Doing your taxes is one of those things that no one really prepares you for when you’re nearing adulthood.
It’s up there on the “adulting” list with paying a mortgage and getting health insurance for me – it’s definitely not something that I ever daydreamed of as a teenager who just wanted to get out into the adult world…
Does tax season creep up on you every year? Do you find yourself frustrated with completing a confusing 1099 form because you’re now self-employed or scrambling to find the W2 form your employer mailed out months ago?
You’re definitely not alone. Most of us (who don’t call ourselves tax professionals) are at least a little dumbfounded when it comes to our taxes. We find it difficult to remember which paperwork we should keep year to year, and which forms we should fill out when the time comes to file.
I know I always need a reminder to keep my tax return from the previous year, as well as the employer forms I used to file such as my W2.
For me, it seems to get more confusing every year! I find out about a new form I should file, or I had more than one job in a year and have to track down tons of paperwork…
Since my husband and I seem to run into numerous complications regarding our taxes every year, we usually enlist a tax professional to help us navigate the murky IRS waters and explain to us what information we should and shouldn’t gather.
We’ve picked up a few tips and tricks along the way and have even considered filing our own taxes this year since now we’re armed with new knowledge!
With a few “tax hacks,” you too can become knowledgeable about this all-too-frustrating chore that comes with making money and being a responsible adult.
First off, we had to learn what it meant to have an Effective Tax Rate.
The effective tax rate is really just what percent of our income would be given back to the IRS in taxes. Simple enough, right?
There are 5 different Income Tax Brackets that essentially portion off every income into sections (or brackets) to indicate what percentage each income level will pay in taxes. For example, if you are making $50,000 a year, you would fall into the $40,125 – $85,525 tax bracket for 2020, and owe 22% of your total yearly taxable income in taxes. (later on we’ll chat about what really counts as your taxable income and how you can lower this!).
The full breakdown looks like this:
- 35%, for incomes over $207,350 ($414,700 for married couples filing jointly);
- 32% for incomes over $163,300 ($326,600 for married couples filing jointly);
- 24% for incomes over $85,525 ($171,050 for married couples filing jointly);
- 22% for incomes over $40,125 ($80,250 for married couples filing jointly);
- 12% for incomes over $9,875 ($19,750 for married couples filing jointly).
- 10% for incomes of single individuals with incomes of $9,875 or less ($19,750 for married couples filing jointly).
So, once you understand tax brackets, the name of the game is getting your income to the lowest bracket possible, so you pay the least amount of taxes on your income!
The key to success when attempting to move down a tax bracket is Tax Deductions.
A tax deduction occurs when there is some kind of expense or income that shouldn’t be counted towards your taxable income. When you claim this deduction on your taxes, your income level is lowered accordingly. For example, if you’re paying off some student loans, you can subtract any interest that you paid for these right from your income!
Depending on which deductions you are eligible for, you could possibly put yourself in an entirely new tax bracket just by being aware of the deductions available to you. So if you do make $50,000 per year, you could wind up in the 12% tax bracket if after deductions your income equals $40,000!
Now that you can see the huge benefits of tax deductions, you’re probably wondering what options are out there for you and your family.
There are so many options for deductions you can take, depending on your circumstances. Here are just a few of the most common (be sure to do your own research and make sure you’re taking all the deductions you can!):
- Student loan interest: whatever interest you paid over the course of the tax year towards student loan interest can be deducted from your taxable income.
- Contributions to your retirement: if you contributed to your IRA in the tax year, this amount can be deducted from your income as well.
- Charitable gifts: if you gave to a nonprofit organization, donated items to Goodwill, or gave part of your income to a church you attend, these amounts can be deducted from your taxable income. Your generosity is rewarded!
- Medical expenses: you can add up your medical expenses from the year and deduct the portion of expenses beyond 7.5% of your gross income. In addition, if you have a health savings account you have been contributing towards, this money can also be subtracted from your total income.
- Home office related expenses: if you work from home, you could potentially deduct percentages of your utility bills, and certain items you had to purchase to make your home an office.
There are several more deduction options, but these 5 comprise the main opportunities most of us have to reduce our taxable income. Added together, you might be surprised at how much deductions can save you from paying in taxes.
As tax season creeps up on us, be sure to check out all the deductions available for your and your family before you figure out your tax bracket! You’ll thank yourself later when you get an unexpected refund or owe less to the IRS than you thought.
Contributor’s opinions are their own. Always do your own due diligence before investing.
- Life Insurance for the Rest of Us: When I Realized I Needed It and Why
- Why Now is the Right Time to Bump Up Your 401k Contributions
- When Should You Write A Will?