Taxes 101
Ready for another topic? Let’s talk about the reason why that fancy salary number you were told when you got the job doesn’t magically appear in full in your bank account every month!
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A quick note: Should be obvious but let me remind y'all that I am NOT a financial nor tax professional. Do your own research before making any big financial (or life) decisions!
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Let’s talk taxes!
If your reaction to that was, "oh S#!t"...
Depending on what time of year you’re reading this, you may need to start thinking about filing them. In a normal year, the filing deadline is April 15th. (In 2020, a.k.a. the dumpster fire of a year, they delayed the deadline until July 15th.)Start with this easy to process checklist to pull your docs together.
Let's pause for a few sentences to run through the basics, for those who might be beginners to all this:
The real beginners guide to taxes:
The government takes a % of the money you make every year to pay for a variety of services. In the United States, rather than take a flat % from everybody (which would affect people scraping by disproportionately to those who are making plenty), the government has brackets whereby when you reach certain $ thresholds, the % you're taxed increases.
Dramatically oversimplified, your taxes are calculated by:
Tax owed = your income x #%
(# goes up and down, according to your tax bracket).
Deductions, credits, refunds, oh my! What's the difference?
All of these can save you money on your tax bill, so good news all around. To explain the difference, please grant me a few sentences to cover the basics of how your taxes are calculated...
Deductions: Allows you to reduce the "your income" number which reduces the amount of taxes owed and can sometimes even drop you into a lower tax bracket! Contributing to "tax deductible investments" like your 401K is one way to do this. Want more info, read this! Want even more specifics, check this one out (especially relevant for those in school).
Credits: Directly reduces your calculated "tax owed" number. Like getting cash back on your credit card or with Ebates, a credit doesn't affect the amount you made or the % that calculates your taxes, rather it gives you (usually) a flat amount back that negates some of the taxes you owe that year.
Refunds: If you are a full-time employee, your company withholds a portion of each paycheck to make sure that you have enough to pay taxes at the end of the year. When you file your taxes, if the amount that was held back is more than you owe, you get a refund for the difference!
Wait a second, do I have to pay taxes on the money I make from my investing too?
Eventually yes, but just because the balance of your account is going up doesn't mean you owe taxes on all that. I liked this explanation (you really only need to read the first half of the article)!
Capital Gains Tax refers to the tax rate specifically for money madeif you sell an investment for more than you bought it and "realize gains." The amount you're taxed for that income ("gains" = income) depends on how long you owned the stock. Under a year? It's a "short term capital gain" and you're paying your normal tax rate. Over a year? You're looking at "long term capital gain" and the rate is significantly lower. (0%, 15% or 20% depending on your income. For most of you all, it'll be 15%!)
Note: This is yet another reason why the buy and hold strategy for investments is typically more financially responsible than trying to game the market buying and selling stocks quickly! Everybody loves a tax break!
Are these rules always the same?
The tax code changed some in 2019. And I’m sure that won’t be the last time. Here's a 101 on those changes. We'd all probably need a 201 and 301 but baby steps :)
Takeaways:
Don't be late to file your taxes! April 15th!
There's a lot to keep track of. Don't be afraid to ask for help (either from a tax filing software like H&R Block, TurboTax or a professional).
There are tons of opportunities to keep your tax burden low. For this year, create a folder to keep track of any charitable giving receipts. Also yay 401K and IRA contributions!
