Everyday Finance and Economics with the Siglers
Everyday Finance and Economics with the Siglers
EP 01.5: Taxes Part 2- Listener Questions
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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 a continuation of our tax episode, where we dive back in and answer listener questions about tax day which is May 17, 2021. We give a quick recap of the basic information we went through last week about how to complete your taxes and what tools you can use to do so, but also go into more specific questions such as what happens if you can't pay, what to do if you get a phone call claiming you owe money to the IRS and more! As always don't be afraid to reach out with any questions by email, and be sure to join us next week when we cover budgeting!
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Introduction
Speaker 1Hello, and 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 practical advice on how to get started and be smart with your money. We're your hosts, Glenn and Christina
Economic News
Speaker 2Sigler. So Christina, what's going on in the economy this week.
Economic Term of the Episode
Speaker 1All right. Here's what matters this week. Um, the Suez canal is blocked and that is a major problem. Uh, the Suez canal is a very, very narrow man-made canal that connects the Mediterranean sea and the red sea. And that's how 12% of all the world's shipping gets from Europe to Asia. It's a very important waterway, uh, because before that, you had to go around the Southern tip of Africa to get things from Europe to Asia, and that's just really not convenient for anyone. So it's responsible for about three to$9 billion, billion dollars worth of goods per day. And right now it's blocked by the 1,300 foot, 200,000 metric ton ship the ever given. And there's a lot of chips backed up in the Suez canal right now. And some companies have even decided to send their ships around the Cape of good hope, um, around the Southern tip of Africa, which adds weeks to the journey and is very, very expensive. So this is going to end up raising the prices, at least a little at, it could be a lot depending on how long it takes to ever given to get unstuck. Because right now they're trying to like dig and expand the whole, but it's, it's not, it's a very large ship. And the economic term of this episode is a tax credit. A tax credit is a tax incentive, which allows certain taxpayers to subtract the amount of the credit that they have accrued from the total that they owe to the state. So it was something that lets you deduct the amount of tax that you owe, basically. All right, dad, I think it's time to get into this week's topic. What are we talking about today?
Speaker 2We're talking about taxes again,
Recap: What are taxes?
Speaker 1Really again. All right. Well, let's, let's give our listeners a little bit of a recap from last week because last week was a lot. Um, and the first question is what are taxes? The answer, uh, taxes are our contributions to fund the federal and state governments for the services and support that we require as citizens.
Speaker 2Yeah, and the process of filing our taxes is simply when it's simple. When you think of basics for all of us who are wage and salary earners, our employers send the government, some of our wages, each pay period for our tax applications, completing your tax forms allows us to calculate how much we would hae. We should know in taxes based on our income and living situation. This allows us to compare what has already been paid into the government on our behalf and how much we really owe. If we paid him more than we owe, we get a refund. If we owe more than it's already been paid, we have a tax bill and that's it.
Last time we discussed how to complete our taxes can you remind us of that again?
Speaker 1Okay. Well, last time we discussed how to complete our taxes. Can you remind us, can you remind us of that again?
Speaker 2Okay. There are three ways to complete your tax forms. One is fully manually. That's the hard way, uh, download your tax forms you need and instructions go to the IRS website, ww.irs.gov. Fill them out. Forms are also available at the post office public libraries. This can be hairy for many, but there are publications and online resources to help.
Speaker 1And our podcasts, our podcasts is also one of those resources and this, this option is free. Let's just not forget to mention that that is true.
Speaker 2Uh, software, software, or online filing tools, terrible tax H and R block tax act, tax layer. Jackson Hewitt are among the many tools that can be used to complete your taxes. These tools typically walk you through the forms in an interview slash questionnaire approach, uh, and it even includes additional guidance and the details of the rules within the software online tool to help you the last and probably the easiest method for everybody is just gather all your stuff and hand it off to a tax professional. Um, you're, you're gonna spend your time just gathering your information, but then after that, your interview with the, with the individual about your, your living situation allows you to rest at ease because someone who does taxes for a living is now completing your taxes. Those, the options go from the least expensive to the most expensive, right. Uh, but there are even some free options. And if you've got simple, simple situations, uh, you can even file online.
