This three part guide with help you understand your taxes and how to file them

Don’t Dread the IRS: Three Part Guide to Tackle Your Taxes

by Maia Monell | 7 July 2020

So, it’s July. Usually my favorite month of the year. Summer’s in full-swing, my tan lines are on point and I have a birthday in toe. 

And yet, July 2020 is 100% NOT looking so hot. Aside from the doom & gloom of our COVID-ridden word, tax season has now crept its way into what should be the joys that July still has to offer. 

Summer is here but so is tax season

Which begs the question, why the f*&k are we (still) so afraid of tax season? 

Because, my fellow Nav.igators, what you don’t know, you won’t ask and what you won’t ask, you won’t ever find interest in. I hope this 3 Part Guide to Tax Filing bring some relief in knowing that you’ve done it right. That you got this.

Let’s get started. 

Part 1: Who the Hell are You? 

Tax Bracket

So, before we get into the world of deductions, credits and those frustrating acronyms, let’s first consider Rule #1, know who you are. 

The IRS cares less about your hopes and dreams and more about your bottom line. So, when filing first consider your gross annual income as this will dictate how much you owe. 

There are 7 federal tax brackets, each assigned a different rate, ranging from 10% – 37% with ranges in each varying based on your status…

Filing Status

Your filing status determines how much your income is taxed.

There are 5 filing statuses to become familiar with: 

  1. Single: For you single-tons out there, this one’s for you. If by December 31st you’re single (or legally separated) you’ll likely file under Single.  
  2. Married Filing Jointly: For those of you married and choosing to file a joint tax return (where you report your combined income and deductions). 
  3. Married Filing Separately: If you’re married, this one might benefit you if you want to be responsible only for your own return. This can be helpful if you pay less tax filing separately than if you would together. 
  4. Head of Household: This one’s for you if you meet the following criteria: 
    1. You’re unmarried on the last day of the year, 
    2. You paid more than half the cost of home expenses for the year
    3. A dependent lived with you in your home for more than half the year (school absences are allowed). That said, if you care for a parent, that parent doesn’t have to live with you. 
  5. Qualifying Widow(er) with Dependent Child: This one allows you to file under this status in the first two years after your spouse has passed. You’ll be entitled to a joint return tax rate and the highest standard deduction. 

For more info, check out this resource from the IRS. 

Part 2- Bring Out the Calculator

Adjusted Gross Income – Income Taxes

The government makes most of its revenue for budgets on income taxes, or money they take out of each paycheck earned. So why do we need to file taxes each year? Well, it’s actually to determine whether the government collected enough taxes through withholding a portion of your income or if they actually owe you money (hint: refund) for paying too much tax. 

So then, what is considered taxable income? It’s not just from your bi-monthly or monthly paycheck.

 Here’s what counts as taxable income: 

Salary, Wages, Tips, Commisions, Bonuses, Unemployment benefits, sick pay, and fringe benefits.

And, honey, that’s not all. Taxable unearned income includes: 

Interest, dividends, profit from the sale of assets, business and farm income, rents, royalties, gambling winnings, alimony

What about deductions and retirement contributions?

I’m glad you asked. 

Deductions

Tax-deductions are typically expenses that you incur during the year that can be applied against (or subtracted from) your total income in order to figure out how much tax you owe. Here’s a list of general deductions: 

  1. Capital loss on a stock
  2. Healthcare costs like medical bills and prescription drugs
  3. Property taxes
  4. Mortgage interests
  5. Home office and other job-related expenses
  6. Charitable donations

One additional deduction term to be familiar with is a tax loss carryforward. This is a deduction for a capital loss that was carried forward from the previous year. 

Contributions

Now, let’s cover contributions to your retirement accounts (like a 401(k) or IRA) first. When you allocate a portion of your income into a retirement account, you should decide if you want a tax-deferred or a tax-exempt account. Here’s the breakdown: 

Tax-deferred: Think traditional IRAs or 401(k)s. These accounts allow you to contribute a portion of your pre-retirement income each year. That income isn’t taxed, rather it’s deferred until you reach retirement age. In 2020, individuals can contribute up to $19,500.00 / year to a 401(k) and up to $6,000 to a traditional IRA. 

Tax-exempt: Think Roth 401(k)s and IRAs. These accounts provide future tax benefits as the income generated from these accounts is not taxed upon withdrawal. Meaning, your investment returns grow tax-free.

Which brings me to capital gains tax. If you proceed with a retirement account that’s tax-exempt, you’ll earn every penny of interest earned on that account. However, if you contribute consistently to a standard taxable portfolio, your earnings will be vulnerable to capital gains tax, or a tax on your capital gains (earnings from a capital asset) when you decide to sell those investments. Losses on personal capital (like your home or car) are not tax-deductible. 

