30+ Things College Graduates (and Everyone Else) Need To Know About Tax Rates

 Answers, tips, and info for getting through your first (or second or third) tax season.

"This guide will give you a solid understanding of tax rates, and everything connected to them – as well as set you on a path toward managing your finances with confidence and efficiency."

https://moneyzine.com/tax/30-tax-facts-for-students/ 

Learn: 

What is a tax rate?

The purpose of tax rates

How tax rates are calculated

Tax rates in 2022/2023

Who pays these rates?

Getting ready for Tax Day

Filing taxes - general information

Filing taxes - pro tips

Dangers of lax reporting- the importance of honesty

How a tax rate can go up or down Strategies for reducing taxes

FICA taxes- Social Security and Medicare

Tax deductibles and credits

Getting your credit/refund

About state tax rates

8 states do not levy income tax on residents but make up for revenues with sales and property taxes

Progressive/flat-rate tax systems

So how much will you actually pay?

Standard and itemized deductions

Do tax rates apply to tips and commissions?

Tax rates for gigs or multiple jobs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30+ Things College Graduates Need To Know About Tax Rates

 Answers, tips, and info for getting through your first (or second, third...) tax season.

"Graduating from college and jumping into a new career is an exciting time, with opportunities appearing endless, and the feeling that you’re ready to take on the world. But these opportunities are accompanied by new responsibilities, and it is normal for graduates to feel out of the loop when their first tax season rolls around."

"This guide will give you a solid understanding of tax rates, and everything connected to them – as well as set you on a path toward managing your finances with confidence and efficiency."

Of course, the information applies to anyone filing income taxes, not just college grads. 

https://moneyzine.com/tax/30-tax-facts-for-students/

 

2021 Federal Taxes: Expanded child Tax Credits and Child-Care Flexible Spending Accounts

 Q: (True or false): Taxpayers who got direct deposits of 2021 child tax credits last year could have lower refunds or higher taxes due than expected on returns they’re preparing now.

A: True. Millions of taxpayers received partial prepayments of expanded child credits for 2021 last year via direct deposit. As a result, these amounts won’t be available to boost refunds or lower a tax balance due, and many filers could be in for bad surprises when they complete their 2021 returns.

Q: (True or false): I underfunded the child-care Flexible Spending Account offered by my company last year because of pandemic uncertainties. But when the day-care center stayed open, I spent thousands of dollars on child care and now I don’t get a tax break.

A: False. Just for 2021, Congress greatly expanded the child- and dependent-care tax credit so it applies to 50% of qualified expenses up to $16,000 for up to two children. Many parents aren’t aware of this expansion.

Thanks to Laura Saunders writing for The Wall Street Journal, Feb. 26-27, 2022.  

Tax Season Starts. Why file early?

 One reason to file your federal income tax return promptly this year is that it might result in a higher stimulus payment on the next round which President Biden has proposed. The IRS is likely to base the payments on either 2019 or 2020 income. If your 2020 income is lower than 2019 as is true for many Americans, filing soon may result in a higher stimulus payment on the next round.

Income Tax Standard Deductions for 2020

 It's tax prep time for 2020 income. Don't forget that unemployment insurance is taxable but stimulus payments are not taxed.

The basic Standard Deduction (SD) is $12,400 for a single filer or married filing separately. Double the amount for joint filers and qualifying widow(er)s: $24,800.

For those born before January 2, 1956 or blind: add an extra $1,650 to the SD.

If two spouses are over 65, their SD is $27,400.

The much higher SD is the reason that few taxpayers itemize deductions.

Unemployment compensation is taxable: Stimulus payments are NOT taxable

 Unemployment insurance payments are taxable by the federal government and states. Recipients can opt to have taxes withheld from their payments. If you failed to do so, you need to prepare now for the tax impact. You won’t, however, owe Medicare and Social Security taxes on jobless benefits as you would with paycheck income.)

The good news is that you don’t have to pay income tax on the stimulus checks, also known as economic impact payments. The first payment in April was for up to $1,200 per person, plus $500 for each child. The second stimulus in December was up to $600 per person, plus $600 for each child.

