When you make any money, Uncle Sam is that annoying family member always asking for a cut. It’s annoying that the government takes our money. But that money is used to help offset costs and funds programs like Medicaid, Social Security, and national security and defense (though I’m sure we all have opinions about where that money should really go). We gotta pay taxes as that’s the main way the federal government makes money.
If you plan on doing your own taxes, we’ll break it down for you, but you’ll need to get your tax documents ready, understand some basic tax lingo, and file on time either for free or using a paid service.
Pull Your Paperwork
First, you’ll need to get your W-2 and/or 1099. Your W-2 will come from your employer and 1099 from any side hustle/independent contractor work and show your earned income.
You’ll also need to get any interest statements from any financial accounts, such as a savings account or brokerage account, which will be form 1099-INT and is considered unearned income. You might also have the 1098-E form which outlines how much you paid in student loan interest. The good news is you could be eligible to deduct up to $2,500 in student loan interest (take that Sallie Mae!). Here’s some more info on that.
Having your previous year’s tax return, records of contributions to retirement, and receipts for any tax-deductible items will save you time and those oh shit where do I find that moments once you sit down to file.
Talk the (tax) Talk
One of the main roll-your-eyes activities during tax time is figuring out what all the jargon means. Here are the boring terms you should get familiar with (and then can immediately forget until next year).
Tax credit: A tax credit helps you lower the amount you owe in taxes dollar-for-dollar. So if you have a $1,000 tax credit, you’ll save $1,000 in taxes. If you owed $2,000 in taxes, with this credit, you’d owe only $1,000.
Tax deduction: A tax deduction can lower your taxable income, which may mean paying less in taxes. If you earn $50,000 per year and get a $2,000 deduction, you’d be taxed on $48,000.
Tax liability: A fancy term for how much you owe the IRS. If you owe $3,000 to Uncle Sam, your tax liability is $3,000.
Tax bracket: Federal income tax brackets require you to pay between 10 and 37 percent of your income, based on how much you make. Check out current tax brackets here. You’ll also want to know your local state income tax rate. If you make $50,000 per year and you’re a single filer, your base tax rate is 22%. We have a progressive tax system, so everyone is taxed at the same rate within these brackets.
Adjusted Gross Income (AGI): Your AGI is actually more important than your gross income. AGI refers to Adjusted Gross Income, which is all of your income minus certain deductions such as your retirement contributions. Your AGI is important because any credits and deductions typically have AGI limits. It also affects if you can use the IRS free file tool. If your AGI is more than $72,000, sorry, but you’ll have to pay up.
Filing status: What you put down, such as being single or married lets the IRS know how they should tax you. I know it seems like the IRS wants to get all up in your business but they tax differently based on your relationship status (luckily, there’s no “It’s Complicated” tax filing status)
Lastly, you want to file your taxes on time to avoid the IRS breathing down your neck. Typically, the deadline is April 15th each year (or around there if it’s a weekend). If you need more time, it’s possible to get an extension but if you owe you’ll still have to pay up or be faced with interest and penalties (yikes).
You can totally do taxes yourself and e-file but don’t be afraid to use an online program or even get an accountant if your tax sitch is more complex. Online tax software has free options but you will probably pay around $60-$120. Meanwhile, hiring an accountant can set you back $146 to $457.
Taxes are a drag, but nothing you can’t handle.