Capital assets include things like stocks, bonds, precious  metals, jewelry, and real estate. The tax you pay on the gain depends on how long you’ve held onto the asset before selling it. In terms of taxes, these gains are considered to be either short term or long term. Any gain is considered short term if it’s been owned for one year or less. These short term gains don’t benefit from any special rate.

However, taxes on those long term gains are generally lower than if the gain was realized in a year or less, making it more favorable to you to hold onto the asset for over a year. Fun fact: the Tax Cuts and Jobs Act (TCJA) in 2018 created tax brackets for long-term capital gains tax. 

More on these here

Credits

Unlike deductions that reduce your taxable income, tax credits subtract from come off of what you owe to the IRS. The Internal Revenue Code allows for a variety of credits based on things like the number of dependents you care for or your or your earned income (for low-income earners). You’ll be responsible for applying for these credits on your tax return form. 

And that gets me to arguably the most confusing part of the tax process, the Forms. Here’s a helpful list of forms, what they mean and if you need to consider them when filing your tax return. 

Part 3: Grab a Pencil

Forms, Forms and More Forms. 

Personally, I think the worst part of taxes are the acronym- ridden forms. So, I thought I’d break down the most used tax return documents here for the benefit of all of us.

Income and the 10’s:

1040: This is your starting point. All US residents must file a Form 1040. It’s the form where you identify your filing status and where you report income, calculate deductions and credits, considerconsiders tax due and applyapplies money already withheld from wages or estimated payments towards tax liability.

1099: This one’s what the IRS considers “information returns.” There are 1099s used to report various types of income you may receive throughout the year, other than your full time salary. Pay attention to this for your side hustle, crowd-funding investment platform, etc.

Look out for a 1099-MISC from any business that pays you at least $600 during the tax year.

Look out for a 1099-DIV report if you own a portfolio of stock investments or mutual funds. This report will convey the dividends and other distributions you receive throughout the year.  

Have an interest-bearing account (like a high yield savings?), be sure to get the 1099-INT form from your bank as this form reports these interest payments.

Retired? You’ll need a 1099-R form to report total withdrawals from your traditional IRA, pension plan, annuities and profit-sharing plans. 

Have a debt cancellation? Be sure to get a 1099-C form from your creditor (like your credit card company) as the cancellation translates to ‘income’ which may be taxable.  

Workplace W’s: 

  1. W-2: Otherwise known as the Wage and Tax Statement is what you probably have been sent by an employer at the end of the year if you’re a fulltime employee. This one reports your annual wages and the amount of taxes withheld from your paycheck. You should get this before Jan 31st to allow for enough time to file! 
  2. W-4: This is the form that you fill out for your employer which indicates your current tax situation (see filing status info above). It will tell your employer how much tax to withhold from your paycheck. 

Credits Schedules

  1. Schedule 3 on your 1040: This new section is where you can claim (as of 2019) both refundable and nonrefundable tax credits. Unfortunately, you can’t just claim a credit on your 1040, to do so, you’ll need to fill out this Schedule 3. 
    • Part 1: Nonrefundable Credits: these will lower your tax bill but you won’t get any refund. Things that count towards a nonrefundable include: 
      1. Foreign tax credits
      2. Credits for child / dependent care
      3. Education credits
      4. Retirement savings contributions
      5. Residential energy (have you upgraded to solar? This one’s for you!)
      6. + a few others. More info here. 
    • Part 2: Other payments and refundable credits: These are those credits that you’ll receive a refund for, even if they reduce the amount you owe to $0. Including some standard situations like: 
      1. Estimated tax payments and amount applied from previous return
        1. These are needed if you’re self-employed, have income from interest on dividends or expect to owe more than $1,000 in taxes. 
      2. Net premium tax: for those of you who purchase healthcare coverage through the insurance marketplace, you could get a credit towards ‘advance payments.” 

For more on the new Schedule 3 form, go here. 

Woah, you made it here. Are you ok? Have you poured out a delicious, summertime cocktail to help you sort through this article? Are you as angry with me as my editor was for a total and complete lack of brevity? 

I get it, taxes suck. Paying the government your hard earned money, frankly, sucks. But at the end of the day we can’t all be living off the land and grid in sheer peace. Because, honey, how boring would that be? Thus, we have to pay for the lives we want to lead. But that doesn’t mean we can’t optimize our “take-home” potential. 

Remember, the more we know, the more we SAVE and the more we save, the more we earn, grow and thrive. While taxes might stay the same, the way you feel about them sure might change. 


We’re changing the narrative around money but change can’t happen with a one-sided conversation. That’s why we’re excited to bring different voices and experts to share their wisdom. Send us an email and let us know what you think. And remember the nav.it money app offers you free tools for managing your money moves like automated savings and budget tracker.

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