What are the tax forms like? Is this a big questionnaire?
Speaker 1Yeah. Okay. So what are the tax forms like actually, like what is it like to fill one out? Is it just like a questionnaire or what,
Speaker 2Yeah. If you're completing your taxes manually or through the software, uh, online, um, it's similar to compete, completing a questionnaire each year. The first section is your personal information, your name, where you live, so security number, single filing status and things of that nature. Uh, the second section is where you input, uh, your, all your income data, uh, W2 from each junk company. You, you work for, uh, 10 90 nines, financial statements from your investments, uh, activities and for your bank accounts, uh, after that, you're going to put in your deductions, whether you're, uh, whether you're going to stand, use the standard deduction, or you're an itemized deduction that comes in here this year from, for, for the vast majority of people, Oh, you're gonna use the standard deduction. Um, roughly 85 to 90% of all people use the standard deduction for single individuals is 12,404 married folks filing jointly it's 24,800. The sum of your income, less your deductions results in your taxable income,
Speaker 1Less means minus yes, it's attractive.
Speaker 2Yes. Tax software calculate calculates this stuff automatically manual paper filers. You're going to have to do some math. You bring a calculator and there are also tax tables and schedules within the, within the instructions to help you. If you're doing it manually,
Speaker 1It's helpful chart. All right,
Speaker 2After that comes identification of any tax credits for which you qualify. And that, that takes a little bit of research because there's a lot of different tax credits. Uh, so you know, you'll have to read through, uh, and research whether you qualify for those items, some of the more popular ones we'll discuss a little bit later. Um, remember tax credits are direct reductions of the amount of taxes you will. So if it said you owed$5,000 in taxes and you have a$600 credit, your tax gets reduced by$600. Okay. Okay. After, after that, it's just math. How much has already been paid in through withholding versus how much
Speaker 1From like your paycheck, right.
Speaker 2That's exactly right. Okay. And so we, when you do that comparison, you've either had, you know, more money withheld. So you get a refund or you've had less money withheld and you have to pay the IRS a little
Speaker 1Bit of money. It's never exactly right. Is it,
Speaker 2Um, you know, for, for most people it's never exactly right on, but you want to be, you want to be close that, that that's you, that's your goal to be, uh, close. Most people, um, have more withheld than tack, then they're going to owe in taxes and, and, uh, you know, okay. So you're, you're not going to get a surprise, a bad surprise, but the question that you have to ask yourself is why are you having that much withheld because it's an interest free loan to the federal government. And so you, you want that to be, uh, close.
What resources are available to help if I get stuck, or need to learn more?
Speaker 1Yeah. Yeah. And this is just a reminder, everybody, that tax day for 2021 for taxes for the previous year of 2020 is on May 17th. This year. It is not April 15th. Like it normally is, it is not May 17th. So your taxes are due May 17th this year. Uh, what resources are available to help if I get stuck or need more information. Okay.
Speaker 2Okay. There are a lot of resources available for help. Again, online ww.irs.gov. You can, the IRS now that said, yes, yes, you can. That's that said there are in a, there can be some very long wait times when you try to call IRS during tax.
Speaker 1Yeah. That's a long automated system. Right.
Speaker 2You can talk to folks and, and you can't get real-life folks to help you. Um, additionally tax calculators are available, as I said before, online from, you know, various, uh, some, some of the various software providers, um, and also embedded in those tools, uh, are, are things that can answer questions or even get you in touch with a tax professional through the software. Um, and then of course there's always YouTube. Yep. Um, there are literally dozens of, of YouTube videos out there to help folks walk through some of these tax forms. Probably more than that probably, but I couldn't look at all. So I just took a look at a few of them. Um, and, and they, you know, they do a good job of walking you through, um, walking you through the forms. You gotta find one that, that speaks to you. That's teaching you the, the, this forms in a way that you can understand that, but that that's also a resource that's available and there's volunteers out there as well.
