The Tax Question Everyone Is Asking

Brought to you by the EveryDollar app. Start budgeting for free today. So Jade, when are taxes due, someone asks, and what if I'm late? Well, they're due on April 15th, that's the date. But you shouldn't be late because if you think you're going to be late, just file an extension. That's what I would say. But even if you file an extension, the taxes are still due. Still got to pay them. If you don't pay them on April 15th, the penalty's in interest again. Oh yeah. The extension is not on payment. The extension you file is on the paperwork, on the actual filing of your taxes. So you can file an extension to file your taxes, but you should pay them anyway. Pay what you think they're going to be because they're going to start penalizing you that day whether you file an extension or not. Tax deduction versus a tax credit. I like this. So a deduction, that's going to lower your taxable income, whereas a credit would lower the overall amount that's due. I like to think of a credit like a coupon, $30 off, 50% off. Yeah. And not many things are tax credits. Most things are tax deductions. That's right. So a tax deduction is $10,000 deduction means you reduce the income that is taxable by $10,000. And so if you're in a 25% tax bracket, that then would save you $2,500 on your taxes because you don't pay taxes on $10,000 worth of income at 25%. So that's a tax deduction and that's 99% of the time what we're talking about around here. Occasionally, there's something that gives you an actual tax credit, which is dollar for dollar. $10,000 tax credit reduces your tax bill. That's great. By $10,000. That is 75% better than a deduction. Okay. But yeah, not many of them out there, but there's a few things that you get tax credits for. Okay. This one blows people away. The number of people that don't understand this is like everybody. How do the tax brackets work? Yeah. So the tax brackets, they're a progressive system. So there is a range of income that is taxed at a certain amount. Your entire income is not taxed at the same amount. A higher bracket never means that you're going to pay that tax percentage on your entire income. So if you've never done it, go through and you can Google the tax brackets for the tax year and you can see how it's broken down. Everyone pays the same amount of taxes on the first $25,000. Everyone pays the same amount of taxes on the first $50,000. Even if you make $2,000,000, the first $50,000 is taxed exactly the same. So as you go through the bracket, when you jump a bracket, it does not jump your entire income by that percentage amount. Only the amount above that last bracket. And so it might be that you have $5,000 above a bracket. That's right. And so it's hardly anything. So that's so good because a lot of people are like, I don't want to make more. I don't want to be in that bracket. That's crazy talk, you know? Well, there's not a 100% bracket yet. So of course you want to make more because you get to keep it. I think the max is what, 30-something percent. So you still get to keep 70 cents on every dollar no matter what you make. So go make more. Shut up. Yeah. So how much to set aside if you're self-employed? All right. You always want to take 25% to 30%. Set that aside for income taxes. And just know that you'll likely need to pay quarterly taxes. I like to do a quarterly estimate. Set that aside. That way Uncle Sam has his cut. Yeah, the quarterly estimate is a one-page document. How much were the revenues for my business? How much minus the expenses for my business equals the profit for my business times tax bracket. And you have to pay that once a quarter if you're self-employed. If you don't, you're going to get penalties and interest on that after the first year. First year, they give you a pass, which also leads people into doing stupid stuff like not paying their taxes. But you need to do your quarterly estimates. And it's really not rocket surgery to figure this out. It's not that hard. So you just sit down and go, okay, the business made $100,000 and we spent $90,000. So our taxable income is $10,000 on the profit and we're in a 25% bracket. So I'm going to set aside $2,500 and I'm going to send that in with my quarterly estimates. And then that has the same effect at the end of the year as those of you that have a W-2 job, where you're withholding automatically out of your check. The only difference is you actually have to send the money in, which pisses you off more. And so, cause you actually know that you're paying taxes. When you have it withheld from your check, it's out of sight, out of mind. You don't think about it. So about a fourth, about a fourth of your profits. So if you're running a business, you're on a separate checking account, whatever's left in that account, if you pay only business expenses out of that account, which is what you should do. And you only put business income in that account, which is what you should do. What's left in there is profit. And so if you pull $5,000 out, you should set aside $1,250 and, you know, only pull $3,750 into your checking account and set aside $1,250 so that when you're ready to do your quarterly estimates, you're ready to do your quarterly estimates. Standard deduction versus itemizing. All right. So that's usually people's question, which should I do? And the answer is whatever is going to lower your taxable income more. For most of us, the standard deduction is where we're going to sit. If you're just normal W-2, not much going on, but the rent. I mean, if you're a married filing joint, that's $31,500 that they're deducting. And so that's where most people sit. Now, if you own your own business and there's a lot going on, and maybe you're working with a tax professional, they might say that itemizing is the way. But most people are going to fall in that standard deduction because it's easier, often higher. Only itemize if your expenses exceed that standard deduction amount. Yeah, exactly. Because you need, you know, that $31,500 married filing jointly. If you don't have that much in write-offs, for whatever reason, then you're better off. And here's how silly it is now. With this huge amount of standard deduction now, the $31,500 is way high. It's now 91% of Americans do standard deduction. Now, if you do standard deduction, you are not writing off charitable giving. You are not writing off interest on your home mortgage. Because you're taking a standard deduction and you're not itemizing. You only write those things off if you're itemizing. That's right. And so you say, I'm keeping my home mortgage because I get a tax break. There you go, Dave. You lied. You lied to yourself. You didn't get a tax break because 91% of you. So good. Did the standard deduction. Life changes that affect taxes. Yeah, so like I was saying before, most of us can maybe file our own taxes if we're doing, you know, normal W-2. But if you've had a major change, maybe you got married, you had kids, you got a new job, you bought a home, maybe you entered retirement. All of those things definitely can affect your taxes. And after major life changes, just go ahead and review, adjust your withholding. Decide if it's now good to work with a tax professional versus filing them yourself. Yeah, and that ends up, you know, why are your refund changes is those things. It's stuff like having a kid, buying a house, starting a business, stuff like that. Those are pretty big old divorces, deaths, all those things like that. Anything that's going to cause your refund to change. Now, if you're constantly getting a refund, you need to remember Santa Claus does not live in Washington, D.C. That is not free money. That's not the Disney fund. Walt Disney doesn't live there either. No one charitable lives in Washington, D.C. Everyone in Washington, D.C. wants your money. They're parasites. They're a tick on the butt of America. They're parasites. They're sucking the blood out of you. And so do not think you are getting a blessing from Washington, D.C. If you got a refund, honey, it's because you had too much of your money taken out of your check, and then they send you your money back at the end of the year with no interest on your money. That's what a blessing DC is. That's what a blessing the IRS is. So you get $3,000 back. All that is is $3,000 of your freaking money because you had $250 a month, too much taken out of your check. Change your W for stop having refunds. No more refunds. And it's so easy to calculate your withholding. Oh, I use the IRS tables. Wait a minute. You just assumed the IRS was competent. Well, that was a dumb thing to do. It's like saying the DMV is competent. No, no, you run your taxes out. You figure out what your withholding should be and get the proper amount withheld. A way to do that is look at your last tax refund. Divide it by 12. Go on your W-4. There's literally a line on there that you can decide what your withholding is. Change it. Create your free every dollar budget today. The simplest way to budget for your life.