstein, physicist