"Individuals with income of up to $75,000 ($112,500 for individuals filing as “head of household,” typically single parents) and married couples filing jointly with income up to $150,000 qualified to receive the full payment. People with higher incomes got smaller payments or nothing if their income exceeded certain caps."

"If you were eligible for the payments but didn’t receive them for some reason — or didn’t receive the full amount — you can still get the money by claiming a “rebate recovery” credit on your 2020 tax return. You must file a return, even if you’re not otherwise required to do so, to claim the credit."

President Biden has proposed a third round of stimulus payments of as much as $1,400.

Thanks to Ann Carrns of The New York Times.

 

Easy way to build an emergency fund

According to the IRS, around 72% of Americans received a refund on their taxes in 2019. This extra cash may be the largest check some people receive all year and can be a perfect opportunity to start—or grow—your emergency savings funds.
Learn how your tax return can kickstart your savings. The Consumer Financial Protection Bureau's guide walks you through some fast and easy ways to use your tax refund to increase your savings.
Watch the short video and read the CFPB Tax Guide

This guide will cover the following topics:

• Why save your tax return
• How to save money fast
• Affordable ways to file your taxes
• Protect yourself from tax fraud

Sign up for the CFPB Savings Boot Camp, a six-step email course to help you on your savings journey.

Building an Emergency Fund: 
Setting up a dedicated savings or emergency fund is one essential way to protect yourself, and it’s one of the first steps you can take to start saving. By putting money aside—even a small amount—for these unplanned expenses, you’re able to recover quicker and get back on track towards reaching your larger savings goals.

This guide will help you answer the following questions:

• What is an emergency fund?
• Why do I need it?
• How much do I need in it?
• How do I build it?
• Where should I keep it?
• When should I use it?

https://www.consumerfinance.gov/start-small-save-up/an-essential-guide-to-building-an-emergency-fund/

https://www.consumerfinance.gov/start-small-save-up/how-to-use-your-tax-refund-to-build-your-emergency-funds/?utm_source=newsletter&utm_medium=email&utm_campaign=TaxTime_P&utm_content=March20

Trump's tax cuts - Who benefitted?

According to Forbes: “The richest 1 percent received 9.3 percent of the total tax cuts, the top 5 percent got 26.5 percent, the top quintile received 52.2 percent and the bottom quintile got 3.3 percent.” (a quintile is 20% or 1/5). Source:

Did The Rich Get All Of Trump's Tax Cuts? 

by Lawrence Kotlikoff 

https://www.forbes.com/sites/kotlikoff/2019/07/23/did-the-rich-get-all-of-trumps-tax-cuts/#c93ecddf2099

Preparing your 2020 tax return for 2019 tax year

Advice from Janet Berry-Johnson, CPA. 

Source: New York Times Wirecutter
https://thewirecutter.com/money/tax-filing-mistakes-2020/

File early

If you’re looking forward to getting money back this year, file your tax return as early as you can to ensure you receive that refund as soon as possible.

Consider filing electronically

The IRS recommends filing electronically whenever possible, calling e-filing “easy, safe, and the most accurate way to file taxes.”

Review your withholding

To change your withholding, you need to fill out a new Form W-4 (PDF) with your HR department. The form, which has been redesigned for 2020, lets you fine-tune the amount of tax withheld from your paycheck. Work with your CPA or tax adviser to crunch the numbers, or get help from the IRS withholding calculator.

2019 standard deductions are:

• $12,200 for single taxpayers
• $24,400 for married couples who file a joint return
• $12,200 for married couples who file separately
• $18,350 for head of household filers

If you’re age 65 and older (and/or blind), you can claim an additional standard deduction of $1,300 ($1,650 if you file as single or head of household). If both you and your spouse are 65 and older, that $1,300 becomes $2,600.

 
It is essential to understand that the tax brackets only kick in after the standard deduction (or itemized deductions)! For example, Married couples who are both over 65 can earn $27,000 free of federal income tax ($24,400 + $1300 each). Only then is additional income subject to tax, with the first increment ($19,400) taxed at 10%. It is critical to know your marginal tax rate! Use the table below to know your highest federal income tax rate.