Do I have to file taxes?
Speaker 1Okay. Done with everything that is deemed as mandatory. There's that one eternal question, which is, do I have to do I have to file,
Speaker 2Um, in general, if you, if you make less than$12,400 in salary and wages per year, per year for, for 2020, you don't have to, um, now that's going to leave money on the table, you know, because if you are, if you earn less than that amount of money, you would likely get virtually all of that money back in refunds. And so that's, you know, that's really one of the reasons you want to, uh, file your tax.
Why does the IRS have us file basic income tax information when they know how much we make? I get it for people with complex tax returns but not for just a normal income tax, Why cant they just send me a refund or a tax bill?
Speaker 1Okay. So why does the IRS have us file basic income tax information when they know how much we make, um, I get it for people with like complex tax returns, but not for just a normal income tax. Why can't they just send me a refund or a tax bill?
Speaker 2And so-so th th there's a lot of truths in that. So, uh, employers are required to send in your information when they send, uh, you know, when they send you your tax information, they're also sending the IRS, your tax information to the IRS can really figure out how much you earned in salary wages, but they may not be fully aware of the life situations that create, uh, changes in our taxes, changes, marital status, job, status, living situation, birth of kids, charitable deductions, and many more all impact our tax situation. You as the filer have a vested interest to make sure that those things are up to date so that you can minimize the tax that you owe. Because if the IRS, uh, you know, does that for you, you might not like the results. They might not include all the things that, uh, would benefit you in terms of minimizing your taxes. So you don't have to do it, but you have a vested interest to do it. This is your opportunity to get here.
Who shouldn’t file for taxes?
Speaker 1Okay. Uh, who shouldn't file for taxes?
Speaker 2So that's an interesting question. Who should,
Speaker 1Yeah, because I feel like, well, for me, I shouldn't file for taxes cause I don't make any money, but
Speaker 2All right. So that is, um, if you make less than 12,400 per year, um, without other sources of income from training or investments, you may want to consider not filing notice. I said, consider example, if you're single and earned only$6,000 a year, and you get a W2 that indicates, uh, only$25 with were withheld from your income, you might want to consider if it's worth your time for file a tax form to get back 25.
Speaker 1Yeah, yeah, yeah.
Speaker 2And so, but each individual has to answer that question. Uh, would you file a taxes if the, if$50 were withheld or$150 or 300 were, where, where would you file Christine?
Speaker 1To me, any money at this point is money that I need. Um, it's the college student mentality, but I, it really just, I guess what you're saying is it matters like how much the money on the table means to you, right? Like how much do you need it versus how much do you need your time back? Right. And value of money.
Speaker 2Right. Well, th that is true. Yeah. But by not filing, you're essentially gifting this money to the IRS and federal government. The time trade off might be worth it to you. Um, and so that's the bigger thing that you have to consider ma'am as I said before, um, you know, if there are such, there might be situations where, uh, the IRS may think, Hey, you made more money than, than$12,400 last year. Um, so we think you owe a lot more taxes. If you file your taxes, you you're putting on the record. Here's how much money I made from all my sources. And, and, and that, you know, essentially reduces that up, you know, reduces that, uh, possibility of the IRS saying, Hey, you owe a whole lot more.
What do I need to file my taxes?
Speaker 1Okay. So what do I need to file for taxes?
Speaker 2Okay. So we talked about this the last time, a little bit, but we'll recap, quick repo, personal identification, information, name, social security number, address, filing status, your income information, salary, and wages from all your W2's from all your workplaces bank or financial institution statements, including gains and losses from any trading activities you had, uh, miscellaneous information, income information, all your form, 10 90 nines, and 10 98, 10 90 eights are things for college students. Hey, you, you went to college 10 98. Sometimes your parents might be using that instead of you. Um, and, and the any self-employment information. Did you do any gig work
Speaker 1And stuff like that? Do you use them 10 98? Uh, Oh, wait, I sent it to you. Yeah.
