EP 01: Tax Season for First Timers

Hello! and welcome to Everyday Finance and Economics with the Siglers! The podcast where we discuss what you need to know about personal finance and economics and give you practical advice on how to get started and be smart with your money.


This episode is an introduction to taxes, since tax day is coming up on May 17, 2021. We answer important questions such as how to prepare for taxes, how and what to file, and what tools are available to use. We will be doing another episode on taxes next week, filled with your listener questions because taxes can be quite complicated, and we want to share as much information as possible! So please email us (efespodcast@gmail.com) or dm us on instagram @efespodcast for your question to be featured on our next episode. Hope you'll join us!


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Transcript

Speaker 1: 0:04

Yeah ,

Speaker 2: 0:20

Welcome to everyday finance and economics with the Sigler's the podcast where we discuss what you need to know about personal finance and economics and give you the practical advice you need on how to get started and be smart with your money where your host Glen and Christina Sigler. So Christina, what's going on in the economy this week,

Speaker 3: 0:41

Soda what's going on in the economy this week is the federal reserve, the bank that kind of oversees the entire us economy and making sure we're doing okay. Staying on track has decided to keep interest rates at zero until 2023 to help the economic recovery of the United States. And also in that same vein tax day has moved to May 17th this year because of the COVID-19 pandemic. So in the episode, and normally every other year, it is April 15th. And in the episode we say April 15th, but this year for 2021 to file for the year, the tax year of 2020, your taxes are due May 17th for individuals

Speaker 2: 1:25

And for our economic term of the episode, we have to , and there are hints about what we're going to be talking about today. A taxable income and deductions. So taxable income is divided as the gross income minus deductions, and gross just means all income from whatever source, all the money that you get. Minus deductions, exemptions and personal exemptions and deductions, they can vary. There's three types standard itemized in business. A standard deduction is a reduction based on filing status with no requirement of records. And most people use this type, an itemized deduction, X is expenses and qualifying categories, and that requires some documentation of the expense and business deductions are for small business owners and contractors, and it's money that offsets against the income to reduce the business income. So taxable income is all your income minus deductions, which , uh, which are things that you can take off to reduce your taxable income. So, all right, dad, I think it's tied with that introduction to get into this week's topic. What are we talking about today? We're talking about taxes and more accurately income taxes, right? So in the United States , uh, we have separate federal state and local taxes and there's different types of tax , uh , sales tax, payroll, tax, property tax capital gains tax, a state tax and income tax. We're going to focus on individual income tax because that's, what's due on April 15th. That's what tax day is all about. Um, we also have in the United States, what's called graduated tax rates. Meaning you get tax based on how much money you make. The lowest percentage is 10% of your income. And the highest, if you make a lot of money is 39.6% of your income. So dad, our taxes in college different than regular taxes.

Speaker 4: 3:19

Yeah. Taxes in college are not different, but there are some considerations that you've got to take into account as a college student and the number one being how much money did you earn, obviously on the graduated Texas, there are different thresholds based on how much you earned and what kind of money you receive , uh , during the last year. And that, by that, I mean earned income versus unearned income earned income stuff that you've got from salary wages, gig work , uh, versus unearned income, which is stuff that you got from , uh, any investments that, that, that you have.

Speaker 2: 3:56

So just to reiterate earned income is stuff that you worked for stuff that you went and did to get money and unearned income is stuff that you just passively, it's like passive income versus active income, right?

Speaker 4: 4:07

That is correct. Now there's two other things that you need to take into consideration. First is your filing status, single, married, divorced, widowed, what I'm expecting. Most of the folks that listen to this to be single, if you're in college and folks in college are single, there are some folks that are married and in college, but , uh, the other one is a consideration, is your status as a dependent. And by that, I mean, can someone else claim you as, as their dependent , uh, are they paying for more than 50% of your annual living expenses? And for most of you that, you know , um , that might be something that you need to take into account. Um, if your parent , if , if you go home, your parents are paying for a lot of stuff. Well then they can still technically claim as a dependent . If you are in college and your parents claim as a dependent , you can still file to get any refunds that you're doing.

Speaker 2: 5:12

All right. So what are some things that you can do to prepare for taxes?

Speaker 4: 5:16

Yes . Well, the steps are basically saying you're going to gather all your information , uh, the documents , uh, reports, social security tax, ID numbers, date of birth for everybody on your return, income and investment information, all your W2's. If you worked three, four jobs, you need three, four W2 statements or income statements, bank, or financial institution from all of them. Um, and then any other things , uh, for state refunds , uh, and, and any, and all form 10 90 nines. And those are really , uh , for, for, for most people, that's going to be related to your investment income material, self-employment records, medical record, medical expenses, charitable donations. And if any of you own a house it's things related to your home ownership in terms of interest payments.

