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Lifestyle

Five Important Things to Keep in Mind When Doing Your Taxes

Katia Chesnok is a Latina money expert and coach and the founder and content creator of Economikat, a personal finance educational platform. She educates Latinx on all things money and empowers them to earn more, save more, side hustle and start investing to build wealth.

Most of us can agree that taxes are confusing and overwhelming. Even if you have prepared your own taxes before once or many times, they can seem complicated most times but they don’t have to be. Tax day comes around once a year, but staying on top of your taxes is a year-round activity. You should be aware of your tax filing obligations and know the options you have to save money on your taxes, even if you’re using a tax professional to prepare them.

Taxes are involuntary fees levied on individuals and enforced by the government. We pay taxes to help fund public services and to build Infrastructures used in a country. The government taxes individual and corporate residents; the tax collected is used to improve our economy collectively. In the United States, taxes are applied to different forms of money or income received by the taxpayer. For example, if we sold an investment that appreciated (so we earned money from the sale) then we have to pay capital gains, we also have to pay income earned taxes from our job salary.

There are several ways to file your taxes. You can prepare them yourself, use a tax software or an online program, visit a tax preparer in person or virtually or get help from a certified public accountant or enrolled agent. There are many levels of support and costs depending on the complexity of your situation. Due dates are very important when preparing taxes, meaning that if you don’t file for taxes and pay by your due date you will most likely get charged penalties and interest. Read on to learn five things you absolutely nee to know about taxes.

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How to save yourself more money and have a lower tax bill.

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One great way to reduce your taxable income is by contributing and if possible maximizing your tax advantaged investment accounts such as IRA (individual retirement account) and HSA (health savings account). The money that you’ll contribute to these tax advantaged investment accounts reduces your taxable income and could place you in a lower tax bracket. The deadline to contribute to a Roth IRA, for example the deadline to contribute to a Roth IRA for 2020 is April 15, 2021.

Your tax bracket is more important than you might think.

Your tax filing status is very important because this determines to which tax bracket you will fall into and also the kind of standard deductions you will get. For example: unmarried adults without kids may only claim the single tax filing status.

Be aware of capital gains tax on sold assets (like stocks).

If you sold assets such as stocks and gained money during this sale, you should be aware of the capital gains tax. This tax is paid on gains realized on capital assets such as stocks, bonds, jewelry, coin collections and real estate properties. All capital gains are taxed by the IRS but they have a different tax approach for short-term gains vs long-term gains. For example, the rates are 0%, 15%, 20% depending on your tax bracket if you held your assets for more than a year and that’s referred to as long-term capital gains. If you held the asset for less than a year, then this gain is taxed as an ordinary income and that’s referred to as a short-term capital gains.

Know the exemptions that apply to you.

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Exemptions help you to lower your tax bill. You can get different types of tax discounts just by being a contributing member of society, being married, having children. These discounts are exemptions and they reduce the income amount you will be taxed on.

It’s important to know which tax deductions you can claim.

Additionally, we should determine if we want to apply standard deductions or itemize your deductions.

  • Standard deductions: this is a standard and simple way to claim our deductions, if your taxes are very simple then it’s suggested for you to use it.
  • Itemize your deductions: this is a more personalized approach, as you classify and list out each specific deduction you qualify for. We can do this when the sum of all our deductions is greater than the standard amount. Itemizing your deductions can save us hundreds or thousands of dollars in taxes but this doesn’t apply to everyone. Assess your particular situation to see if this applies to you or if consult a CPA or a tax professional if you’re not the one preparing your taxes.

You can write off some expenses and that will also help you reduce your tax bill. Make sure that you have documentation to prove these expenses, in case you’re audited by the IRS in order to show that they’re legitimate. Some tax deductions we can claim:

  • Some medical expenses, especially if they exceed 10% of our adjusted gross income. Our adjusted gross income is our income minus tax deductions.
    • If you’re self employed, you can include business expenses like home office or office supplies, mileage you use of your car, startup costs, internet expenses, meals, business trips etc
    • Contributions to your tax deferred retirement accounts
    • Qualifying educational expenses
    • Charitable donations

     

    Tax day is normally April 15th but this year the deadline to file our taxes for 2020 was extended to May 17th. 2020 was an unusual year, many lost their jobs but also many started businesses or side hustles. So, if you started a side hustle or freelance work you will most likely qualify for benefits that you were not eligible for in the past. Also, if your income decreased or if you have children, you might be able to qualify for additional stimulus payments.

    Nonetheless, taxes can be challenging. This is not a topic we’ve been taught at school; but the most essential step in preparing our taxes is having documentation to prove and support our claims.  If you follow this guide you will have the essentials you need to get the most our of your taxes versus having your taxes get the most out of you.