Speaker 2Yes. You did send me your 10 98. I have your 10 98.
Speaker 1So that must be for dad.
Speaker 2Now, if you itemize, you might, you need, uh, you know, some additional information. So medical expenses, information on medical expenses, charitable nature donations and cash and goods, uh, home ownership information. Did you pay property tax on your, on your house? Was there any mortgage interest on your, uh, on your house and then any state taxes that you paid, um, you know, sales or income tax property, uh, property taxes. Um, and then of course you're gonna need the tax forms. So, uh, th th th that, that in a nutshell are the things that would, um, uh, would be needed by the majority of the folks. And if you've got more complex tax situations, you're obviously going to need some, some additional information.
Speaker 1Wait, sales talks like receipts for buying stuff.
Speaker 2Uh, you can do it that way. You, you, you, there, there's actually a couple of ways to do it. You can actually sum up the sales tax from everything that you bought.
Speaker 1Oh, so every single receipt I need to say,[inaudible],
Speaker 2That's one way to do it, but there, but there are also, the IRS has calculators that say, okay, if you made this much money, you probably spent, you've probably spent this much in the sales tax would be this.
Speaker 1Did you ever do the safer seat methadone? I have not done that yet. It seems. That seems like too much. Every single time I bought food.
Speaker 2Yeah. Now, so I'm not doing that, but there are, um, if you buy big ticket items there, there's essentially a blended method. You can say, I spent all this money on these big ticket items and then the rest, you know,
Speaker 1Estimate. Yeah. So like you bought a Maserati. No, I did not. Well, I mean, but that has a lot of sales tax though.
Speaker 2I'm sure it does, but I would not know.
I got phone call claiming I owe money to the IRS, what do I do?
Speaker 1I was just, it was just an example. Yeah. Your mom would shoot me. I wonder what yeah. Don't ever do that. Um, anyway, so let's move on to a subject that I think we all can relate to. I've gotten calls from the IRS and I don't even, I was when I was a minor. So if I get a call from the IRS, claiming that I owe money to the IRS, what do I do?
Speaker 2So, first of all, I'm going to clarify that statement.
Speaker 1It wasn't from the IRS, I got a call from a scam. It was a scam. Let's just, if you get a call from the IRS, the IRS is not calling you. Let's just make that.
Speaker 2Yeah. Yeah. Unfortunately, there are a lot of fraud attempts during taxis. The IRS does not call IRS. If they're notifying a taxpayers, you're going to get a notification via the mail. Not text, not email, not phone, not social media, no mail. If you receive a call or a message claiming that you have to urgently respond for debt collection or that they're, you know, they're going to be some horrible consequences, uh, to you for that, right? Don't give them your information.
Speaker 1Don't click on any links. Don't click on it.
Speaker 2Um, you know, get off the phone with they're on the phone. If you're on the
Speaker 1Phone with them, hang up,
Speaker 2Hang up, report them, report them to that phone number. Do not give out your social security number. Do not give out any other details. You're better off just not answering
Speaker 1The IRS has your address, or they will go through the cause. Think about it. The postal service is like a United States, federal government institution. Well, so that's official. That's official.
Speaker 2Well, look, that that is the method that the IRS uses to contact. Uh, um, they, they have, they want to have a notice, uh, an official notification record and you can trace that through
What are some types of tax credits?
Speaker 1The mail. Yep. All right. So what are some types of tax credits? We talked about this a little bit earlier, but let's, let's really get into it.