Speaker 2: 6:12

So back to the first thing you said, you're going to need , um, identification information for everybody on your tax record. That's only going to be if you have like dependents or a spouse, right?

Speaker 4: 6:25

Correct. So if it's just, you, you just need your name, address, social security number, and then your date of birth. That's, that's the best personal information that you need.

Speaker 2: 6:36

Okay. So how do I know what type of taxes I should file

Speaker 4: 6:41

For , um, for individual income taxes, the tax cut and job act that was passed a couple of years ago, simplified things. So there's really the 10 40 for federal federal tax forms. Uh, States may or may not have , uh, income taxes. So depending on which state you reside in, or is your permanent record state, you may or may not have to file income taxes. And that get becomes a little more complicated. If you're going to school and earning money in one state, yet you reside in another state, you'll have to look up the specifics of your state to find out , uh , find out what , what you may have to do because there's 50 different rules. So,

Speaker 2: 7:26

So there's, there's a possibility that you're going to have to file a federal taxes and then two more documents for state taxes.

Speaker 4: 7:34

That's correct. But for most people that file state taxes, it's , it's their federal tax and their state tax. There's, you know, there's very few people that, you know , earn money multiple, but you know , that does happen.

Speaker 2: 7:47

Okay, okay. If I don't make that much money, why should I file taxes? If I'm like working a minimum wage job or something?

Speaker 4: 7:54

Well, if you don't make a lot of money, it's likely you can get a refund for some, or all of the taxes withheld from your pay. And I'll say , may we'll help you with any stimulus funds that you qualify for. I know filing taxes, isn't fun, but you have a financial incentive getting a refund and getting potentially hundreds of dollars back that that w was withheld from you for , for taxes.

Speaker 2: 8:20

And then also stimulus checks, because we know that's very relevant right about now.

Speaker 4: 8:25

Absolutely. Absolutely.

Speaker 2: 8:28

All right. So what happens if I don't file taxes, though? What happens if I don't pay?

Speaker 4: 8:34

So for those of you who are dependents, whose parents are filing taxes and are below income threshold, you don't have to, you don't have to file your file income taxes around, but you're leaving money on the table. But if you're independent and your income above the threshold, there are penalties for not filing your, for being late, but filing your taxes for not filing your taxes. And there's no , uh, there's no time limit from the IRS on late filing a late filing. So,

Speaker 2: 9:06

So they can come get you forever. Huh?

Speaker 4: 9:09

Uh, that's the way the rules are written. Um, there , there is no statute of limitations filing for taxes. Um, and they're going to charge you penalty and interest , you know, back from when you should have filed and paid those taxes. And that's, if you owe now, if you're due a refund, you've got three years, you've got three years to file those taxes to get your money back. Um, no , that doesn't seem fair, but that's the way the rules are written. Uh, as it's pointed out before, late filing can end up costing you money in fees, late fees and interest costs. That actually is a lot more than any, any amount that you owe. Um, and so, you know, if , if you run into trouble with that, work out an arrangement with the IRS, and if you think that you're going to have a problem just filing on time, you can qualify for an extension a six month extension, and they'll give it to you. No questions asked, Hey, I need a six month extension. You fill out this form, you send it in, you got your six month extension. I have done that on more than one occasion when I've been super busy around the time of , uh, of tax season or a flood , I needed some more time to work it out. The challenge with that is even though you've got six extra months to send the forms in the payments are due April 15th. And so if you, if you, you can, you can make an estimate of, okay. I think I owe a hundred dollars, send that money in on April, on April 15th or else you'll get hit with penalties and interest charges for, for , for late payment .

Speaker 2: 10:58

And if you send, if you accidentally like send less money than you actually owe, then

Speaker 4: 11:04

We're going to get, you're still going to get hit with, Hey, you, you said a hundred dollars. You said it said $150. There's going to be an interest charge and penalty for sending $50 less. Well, I can't say it . Look, try to work that out.

Speaker 2: 11:21

So if we're talking, if you have to estimate overestimation is the thing ,

Speaker 4: 11:28

Um, you want to be as accurate or close as possible. And so if you're off by 20 or $30, they might hit you with a fine or some interest. And it, it, it won't be that much, but you gotta try to be close. You gotta have a good day .

Speaker 2: 11:41

Okay. So what, what do I use to complete my taxes?

