Happy Tax Season, Pals!
If you read my recent article on financial deadlines, you’ll know that (in most cases), you need to file your taxes by April 18th.
I know filing taxes can be daunting and stressful, but this year, you have me in your corner, and we got this. People come to me with tons of questions about taxes, and I’ve found that at the heart of these questions, there’s fundamental confusion about the purpose of filing a tax return. And why wouldn’t there be? We don’t learn this stuff in school!
So here’s the Taxes 101 class you should have had in school, but didn’t. I break this down into three little steps you should take— but only if you want to maximize the amount of $$$ you get back from your tax refund. If you don’t want more money, I guess you can stop reading now?
1. Find Your AGI.
At the most basic level, when we file a tax return, we’re telling the government how much money we earned the year prior so that we can be taxed appropriately (or, at least, what the government has determined to be appropriate).
But the government doesn’t get to tax all of your income. Think of it like this: say you have a piggy bank that holds all of the income that you made in 2021. When you file your tax return, you’re handing over your piggy bank to the government, and the IRS shakes out a percentage and uses that money to fix roads, build bridges, all that jazz. But you get to take some money out of Miss Piggy before handing it over to Uncle Sam. So then, by the time Uncle Sam gets your piggy bank, he has less to shake out, and you have more in your pocket. Quick Nictionary note here: the total amount of income that Uncle Sam does get to tax is called taxable income.
In order to maximize what stays in your pocket, the first (but often overlooked) step is to understand your AGI, or adjusted gross income. Your AGI is calculated by taking your total income in your piggy bank (AKA your “gross income”) and shaking out qualified expenses (AKA “adjustments”). In some cases, qualified adjustments are student loan interest, alimony payments, or contributions to a retirement account.
You can learn more about the adjustments you quality for here.
2. Deduce Your Deduction.
Once you have your AGI, you can calculate your deductions. This is another group of expenses that you can subtract from your taxable income. Some common deductions are medical expenses, charitable contributions and property taxes. There are two ways to calculate your deduction: you can opt for the standard deduction, or you can decide to itemize your deductions.
With the standard deduction, the IRS is basically saying: “Okay, you probably have eligible deductions… but it’s too complicated to parse all that out, so let’s create a flat amount that everyone in the country can choose to take.” This year that “standard deduction” is $12,550 for individuals. Here’s the key on deductions for this year—
So that’s one option. But, if you look at the list of eligible deductions and see that you have spent a lot of qualified deductions— so much that it’s totaling to more than the standard deduction— you should itemize your deductions. In other words, add up all of your deductions and show Uncle Sam the receipts.
You can read more about common deductions here.
3. File and Save.
When it comes time to submit your tax return, you want to choose the best filing method; you want to make sure you’re not missing any deductions or credits, but you also want your filing experience so easy and affordable (so you don’t rip your hair out).
You have three different options: 1) You could file on your own for free, 2) File through an online software, or 3) You could hire a pro.
If you don’t have a particularly tricky tax situation (and you would know if you do) and you’re opting to do the standard deduction, I’d recommend just using an online software or filing on your own. If you run a small business or have one of those tricky tax situations, you may want to hire a professional. But before you worry about the cost of filing— I have some good news!
You may qualify for free help with your taxes. Check out this page to learn more.
Happy filing! Remember: we got this.
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