Income tax brackets have been adjusted for inflation

For the 2019 tax year (January 1 to December 31, 2019), tax brackets have been slightly adjusted to account for inflation.
2019 income tax brackets

Marginal tax rates	Single	Married filing jointly	Head of household	Married filing separately
10%	$0–$9,700	$0–$19,400	$0–$13,850	$0–$9,700
12%	$9,701–$39,475	$19,401– $78,950	$13,851– $52,850	$9,701–$39,475
22%	$39,476– $84,200	$78,951– $168,400	$52,851– $84,200	$39,476–$84,200
24%	$84,201–$160,725	$168,401–$321,450	$84,201–$160,700	$84,201–$160,725
32%	$160,726–$204,100	$321,451–$408,200	$160,701–$204,100	$160,726–$204,100
35%	$204,101–$510,300	$408,201–$612,350	$204,101–$510,300	$204,101–$306,175
37%	over $510,300	over $612,350	over $510,300	over $306,175

Data from The Tax Foundation

Trump tax cuts are a sugar high for the economy

Consider this as you prepare your federal income taxes for 2019: While the Republicans promised the 2017 tax cuts would pay for themselves, they have simply increased the federal deficit to unsustainable levels.

"During his 2016 campaign, President trump talked about paying off the federal debt within 8 years. Reality and the policies that he has enacted have moved in the opposite direction."  (Richard Rubin writing in The Wall Street Journal, 1/29/20).

The US budget deficit is expected to reach $1.02 trillion this year as government spending continues to outstrip tax collection, according to the Congressional Budget Office. At this rate, the US federal debt is on track to reach $31.4 trillion, or 98% of national GDP, by the end of 2030, the CBO said.

"A combination of the 2017 tax cuts and a surge in new spending has pushed the deficit wider. This year would mark the first time since 2012 that the deficit breached $1 trillion, a threshold that has alarmed some budget experts because deficits typically contract — not expand — during periods of sustained economic growth" writes Jeff Stein in The Washington Post. "The deficit in 2016, President Barack Obama’s last full year in office, was $585 billion."

"The CBO projection also appears to cast doubt on recent statements by President Trump and other administration officials that the 2017 Republican tax cut is creating enough revenue through new economic growth that it will offset all near-term losses."

https://www.washingtonpost.com/business/2020/01/28/us-deficit-eclipse-1-trillion-2020-cbo-says-fiscal-imbalance-continues-widen/?wpisrc=nl_sb_smartbrief

US Budget Deficit sets record... again AND job creation lowest since 2011

The US budget deficit reached $1.02 trillion in 2019, according to the Treasury Department. This marks the first time the deficit has topped $1 trillion since 2012.
Thanks in part to Trump's tax cuts we are leaving the next generation with an astronomical deficit.
https://edition.cnn.com/2020/01/13/politics/us-budget-deficit-2020/index.html

And: The US economy created jobs last year at the slowest pace since 2011, according to the Labor Department. Job creation averaged 175,000 monthly in 2019, compared with 225,000 in 2018.
https://www.afp.com/en/news/3954/us-job-creation-2019-slowest-8-years-doc-1nl75p3

Required Minimum Distributions from taxable retirement accounts

Required Minimum Distributions (RMDs) are designed so that the government can start recouping taxes from retirement accounts such as traditional (NOT Roth) IRAs, 401(k)s, 403(b), 457 and other tax-advantaged accounts. Congress just passed a law to delay the date at which one must start withdrawing funds and paying taxes on the withdrawals.

The rules on when retirees must take required minimum distributions (RMDs) changed as of Jan. 1, 2020, thanks to the SECURE Act, which was signed into law on Dec. 20, 2019.
The SECURE Act now delays those required distributions until age 72.

If you were born on July 1, 1949, or later, you do not have to take an RMD until age 72.

If you were born before that, you fall under the old RMD rules, and you'll be forced to withdraw money (whether you need it or not) every year starting after age 70½.

"The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner." This info is from the IRS website but they have not yet (1/13/20) updated the site to the new age of 72. 