Speaker 4: 11:47

So there's three basic ways to do it. Uh, one is to go to the website, www.irs.gov and download the forms. You need 10 , you know, all the forms that the IRS has, you can get access through their website. So the forms are there. The instructions on how the fill out the forms are there. And they even provide you time estimates on how long it should take you to do. Um, you know, but it's up to you to interpret those things. So, you know, the other thing you might need is a calculator , uh, or , or your laptop to figure out some stuff. The next method is using software online tools. This is where things like terrible tax H and R block TAC at tax act, tax layer, you know, a lot of online and software tools that essentially walk, you allow you to walk yourself through the tax form and they automatically calculate the tax. They just say, you know, did you get married this year? Yes or no. Did you do this? How much money do you plug in? You plug in your data. And it calculates the , the, the answers for you that, that, that is actually, you know, something that's very useful and you can even do it in some cases, you can do it on your phone. So that's cool. But the last method is just collecting all your material and handing it off to a professional, you know, someone that is experienced at doing, doing taxes , uh, that one costs the most. And I went from least cost to the most expensive , uh , that one costs the most. But, you know, there might be someone in your family that does taxes. You know , if you're just starting out, getting a parent to help with your taxes, that's something you can do as well.

Speaker 2: 13:34

So doing it yourself free, the software software has free versions though, right? Yeah.

Speaker 4: 13:41

Well, there , there, there are free calculators. Uh, the, the actual, you know, if you're going to buy the soft, if you're going to do the software, they're usually going to say, Hey, it's going to cost you 2034 . It's going to cost you something for the software. Um, uh, now the, you can, you can file for free. They allow you to send your, your IRA, your, your completed tax form to the IRS for free.

Speaker 2: 14:13

Okay. And then the tax professional is expensive, relatively

Speaker 4: 14:18

Rattler . Yeah . In comparison. Now , now, for some, if some of you that have been established for awhile and, and, and, and have some income, you know, this is a, trade-off where you're going to spend a couple hundred dollars at a time , but you're gonna get the time back.

Speaker 2: 14:33

All right . So what are the tax filing basics?

Speaker 4: 14:36

So we've, we've discussed a lot of this already collecting your information on income and expenses, the siding, how you're going to complete your taxes this year, whether you're going to get the forms yourself, you're going to use software tools, or are you going to go to professionals, understanding F your filing status that when you should know already understanding whether you're in a file as a dependent or not , uh, and then the issue of, Hey, am I going to take a standard deduction versus itemize ?

Speaker 2: 15:04

Okay. So how do you know whether you should itemize or take a standard deduction?

Speaker 4: 15:09

All right . So for, for folks that are not dependence , you're in a you're , you're out there, you're, you're working, you're recent college that you're working. You can take the standard deduction and it's worth $12,400. So that reduces your gross income by $12,400 to get to your taxable income. If you have expenses in those categories that are, that is worth more than $12,400 or $12,401, then you should itemize, if not, you're better off taking the standard deduction. And it's just that simple. Now, people who are dependents can also take standard deductions. Their standard deduction is a little bit diff and, you know, because the expectation is that as a dependent, you're , you know, you're not working a full time job, so you're not going to have a large salary. And so if your under that, if you made like under $12,400, you know , that are , is in standard , the regular standard. If you made under that, and you're a dependent, you can deduct your standard deduction is worth your total earned income, plus $350. And what that effectively does is reduce your taxable income to zero. So you can get all your money back.

Speaker 2: 16:36

Yeah . You can get all your money back. Yeah.

Speaker 4: 16:37

Things, things will be very simple if you sustain it.

Speaker 2: 16:41

Okay. So how do I complete my taxes for my first job in college?

Speaker 4: 16:47

As we said, the steps are the same, collect your information, decide what tools you're going to use, and then walk yourself through the form forms like a questionnaire with multiple parts. Part one is your personal information, name, address, date of birth, social security, that kind of information. Part two is where you put your income and then your deduction, whether it's the standard deduction, which is pretty simple. Or if you're going to itemize it, we're going to itemize, you're going to need another form, but, you know , w we'll talk, we can talk about that in another episode. Uh , and then you get the, between those two, you get your resulting taxable income, and then you're going to calculate your tax based on that taxable income. So if using software it's already done for you, if you're taking it to professional, they're going to do that for you. If you're doing the forms yourself, there's things called schedules that say, Oh, I made this much money between twenty five thousand five hundred and five thousand six hundred , the taxes, this that's the number that you put on , on your, on

Speaker 2: 17:53

Your form. It's like a chart, right?

Speaker 4: 17:56

And then the next thing you do is you compare how much was already withheld from your pay versus how much you owe. And if w if the, the amount that's already been withheld is more than what, what you owe . You get a refund. If it's the other way around, if you still open more than was withheld, you got to send the IRS a little more money. It's that simple, then sign and submit your docket .

Speaker 2: 18:23

Right? Okay. So tax credits come after you calculate your taxable income and deductions are what reduces your taxable income. Right.

Speaker 4: 18:33

Right. Right. And , and , and tax credits are a dollar for dollar reductions in the actual tax tax itself.

