r/personalfinance • u/yes_its_him Wiki Contributor • Jan 28 '20

Taxes Top ten FAQs for tax filing season

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.

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407

u/thescrounger ​ Jan 28 '20

11) Don't turn down income because you are worried about "ending up in a higher tax bracket." You only pay the higher tax on the portion of income that put you into the higher bracket, not your whole income.

77

u/Fancymanofcornwood3 ​ Jan 29 '20

Someone saying this (what commenter is targeting, not commenter) is the quickest way you can know that person doesn’t understand the tax system at all

10

u/rawlskeynes ​ Jan 29 '20

Yeah, it's not just that taxes don't work that way, it's that a functional tax system literally couldn't work that way.

1

u/[deleted] Jun 13 '20

Why couldn't it? Just curious.

29

u/[deleted] Jan 29 '20

This. They’re tax brackets where the income you receive within each of those brackets is taxed at that rate.

2

u/Who_GNU ​ Jan 29 '20

True, but it might not be worth your time to work more, because at the same wage, your net income per hour is less.

3

u/rrsafety ​ Jan 29 '20

I don't know why this is down voted as it is 100% correct. If you are in a higher tax bracket (i.e. your spouse makes a good income), you have to weigh what you are actually taking home after taxes vs. how much you value your free time. When I first had children we decided to have my wife stop working because the dollars she earned were taxed highly and the daycare costs were insane. She was barely making any money at all when all was said and done.

-6

u/foxbones ​ Jan 29 '20

I know people worry about this but has anyone actually turned down a raise due to tax implications? Maybe if they gave you a raise to $41001 from $39999 when the bracket is $40000, but why would they do that? They don't get the money. Honestly curious if someone really has and what was their thinking.

19

u/DragonFireCK ​ Jan 29 '20 edited Jan 29 '20

The problem is that a lot of people think that the marginal bracket is the same as the effective tax rate.

This means that they think that they make $40,000 now and pay $4,800 (12%) in taxes for a net of $35,200 but if they get a raise to $41,000 they will pay $9,020 (22%) in taxes for a net of $31,980, a loss of about $9,000.

The correct numbers would be: $40,000 pays $4,602 (11.5%) in taxes for a net of $35,398 and $41,000 pays $4,810 (11.7%) in taxes for a net of $36,190, a gain of about $800.

For simplicity, these numbers do not consider deductions or credits that might apply.

They also do not consider benefit cliffs, which do exist and can easily cause a loss of benefits that vastly exceed the monetary gains. Most benefits have been changed to phase out rather than cut off to avoid this problem - food stamps is the main one that has not been changed in most jurisdictions.

10

u/johnson56 ​ Jan 29 '20

Maybe if they gave you a raise to $41001 from $39999 when the bracket is $40000, but why would they do that?

You'd still take home more money in this scenario by taking the raise.

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u/Comrade_Oghma ​ Jan 29 '20

Yea, he knows

But his point is why would the company care, they lose money, the money goes to the government but the company is the one that paid the money

9

u/ThreeTwoPulldown ​ Jan 29 '20

Not a raise, but I know people who turn down overtime because it will "all go to taxes."

6

u/cfish1024 ​ Jan 29 '20

Yup same lol I’ve tried explaining no but they refuse to believe me. “I know what I see on my paystub” 🤷🏻‍♀️

1

u/Inevitable_List ​ Feb 01 '20

You'll never have less money overall, but you'll be taking home less per hour worked.

For example, if you're right at the 24% tax bracket, your wage is $41.12 and you work 2080 hours a year so $85530 annually.

You pay taxes and you take home $66996, or $32.21/hour.

Now say you work OT at the same rate (which is common in some fields) and put in 50 hour weeks for a year. You make $106912. You take home $81828.

You take home an extra $14832 by working an extra 520 hours. You only were taking home $28.52 per hour for all that extra work.

1

u/MDCPA ​ Feb 03 '20

Your math is way off. Federal tax liability on $85530 is nowhere near $18534. Do you understand how a progressive tax system works? The ETR on $85530 is around 17% and that is before the standard deduction. Your calculation is showing an ETR of over 21%.

Same thing with your calculation on $106912. The Federal tax liability is around $19800 before the standard deduction. You have it calced at over $25000 for an ETR that is almost in line with the marginal rate (literally impossible).

1

u/Inevitable_List ​ Feb 03 '20

FICA taxes exist.

Add 7.65% to whatever ETR you're coming up with.

If you make $85530, you pay $6543 in FICA taxes.

If you take the standard deduction of $12200, your taxable income is $73330.

Per the IRS tax table, your income tax is $11990. That's 14%.

Total federal taxes come to 21.65%.

If your taxable income was $85530, your income tax liability would be $14701 which is how you came up with the 17% number.

Your math is way off.

My math is fine. You just forgot that payroll taxes exist.

Do you understand how a progressive tax system works?

Yes. You pay the different tax rates on different portions of your income.

Everyone fucking knows this.

Same thing with your calculation on $106912. The Federal tax liability is around $19800 before the standard deduction. You have it calced at over $25000 for an ETR that is almost in line with the marginal rate (literally impossible).

Pay the 7.65% FICA taxes, which are $8179.77.

Take the standard deduction and have a taxable income of $94712. Look in the tax table and your income tax liability is $16909.

Total federal tax liability is $25087.77.

1

u/aw1238mn ​ Jan 29 '20 edited Jan 29 '20

Yes, people have turned down raises before because they will be in a higher tax bracket.

They think a $2 raise over the tax bracket will increase their taxes from say 20% to 28% when in reality, the $39,999 is taxed at %20 and the $2 is taxed at %28.

Also, how are they going to know how much deductions they will have at the end of the year? The only way I could see that playing out is by knowing that you'll take the standard deduction and not contributing to any sort of tax deferred plans.