Originally published at: https://www.ohmydollar.com/2020/02/07/taxes-101/
Lillian is joined by Nina, who asks questions about taxes and we cover what you need to know about witholding, saver’s credit, and how to figure out your taxes when you have a pile of 1099 income.
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Episode Transcript (supported by our Patrons and provided by DSW Transcription)
Lillian: [00:00:00] Welcome to Oh My Dollar!, a personal finance show with a dash of glitter. Dealing with money can be scary, and stressful. Here we give practical, friendly advice about money that helps you tackle the financial overwhelm. I’m your host, Lillian Karabaic, and today, I’m joined by Nina. Thank you for joining us!
Nina: [00:00:14] Yeah, of course!
Lillian: [00:00:16] But first, before we jump into the show, this show is supported by listeners like you through our Purrsonal Finance Society, which is a fancy name for our Patreon members. You can join up with other Oh My Dollar! community members to support episode transcripts, live streams, and more by making a pledge of $1 or more per month. Patrons get cool perks like cat stickers, discounts, and a special badge on our forums. Join at ohmydollar.com/support if you’re interested! Thank you to our newest patrons who joined this week – Stephanie, Leah, and Heather – and put us over 100 patrons. All right, Nina, do you know why you’re here?
Nina: [00:00:52] Kind of …
Lillian: [00:00:53] Why we locked you in this room with no windows?
Nina: [00:00:55] You told me you were going to question me about taxes.
Lillian: [00:00:59] That is exactly what we are going to do because this … So, this is the time of year. I’m starting to get a bunch of envelopes. I’ve been sending some of them out on behalf of-
Nina: [00:01:08] Oh, same.
Lillian: [00:01:08] -the radio station here. All of these envelopes are related to the wonderful thing that is American taxes.
Nina: [00:01:16] Hmmm.
Lillian: [00:01:16] They’re so great! I like some of the things they buy, and I dislike a lot of the things they buy.
Nina: [00:01:22] I like when I get money at the end of the year
Lillian: [00:01:24] Yes, tax refunds, which is an important question, because some people are like, “Why do some years I get refunds and then other years I don’t?” The whole tax code changed last year with President Trump’s tax plan. Whatever you think about the president, it does affect you, if you have earned income in the U.S., and it’s good to know how things have changed. Because even if you’re like me and have been filing and paying taxes for 20 years, it turns out things are different now.
Nina: [00:01:57] Just a bit.
Lillian: [00:01:59] Last year would’ve been the first year that you would’ve seen this in your refund. They honestly didn’t have a lot of things worked out last year.
Nina: [00:02:06] No.
Lillian: [00:02:07] Literally, most tax preparers … The IRS was still telling us in, like, November that they weren’t entirely sure how things were going to work. So, I thought, today, we’d cover some of the basics of taxes and understanding them in the U.S., and if you’re not a U.S. listener, kind of like health care month, please enjoy the fact that you probably have a less-complicated tax system, and you can take a vacation this episode, or just fall asleep to the dulcet tones of U.S. taxes. Do you know the difference between a 1099 and a W-2 job?
Nina: [00:02:41] I think that a 1099 means you’re on a contract versus an employee.
Lillian: [00:02:46] Kind of … It’s commonly described as a contractor, but that being said, there are people who are called contractors at their job, but that are still W-2 employees. The real difference here is the type of income you’re getting. If you’re a 1099 contractor, that means that you’re getting paid, and they are not withholding any taxes at the employer side. There’s lots of types of taxes that are rolled into … You just get the paycheck, and you know it’s less than the total amount you got paid.
Nina: [00:03:14] Basically, yeah.
Lillian: [00:03:15] But there’s a bunch of line items in there, and one of those is Social Security taxes. Social Security taxes, half of it is paid for by the employer and half is paid for by the employee. Also, the employer withholds a certain amount of all the other taxes, based on whatever your total tax bracket is.
Nina: [00:03:32] Mm-hmm.
Lillian: [00:03:32] If you’re a 1099 contractor, that means that you’re getting paid the exact amount that you either invoiced them … If you worked five hours as a 1099 contractor, and you made $20 an hour, and you worked five hours, then you’re going to get paid $100. If you were a W-2 employee, and you made $20 an hour, you’d get less than $100 because those taxes are being withheld for you.
[00:03:59] That goes straight to the IRS on a quarterly system because your employer will do it for you. If you’re in the fun side, employer side, it means that you do the work of sending it off. Then, at the end of the year, we have to square it up, essentially. That’s why in January you get all those tax forms, because those tax forms are statements of, “We paid you money.”
[00:04:22] I think what a lot of people don’t realize is a lot of these forms make it feel like taxes are a science, and they’re not. They’re an art. Two totally skilled tax preparers can sit down with the same information and get different answers, and it doesn’t mean that one of them is wrong. It’s just that we don’t have a lot of mechanisms by which to influence human behavior in the U.S. via law because of the way that we’re structured; because we have a bunch of different states, and they can do whatever they want.