Notably, RMDs for individuals who turned 70 1/2 in 2019 are not delayed, and instead, such individuals must continue to take their RMDs under the same rules prior to passage of the SECURE Act. Despite the delay in the starting age for RMDs, though, Qualified Charitable Distributions (QCDs) from IRAs will not be affected by the SECURE Act; accordingly, QCDs may still be taken from IRAs as early as age 70 1/2. QCDs from TRADITIONAL IRAs allow the taxpaper to contribute directly to a 501(c)3 organization from a taxable traditional IRA and avoid paying taxes on the withdrawal from the IRA.

Small IRA, 401(k) differences can lead to big tax consequences

Writing for The Wall Street Journal, tax expert Laura Saunders explains the necessity of carefully reading the tax rules that affect the use of IRA and 401(k) funds. Failure to adhere to IRS regulations can result in a large unexpected tax bill. Especially if you are taking an early withdrawal, double check advice from a tax professional to ensure you won't owe a tax penalty.
"Because tax-favored retirement accounts are supposed to be for retirement, the rules often impose tax and a 10% penalty on withdrawals before age 59½. Younger IRA owners who take out up to $10,000 to purchase a first home don’t owe the penalty, while younger 401(k) participants do."
“The IRA and 401(k) rules are full of these booby-traps, and they hurt a lot of smart people who aren’t retirement experts,” says Natalie Choate, an attorney and retirement-plan specialist.

Education-expense withdrawals. Payouts before age 59½ from an IRA that are used for higher-education tuition, books and other costs are exempt from the 10% penalty. Similar withdrawals from 401(k) plans incur it.
 
Age 55—59½ payouts. Savers don’t owe the 10% penalty on withdrawals from a 401(k) before age 59½ if they were at least 55 in the year they left their job. But a 10% penalty applies to IRA withdrawals before the owner is 59½, except for certain exemptions.

Borrowing. Many 401(k) plans allow participants to borrow from them. Borrowing against an IRA is prohibited.

Creditor protection. Employer-provided plans such as 401(k)s are better shielded from creditors than are IRAs. 

Trump's tariffs cost US consumers $106 billion per year. Your cost: $831/year

"US tariffs recently imposed on goods from China will cost American households $106 billion annually, according to a report from the Federal Reserve Bank of New York. These tariffs likely will reduce overall tariff revenue collected by the US and will "create large economic distortions," the report said." 
Tariffs are a hidden tax on consumer purchasing power.

Trump's China tariffs hike will cost average U.S. family $831 a year

• Higher U.S. tariffs on Chinese goods are "likely to create large economic distortions and reduce U.S. tariff revenues," according to economists at the New York Federal Reserve. 
• The latest round of 25% tariffs on $200 billion in certain Chinese imports will cost U.S. households $106 billion a year, or $831 for the average family, New York Fed researchers found.
• Tens of billions in recent stock-market losses reflect worries that U.S. trade friction with China isn't going away soon.  https://www.cbsnews.com/news/trumps-china-tariffs-hike-will-cost-typical-u-s-family-831-a-year-fed-economists-say/

Invest that $800 each year for 10 years in an Individual Retirement Account (IRA) or 401(k) at a modest 4% return for a total of $11,173. Use an online calculator to make your own estimates:
http://moneychimp.com/calculator/compound_interest_calculator.htm

Budget deficit grows at alarming rate due to Trump tax cuts

"The US budget deficit reached $779 billion in fiscal 2018, a 17% increase compared with fiscal 2017 and the biggest total in six years. Revenue increased only $14 billion because of tax cuts enacted by the Trump administration."
Consider this factor as you make decisions on who to elect to Congress.
The Republicans are talking about cuts to Social Security and Medicare because of the growing deficit.

