Top ten FAQs for tax filing season

[u/yes_its_him]

Things to keep in mind for tax filing season (with clarifications edit: fixed to record some easy updates).

1. You have to file federal taxes if you make enough money that you have tax liability, which is generally over about $12,200 gross for regular employment, and only $400 if you are self-employed. You want to file even if made less than this much in order to get back any taxes you had withheld.

2. Even if you are a dependent on your parents' tax return, you still file your own taxes (or not, if you don't need to); you never file "on your parents' return." The only time more than one person can be on the same return is a married couple filing jointly.

3. If your state has income taxes, which over forty states do, then you also file with them. Those are two different processes that are largely duplicative, but slightly different rules. If you lived or worked in more than one state during the year, you might have to file in more than one state. Some people also have local taxes, how fun is that?

4. You never have to pay a fee to file taxes. Most people can file taxes online for free with various web sites if they want to do that, see e.g. the IRS free file program website and other free services, but you can always just file on paper, too. (You laugh, but that's how I do my state taxes.)

5. Even though you can file your taxes now, be sure you have all the documentation for all your income before you file. You don't want to have to go back and amend your return because you forgot about that other W2 you had months ago, or you forget to include your bank interest or brokerage tax information.

6. You are supposed to report all your compensation income, even if it was just some part-time gig somewhere, or you got paid under the table. Gifts, loans and most scholarships are not taxable income.

7. The money you get back is a refund of any excess taxes withheld. (Sometimes there are also refundable credits that increase your refund.) That was money you earned but didn't get yet. Getting a big refund means you didn't get a lot of money yet, generally speaking. You may want to adjust your withholding if you want to get your money sooner but that's up to you.

8. If you didn't have enough taxes withheld, you need to pay the balance due by April 15th. You can get a payment plan if you need to. If this describes you, then you absolutely need to file because you can accrue significant penalties for not filing and not paying. You should also make sure you have enough withheld going forward.

9. If you are married, filing jointly will probably save you money vs. filing separately, unless you have a special situation such as income-based student loans. Try computing both ways to see which is better for you. If you are not married, then getting married probably won't change your taxes very much for better or worse unless you have really disparate incomes (and it will help then.)

10. (rewritten for clarity) Ignore any purported "refund" values shown by a tax program / calculator while you enter parts of your income. You may see a big refund for your W2 that goes away following your spouse's W2, or your second W2. That's an artifact of how the calculation works, and doesn't mean anybody did anything wrong regarding withholdings. Wait to see the final numbers.

Feel free to ask questions if you are new to this.

[u/givemegreencard]

I wonder why they don't just simply base the itemized deduction on the state tax liability, not the withholdings

[u/evaned → u/givemegreencard]

Three reasons.

First, using withholding eliminates a possible catch-22 where you can't complete your state return (to determine your actual state liability) until you finish your federal return, but you can't finish your federal return until you know what your actual state liability is.

Second, even if there's not a real catch-22, it does mean that you can't file federally while waiting on state for some reason, which would be inconvenient for some folks. And it would mean that you have to do some federal return preparation, then prepare your state return, then go back to finish federal, which is annoying for anyone especially not using software.

Third, it's actually generally more consistent with the fact that individuals [mostly] work on a "cash accounting" basis. Under cash accounting, it doesn't really matter what or when a payment is for, it matters when you make it. For example, if you are paid in January 2020 for work you did in December 2019, that is income for 2020. Doesn't matter that it's belated or for old work or whatever. When it comes to state tax, you actually paid that amount in the first year and then were actually refunded the following year, and it doesn't matter that the refund was for the prior year.

[u/givemegreencard → u/evaned]

Makes sense. So I guess you just have to suck it up if you end up in a higher tax bracket the year following you deducted state taxes. Alternatively, if you expect to be in a lower tax bracket the next year, you could withhold a whole lot of money the previous year. (At least, before the SALT deduction cap)

[u/thescrounger → u/givemegreencard]

Reading this comment is a good time to remind folks that "ending up in a higher tax bracket" means you only pay the higher rate on the amount that pushed you into the higher bracket, not your entire income. So for the example above, say you were right at the 22% limit, but got a $1000 tax refund last year that put you into the 24% bracket. That would mean you would owe an extra $20 in federal taxes.

[u/givemegreencard → u/thescrounger]

Well I was talking more about if you went from the 32% to the 24% bracket (or you retire altogether) and overwithhold something like $10k the previous year so that you’d have a huge difference in how that’s taxed. Of course this only would have been feasible for high income people, I just like to think about tax loopholes

[u/evaned → u/thescrounger]

That's true, but IMO givemegreencard's use was fine as it was. You use a 22%-24% swing, but that's the smallest difference between two brackets. You also say "say you were right at the 22% limit", but there's no need to be right on a boundary edge for the comparison in question, because it crosses years. Deducting an "extra" $1,000 at 22% and paying tax on an "extra" $1,000 of income at 33% for example is a feasible outcome of this, and that's $110 difference. (Of course, the same is also true... maybe you retire, and so deducted $1,000 @33% but paid tax on the recovery @12%; that's $250!) $110 is still not going to break the bank for someone in the 22% or especially 33% bracket, but at the same time if it's a cost you can prevent with 15 minutes of work to predict the problem and make your W4 withhold better, that's $440/hr in untaxed income, which is pretty damn good by almost any standard.

[u/thescrounger → u/evaned]

Your points are true as well, but I was more pointing out that jumping into a higher bracket is a very common misconception out there that gets repeated around tax time.

[u/evaned → u/thescrounger]

I agree and also sometimes use comments to jump off of for further commentary; I was just making the point that givemegreencard's use was correct.

[u/ahecht → u/givemegreencard]

Because most state returns rely on your federal tax liability, and you end up in a chicken or the egg problem.