Life Lesson 15: Taxes
Learn the Lingo!
Excise taxes - Are taxes paid when purchases are made on a specific good, such as gasoline or cigarettes.
Progressive tax - A progressive tax means that as your income increases, you pay a higher percentage of your earnings as income tax.
Flat tax - A flat tax means you pay the same percent on all your dollars
Deductions - Money spent on certain items or expenses that, IF YOU CAN PROVE, will be allowed to reduce the amount of income you will pay taxes on.
Extension if you can’t get your documentation together in time to file your taxes by April 18th, you can ask the IRS for a longer period of time, BUT YOU STILL HAVE TO SEND THE AMOUNT YOU MIGHT OWE as an estimated payment by April 18th. When you file you will either owe additional, or get a refund of anything you overpaid when you filed the extension with payment.
Filing deadline - Personal income tax return is due on April 18. Business and other legal entities
Standard deduction - The government assumes everyone has a certain amount of deductions that you should not have to pay taxes on. Therefore, instead of everyone having to send in a bunch of little receipts, the IRS gives you the option of taking a set amount regardless of what you spent. It is an inflation-adjusted number. For the 2021 tax year, it is $12,550 per person, with variations for older people, single parents, etc.
Itemized Deductions – If you have more deductions than the standard deduction of $12,550, and you can prove it, then you can claim more than the $12,550 on expenses in the allowable categories and save more money on taxes. The most common items are state income and property taxes, charity, interest on mortgages, and student loan interest.
Withholding – The estimated taxes taken out of your paycheck in anticipation of what you might owe when you file your taxes. When you actually file your return, if you had too much withheld, you will get your money back (a refund). If you don’t withhold enough, you will owe and have to send the IRS or your state the difference.
Refund – After you file your taxes, if you had too much money withheld, you will get the difference back.
Marginal/Top tax bracket – Based on how much income you earn, some of your money is taxed at each level of income. The highest level you are income is at, is your top tax bracket.
Blended Tax Rate – Since some of your money is taxed at several different levels, your average rate is much lower than your marginal tax rate.
Your tax return and money are due to the IRS on April 15th or are they? If April 15th falls on a Friday, due to Emancipation Day celebrated in Washington, DC, taxes are due the following Monday, April 18th. If April 15th falls on weekend, you have till the Tuesday the 17th or 18th.
Who says taxes aren't simple?!
Why Should I Care?
Taxes are complicated and there are a lot of moving parts to understand. Even if you are working a part-time job, it's important to understand taxes. Each paycheck, money will be withheld from your paycheck. Did you know that even though you probably don't have to file, you can file and get those taxes that were withheld back? Isn't that worth knowing?
Take the Quiz!
Who has to file taxes?
If you have a certain amount of income, you have to file taxes. Not all money is income. Money given to you as a gift or a loan is NOT income. Money received from working (earned income) or money received from investments (dividends, interest, or capital gains) are all income. But the IRS says people who don't have a lot of income don't have to file a tax return. In 2021, if you were single, under the age of 65, and you had less than $12,550 in income, you didn't have to file a tax return. BUT if federal or state taxes were withheld from your paycheck, you can file a tax return and possibly get a refund of those taxes back (federal taxes yes, for the state, it varies by state.
Whats the best way to file Taxes?
File them for free!
As you get older and your taxes get more complicated, you might need to hire a tax preparer or accountant to file your taxes, but while your taxes are simple, you can do them for free using the IRS free service and many states have a free service. Check it out on the IRS's website:
Click here to see a sample tax return! Click comment boxes for extra info on the return
States have taxes too!
Most states also have an income tax. Currently, 9 states do not impose an income tax: Alaska, Florida, Nevada, So. Dakota, Texas, Washington and Wyoming New Hampshire and Tennessee currently have no income tax but do impose a tax on investment income. While it might seem cheaper to live in a state without income tax, these states still have the same expenses as the others and just choose to generate revenue from other forms of taxation: property taxes, sales taxes, sin taxes (cigarettes, alcohol).
What does your state charge in taxes?
The Standard deduction isn''t so standard!
Despite it's name, the amount of the deduction you can take to reduce your taxable income changes based on whether you are married, single, old or young and dependent on someone's else's tax return (typically your parents). Check it out!
* Single $12,400
* Married Filing Separate -- $12,400
* Married Filing Joint - $24,800
* Head of Household
(single with a child) $18.650
If you are a dependent on someone else's return, your standard deduction is the higher of $1,100 OR your earned income + $350
And if all this isn't standard enough, add $1,650 per person to the above deduction if you are over 65 and another $1,650 if you are blind!
Progressive Tax Chart for 2022
Remember, not all dollars are taxed at the same level. If you are single, the first $9,950 are taxed at 10%. Any new dollars over $9,950 are taxed at 12% but only for the money above $9,950. Don't worry about going into the next tax bracket - it won't apply to all your dollars!
BONUS QUESTION - Would you rather have a tax DEDUCTION or a tax CREDIT? A Tax Credit!
A tax deduction reduces your taxable income. If you have no deductions, the IRS allows you to use the Standard deduction of $12,400. A tax CREDIT is a dollar-for-dollar reduction of your tax bill, like a coupon. If you owe $2,500 in taxes and get the $1,000 American Opportunity Credit for going to college, then you would only owe $1,500 in taxes. A $1,000 deduction would just lower your taxable income by $1,000. Tax credits are given based on income for activities like going to college, paying for child care, or contributing to a retirement account. Think of credits as a little bonus to encourage you to do certain things like going to college or to help cover the costs of certain things like child care.
income tax can be a lower percentage for people that make less income, but sales tax is the same amount for everyone and might be a bigger burden for lower-income people in a state that doesn't charge income tax. Which is more fair?
If you were designing a tax plan, based on the discussion in the lesson, would you install a flat tax where everyone pays the same percentage of their income in taxes or a progressive tax where people who make more money pay a higher percentage of their income in income taxes?