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There are three certainties in life: death, crappy things happening, and taxes.
Working in public accounting taught me some really great lessons. I learned that you should never mix business with pleasure on your financial records, you should air on the side of caution when trying to take deductions/credits, and that sometimes you really need a professional to help you with your returns.
This video details out eight tips you can use to ensure you get your AGI (adjusted gross income) as low as possible. I did not discuss retirement and contributions to a FSA/HSA account, but those are also factors. Typically, company benefits are already shown on your W-2, so you likely will not miss those.
But these eight things are ones that you definitely need to be aware- especially if your taxes get progressively complicated.
I want to note that in the video I use the work deductions and credits. Deductions are the bomb. They will directly reduce your taxable income dollar for dollar. Credits also reduce your tax bill, but are typically limited to a maximum number.
In the video I mentioned a tuition credit. If you paid $20,000 for one year of tuition (which if you did this, call me- you’re gonna need my help in the near future!), you can receive up to a $2500 credit to help you reduce your taxable income.
How do you know if you will get a refund?
Have you ever wondered how taxes work? How does the IRS come up with this magical number that either gives you a refund or tells you to pay in? Will you get a refund or will you have to pay in? It’s not a roll of the dice, it’s a calculation. Let’s put numbers to this and do a pretend very, very simple example (the chart below will be used in the example):
Below is an example. If this gets too confusing, email me and I’m happy to Skype with you and explain it in person. But try to follow along.
Pretend you have an income of $35,000 and you want to know how much your taxable income will be.
You don’t own a home, so you just take the standard deduction of $6,200.*NOTICE: Deductions directly reduce your taxable income.
You look up your tax rate in the chart above and see that you will be taxed $907.50. They will also be taxing you at 15% for income over $9,075. So your total tax liability is $2,958.75.
Now pretend you are in school and you receive the full tax credit for being a student of $2,500.*NOTICE: Credits reduce the amount you owe on taxes- not your taxable income.
Cool right?
Now, if your job withheld $2,000 in taxes from your paycheck, you will receive a federal refund of $634.
If you had $1200 withheld from your paychecks, you will have to pay in $166.
That’s how taxes work at a very basic level. If case you were curious. You can see why I suggest in the video finding a professional to help you when it starts getting complicated, because there are a lot of crazy, ridiculous, rules that change every single year.
I hope you enjoyed this discussion. Next week’s video will be all about what to do if you are receiving a refund.
Best,