Tax cuts contribute to a huge & growing federal deficit

According to the Congressional Budget Office the federal government spent $895 billion more in the last 11 months than it collected in tax revenues. "That’s a 33 percent increase from last year." This is a direct result of massive tax cuts pushed through by Republicans in 2017 combined with huge increases in spending.
"Trillion-dollar annual deficits are going to be the new normal. The money being borrowed to pay for this bender will eventually need to be repaid — with interest. Yet House Republicans are talking this week about a second round of tax cuts that could cost another $2 trillion over the next decade." They are pushing the additional tax cuts to score political points against Democrats as mid-term elections approach. (reported in The Washington Post by James Hohmann 9/12/18.
If you have kids or grandkids or care about the future of our country... think about the burden current tax cuts will have on you and future generations. Say NO to more tax cuts!
Just as hurricane Florence is poised to cream the Carolinas, FEMA is in desperate shape. Why? Because the Trump administration has shifted FEMA funds to ICE! Also, budget cuts due to the tax cuts is affecting FEMA's ability to help Americans in times of disaster.

Trump proposes more tax breaks for the wealthy

"The Trump administration is considering adopting a $100 billion tax cut that would benefit primarily the rich through a procedure that wouldn't require congressional action. The US Treasury Department could amend regulations to let taxpayers account for inflation when calculating tax liabilities on capital gains, Secretary Steven Mnuchin says." (Retirement Security SmartBrief, 7/31/18). Details at:
https://www.cnbc.com/2018/07/30/treasury-contemplates-how-to-cut-another-100-billion-in-taxes.html

What will be impact of exploding federal deficits?

For all those who delight in lower taxes, be aware of how massive and growing federal deficits will affect you (especially in your old age), your children, grandchildren and future generations. 
"US National Economic Council Director Larry Kudlow said the federal government's budget deficits in 2019, 2020 and 2021 may increase nearly $100 billion more per year than previously forecast. The annual deficit will rise above $1 trillion starting in 2019 if those projections hold true." Reported in the Retirement Security Smartbrief that summarizes articles. This excerpt is from The Wall Street Journal: "Deficit Projected to Top $1 Trillion Starting Next Year"by Nick Timeraos. As he writes: While President Donald Trump 'used to talk about creating such great economic growth to reduce the deficit, now you see a budget acknowledging a massive run-up due to policies he has supported,' said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, which supports debt reduction.
You can be sure that the Republicans will use the growing deficits to lobby for reducing Social Security retirement benefits and Medicare. 

Massive and Growing Federal Deficit

Happy about the new tax bill? Looking forward to having more money to spend? Have you thought about the services that will no longer be available because of the growing deficit? Are you at all concerned about the effects of the growing deficit on Social Security and Medicare? What about your kids and grandkids who are saddled with massive and growing deficits?
"President Donald Trump’s massive fiscal stimulus plans are adding to the U.S. debt overload...."
It's past time to recognize the link between the short term "high" of tax cuts and the long term implications of cuts in services that you and your family rely on now and in the future.
"After keeping borrowing relatively stable in recent years, the Treasury highlighted the Trump administration’s need to sell debt to help pay the government’s bills as the deficit swells and the Fed allows maturing securities on its $4.4 trillion balance sheet to roll off gradually."
The future we all face is fewer government programs, attacks on Social Security and Medicare, crumbling infrastructure and higher state and local taxes to make up for cuts in federal grants to states and municipalities.
Any savings you get on your federal taxes will be more than made up for by higher state and local taxes, fees, and cuts in services and programs.
Source:U.S. Lifts Debt Sales as Deficit Grows, Plans 2-Month Bills, BySaleha Mohsin and Liz  McCormick

https://www.bloomberg.com/news/articles/2018-05-02/treasury-lifts-long-term-debt-sales-as-u-s-budget-deficit-grows

Big Roth 401(k) Tax Surprise

Thanks to Kim Blanton writing in the Squared Away Blog for explaining the complexities of taxes on withdrawals from Roth 401(k) plans.
"Financial experts and writers often tout the Roth 401(k)’s main selling point: when the money is withdrawn in retirement, it won’t be taxed.
Well, that’s not entirely true.
An employee’s own money saved in his Roth account over the years is, indeed, shielded from income taxes when he retires and starts pulling out the money. That’s because the worker had paid the taxes before he put the money into the Roth.
But employer contributions to Roths are different. Employer contributions and any resulting investment earnings are taxed as income in the year that the money is withdrawn."

Read the details at: http://squaredawayblog.bc.edu/squared-away/know-about-the-roth-401k-surprise/