Speaker 2So again, as you said it before tax credit reduced the amount of tax you owe dollar for doubt, and you may qualify for specific tax credits based on your situation and income level. And there are three in general, there are three types of tax credits. They're non-refundable tax credits, which can reduce the tax that you owe to zero, but will not allow you to get money back. And then there's a partially refundable which can provide a refund for some portion of the tax credit. If you meet all the qualifications. So it may say, Hey, we can read, we can reduce your income$2,500, or excuse me, not reduce your income, reduce your tax$2,500. But if you have zero tax that the credit is, you know, a thousand, so you can only get a thousand dollars back. And then there are fully refund fundable. Those that error enable a refund of the full amount of the credit. If your situation warrants, some of the more popular tax credits out there, the recovery rebate credit, which is in effect now, um, uh, part of the, uh, American recovery plan. And, you know, there was tax credit, there's a tax credit. If you haven't received, um, monies from the stimulus package in January and March, you can claim a tax credit and actually get your money back, or, you know, it'll either reduce your tax or it can provide you with, uh,
Speaker 1Oh, that was, yeah. That was a big problem. Cause like some people got either the first check and didn't get the second one or didn't get any checks, although they qualified. So yeah, that's what you should do. Will it, will it do both the checks or just one?
Speaker 2Okay. I think it will do both. Um, but you know, from what I am reading people are typically only having problems with one or the other map, not both. Okay. But you know, there are a lot of different situations out there. Um, so some other tax credits that are popular earned income tax credits, if you have extremely low wages while working full time, and in certain situations you can get earned income tax credits, child tax credits, childcare, or dependent care tax credits, saver, tax credits to encourage people to save for retirement. Um, um, if even if they have low income, uh, energy saving credits to build, you know, to get people to, um, invest in, in green, uh, solar panels and all sorts of things that improve the energy efficiency of their home, you can get a tax credit for that, you know, uh, and also tax credits for senior citizens, uh, and foreign tax credit. So if you pay tax, if, if you make some money that from, from, from an international, um, um, source, sometimes you have to pay taxes to that country. And so your us income tax can get a credit of the amount of tax that you paid to another.
What are deductions?
Speaker 1Oh, that's nice. Okay. Um, what are deductions again? We talked about this a little bit last time.
Speaker 2So taxes re uh, tax credits reduce the amount of tax you owe dollar for dollar tax deductions, reduce the amount of gross income that you have that will reduce the amount that is taxable. Okay. You know, most people, as I said before, most people use the standard deduction, which just requires you to say, Hey, I want to use the standard deduction. You don't have to document anything. You just say out, I want to use it. And you qualify for that. Okay. And again, if you have expenses in favorite categories that exceed the value of the standard deduction, you should itemize,
Speaker 1Okay. So what expense items qualify for deductions
Speaker 2And, and just like tax credits where there's lots of them. There are lots of expenses that qualify for deductions for deductions. Some of the most popular are student loan interest deductions. So college students should be aware of that charitable donation, uh, deductions for cash and goods, mortgage interest, medical expenses, state, and local, uh, tax expenses. If you're, if you go into education, educator, expense, deductions, health savings, account deductions, uh, even deductions for contributions to your 401k.
Speaker 1Huh. Okay.
Speaker 2There are often limitations or special qualifications that you must meet to qualify for some of these deductions. Um, for example, an IRA deduction, well, not, not just prove it. You have to meet these situations to qualify, to be able to take it. So for an IRA deduction, you have to work at a place that doesn't have a 401k. So if, if the place that you work has a 401k, which is a retirement plan, then you can't use the IRA deduction.
How much does it cost to complete my taxes? Are there free services?
Speaker 1Okay. All right. How much does it cost to do taxes and are there free services? Well,
Speaker 2For most of us, the complexity of our tax situation will drive costs, doing your taxes yourself as free software and online tools, uh, from the major providers can provide, uh, can, uh, have, uh, a variation in the price range, free version. So there are free versions, but they are at those simplest, um, least complex tax situations, uh, that w w two wage earners standard deduction. Yeah. That, that can be free. Uh, but most of the software now starts at about$45 range in retail, but can go over
Speaker 1A hundred bucks per year, 40
Speaker 2And$45, uh, yes. For that year, for, for that years now you might get more than one use out of it. Uh, so, you know, if I bought it, then I could use it for mine. I could use it for yours if you're filing independently. Um, and, and that would work. Okay. Oh, I forgot tax prepares tax prepares for simple type of situations. They can be in the 50 a hundred. Well, it's going to depend on the locale. They can. And so, but that's going to be the most expensive. Um, and, and typically folks with more complex situations, we'll, we'll venture off into, into that arena where it can actually go into the thousands of dollars. But for, for, again, for most people, even with simple, uh, simple, um, tax situation, it, it won't cost that much more than the, um, software. Okay. Because I'm just going to give you a secret, they use software to,
Speaker 1Oh, they have to have people out of business.