Speaker 2: 18:44

Okay. So, yeah, that , um, that was a lot of information. Uh, those are the basics, the real, like basic basics, but we will be doing, I will be putting chapter markers with each of the questions that I asked . So you can go back and , um, relisten to hear some of the information. And then also we're going to be introducing a special episode, 1.5 , um, with just answering your listener questions. Cause I know taxes are a lot and we could basically do this whole podcast on taxes and still have more to say, but yeah. Send in your questions to us , um, by email, at [inaudible] or by Instagram, at EFS podcast. Um, and yeah. Do you have any more tips for our listeners, dad?

Speaker 4: 19:34

So I'm just going to essentially tell you not to make the mistakes that I was first starting out with my taxes is number one, start early, your W2 start coming, hitting your mailbox or coming to you in late February. So you should, if you don't have them, you need to ask for them and you need to start collecting all your stuff. You want to start early and finish early to give yourself time to review and make any changes.

Speaker 2: 20:03

Yeah. Because what if I started my job in March? Like what then?

Speaker 4: 20:08

Uh , so, all right . So remember taxes are for the prior year, you're going to the taxes that we do now, or for all of 2020. And that's the tax year is typically January 1st to December 31st. Now there are ways you can, you can make other arrangements, but that's the standard for it .

Speaker 2: 20:30

So have you started your job in 2021? You're not filing on in April, April. Okay. You're filing April 20, 22. That's right . Oh, okay. That makes a lot more sense. Well, they don't tell you that April's not in beginning of the year. So,

Speaker 4: 20:49

So co you know , collector, collector , uh, documents, keep your tax documents together. And did I say review your filing again before you send it ? You got it ?

Speaker 2: 21:03

I don't, yeah. I don't think you said it. Say it one more time. Say it one more time.

Speaker 4: 21:05

Review your work again. This is just like, checking your answers on the test before you hand it in , uh, sign your document. That's usually not a problem for , um, uh, for software or , or , or online submission. Cause they usually make sure that you do some sort of electronic signature and then keep records and schedules and supporting documents and then make copies. How long should you keep the copies for them? A minimum three years. Uh , most of the publication say anywhere from three to seven years , uh , simple with simple taxes. It three years should be enough. Okay.

Speaker 2: 21:42

Okay . And then also, how long did it take you down when you were first starting out like your first job?

Speaker 4: 21:48

Uh, so , uh , I was in the Navy man . That was my, well, actually not that I did. I D I did fill out taxes while I was in college. And that took me for , it took me forever, but I got all my money back. That was that's where, but when I, when I was in the Navy , um, I waited till , uh, December, or excuse me, not December, April 15th to fill out my taxes. It took me about half an hour. It took me, took me about a half an hour to do, and then I had to run around and trying to make copies of it. So, you know, what , what I did then was I made, I filled it out twice. And so it took me half an hour to do the first time. And then , uh, you know, I I'd made another copy for my records. And then I sent it in, don't do that,

Speaker 2: 22:35

Do it like half an hour, do the half an hour on like April.

Speaker 4: 22:39

Yeah. Give yourself some time to, to, to, to, to look at it again. Oh , now resources to , to, to help you.

Speaker 2: 22:48

And you said irs.gov today.

Speaker 4: 22:52

Now a lot of those software , uh, names that I've mentioned , uh , have a lot of online tax calculation tools that help you, that essentially walk you through it , uh, to give you an estimate. It's not, it's not the complete version of , uh, of , uh , of the tax form, but it gives you an estimate and that's, that's actually actually good to do , uh , before taxes . And then YouTube has videos. You'd be surprised at how many videos there are. Yes, you can learn to do anything on YouTube. And then there's, you know, volunteers out there , uh , uh, volunteers and income tax assistance , uh, make the effort to educate yourself for , uh, in, in , uh, in books and other publications. Um, and talk with somebody, talk with somebody, you know, and trust about specific tax aspects aspects. Hey, how do I do this? This is my first time doing, how did you do that ? That , you know , it's gotta be somebody you trust, right ? You know , you don't want to give up your entire financial life unless it's somebody that's already knows your entire financial life. But I expect, I expect to talk to you about taxes, right ?

Speaker 2: 24:06

I start filing taxes, which will be not this year, at least.

Speaker 4: 24:12

No. All right . I think that's it for our show. I want to thank everyone for listening, and I want you to be sure to join us again next time where, you know, first we're going to answer questions on taxes, but then after that, we're going to start discussing budget .

Speaker 2: 24:27

Yes. And if you have questions for us about this episode, about anything related to personal finance or economics, or just about a topic that you want us to cover, you can email us@efcspodcastatgmail.com and follow our Instagram and Twitter, both at E F E S podcast. Thank you so much for listening

Speaker 4: 24:46

Everybody.