Speaker 2They have, they have, you know, some different songs.
Do I have to file state taxes?
Speaker 1Yeah. They have professional grade software. Okay. Uh, do I have to file state taxes
What if I live in work in one state and live in another? Do I have to file 2 state returns?
Speaker 2And that answer's going to depend on your state? Cause not all States have income tax requirements, uh, Florida doesn't um, um, and in lots of States that, that don't, uh, so you're going to have to check with your, uh, your home state of record to find out what the requirements are.
Speaker 1Okay. Uh, what if I work in one state though, and live in another, do I have to file two state returns?
Speaker 2Okay. So now, now you're trying to get complicated on that. Typically you're going to be required to pay tax on the income that you earn in each state. So let's say I live in Tennessee, but I earned my money in Mississippi. Well, if Mississippi has a state income tax, well, I'm going to be required to pay something in, in, in Mississippi, um, States that are on borders, where everybody pays tax, they work out arrangements where, all right, if you earned the money in one state, um, you don't have to pay the tax twice there, again, like it like the foreign tax credit. It's sorta like a tax credit for paying your taxes, Mississippi then, and Tennessee, I wouldn't have to, um, uh, pay, uh, the tax.
Speaker 1So like you live in Jersey, you work in New York city. Yeah. You're paying tax for New York or New York. Well, they may have an arrangement, have arrangement
Speaker 2Where you you're going to pay some tax to
Speaker 1Jersey, both. Okay. So in that case,
Speaker 2You're going to get it. It could be, uh, a portion, but you, again, now you got to go, those are state specific
What happens if I don’t file my taxes?
Speaker 150 different rules. Uh, what happens though? If I don't file my taxes. Okay.
Speaker 2Right. If you're due a refund, the IRS will just keep them out that you were
Speaker 1For two, three donation to the government.
Speaker 2You have three years from the original expected filing date to filing claim. Any refunds after that time, period, you forfeit any refunds. Yet. If you owe the IRS, they will calculate how much they think you.
Speaker 1Right. Right, right. Remember by mail, by mail, by mail. They're not calling you for it,
Speaker 2But this will include any penalties and interest on the unpaid tax bill. And if you ignore this, the penalty and interest charges can easily outweigh the original tax
What happens if I can’t pay the entire amount?
Speaker 1And they can come get that. The statute of limitations on that does not expire. So we'll just say that. Yes, that's correct. And what happens if I can't pay the entire amount?
Speaker 2Um, if you find that you don't have the resources to pay the, uh, the entire amount, you can contact the IRS and work out a payment plan. They can work with you to create a monthly payment and it'll include some interests. And, uh, from my research, their interest is usually less than, than loans or credit card interests
Speaker 1Because you, right.
Speaker 2And for the record, you can actually put your, um, there are ways to put your tax, uh, payments on your credit card. And some people do that, but if you, Oh, you know, and it's a significant amount and, and, and you don't have the money to pay it, you can work out a monthly payment plan with the IRS. And it's always better if you contact them first.
Outro and contact information
Speaker 1Yeah. Don't wait, don't make them send you again a piece of mail because that's how they're contacting you. All right. Well,
Speaker 2I don't think there's any more questions.
Speaker 1No, that's it.
Speaker 2So that's it for our show. I want to thank you all so much for listening. And, uh, I'm looking forward to you joining us again, where we will discuss.
Speaker 1Yes. And if you have any questions at all, for us, you can email us@efespodcastatgmail.com and follow our Instagram at E F E S podcast on Instagram. Thank you so much for listening. Take care, everybody.