Nina: [00:04:53] Yeah.
Lillian: [00:04:53] One of the only mechanisms they have at the federal level is tax policy. So, that means they’ve baked everything possible into the tax code.
Nina: [00:05:00] Of course. Sounds about right.
Lillian: [00:05:03] Which means that we have … It’s awesome; the Germans are pretty much tied for having the most complicated tax code. Germans have a lot easier time filing it, though. Fancy that.
Nina: [00:05:12] Not surprising.
Lillian: [00:05:14] When you’re filing a return, what you’re actually doing is you’re saying, “Okay, the information that has been sent to you is the same as the information I have,” and a return is actually not the same as your refund. You might get a refund from filing your return, but it’s actually … It’s just telling the IRS, “This is how much my income was, and then, oh, by the way, here’s all these other things I think I should get deductions for.”
[00:05:37] There are different kinds of 1099 incomes. Some is work, which is what most people are used to – 1099, W-2 – which is the more standard job, but there’s also income that you might get that you might not get a 1099 for. That would include I’m self-employed, and people pay me money; if I sell you a book, and you give me $20 … The thing that always kind of blew my mind, when I first started running a business, is no one’s in charge of telling the government that exchange happened except me. So, all of them … You keeping your own books as a business, especially a business, like me, that sells a lot of really small things-
Nina: [00:06:17] Yeah.
Lillian: [00:06:17] That’s what I actually need to file my taxes at the end. There’s no third party out there that’s going like, “Oh, I kept track of all the books that Lily sold.” So …
Nina: [00:06:25] That seems like a recipe for fraud.
Lillian: [00:06:30] That is why tax fraud is often how we get people in this country, right?
Nina: [00:06:33] Yeah.
Lillian: [00:06:33] That’s how we bring down crime bosses and things like that. It also means it can be really complicated and hard to keep track of because if you’re like, “Man, I’m just someone who sells things on Etsy. I don’t want to be an expert in freaking taxes, or accounting,” but you do actually need to know how much income came in last year. If you’re like me, I’m still dealing with cleaning up problems in my books from last year, so I don’t actually know how much money I made, which is real great.
[00:07:01] The great thing about being self-employed and having those is that you get to take out deductions, which are business expenses. You won’t pay taxes on the full amount that you got paid. Just like taxes would come out if you were a W-2 employee, you can actually deduct all the business expenses. We have plenty of episodes on this, so if you’re wondering what is a business deduction or not, go listen to one of those episodes. I’ll link to them in the show notes.
[00:07:27] But there’s other income that you might not think about. You’re like, “I’m not self-employed. I don’t have other income,” but you might get a 1099-INT, which is a type of form that you will get from your bank that shows how much interest you got. The great part is if you just have a savings account, and you get like five cents of interest a year, you will still get a 1099-INT. You’re like, “Really, do I have to declare this?” The good news is they upped the threshold now, and you can … Most banks will not actually send you one in the mail-
Nina: [00:08:01] Okay.
Lillian: [00:08:01] -which means you need to know that you need to go online and get it downloaded from your tax website. It’s real great. So, when you go into your bank [crosstalk] there’d usually be a Tax Documents area, and that’s for interest. There’s other things, too, right? So, something like a Kickstarter is a great example of something that is taxable income, because if you back a Kickstarter, you have an expectation, years later, it might be that you’re going to get something in return. So, that is income that’s tied to a business. Things like GoFundMes are considered gifts, and gifts are not taxable. Gifts are only ever taxable to the person that gave them. They are not taxable to the recipient. So, if you have a GoFundMe because you can’t pay your rent, or someone has a medical disaster, that money is considered a gift, and it is not taxable to the recipient.
Nina: [00:08:54] But it is taxable to me-
Lillian: [00:08:56] If you gave it. If you were like, “Hey, I have $500,” and you gave it to someone, that is not taxable. If you go over the gift limit, then there is a gift tax. If you go over the gift limit, you’ll probably know it because it’s, I believe, $20,000 this year. But the gift tax does come up for even some middle-class people, sometimes, if they want to buy a house with their adult children. If you are in this scenario of you’re, for once in your life, maybe transferring over $20,000 to an adult child, you may want to do research. That’s why, often, people will split it tax years, because if you give it on December 31, 2019 and then the next day, on January 1, 2020, then it would be split into the two tax years, if you split it up into two payments. A lot of people end up doing that. You also might get it- you might get a 1099 from unemployment.
Nina: [00:09:55] Yeah, I’m avoiding that, right now.
Lillian: [00:09:57] Oh, yeah. Do you have an unemployment check from last year that you’re like, “Oh, great …”?
Nina: [00:10:01] I do. I just haven’t opened it. I just threw it on my desk and was like, “I’ll deal with that at a time when I do my taxes.”
Lillian: [00:10:06] Well, and we’re a big fan, on this show, of make sure you’re in the right mental space to deal with this. But, also, I have discovered that no one gets their money together by ignoring it and letting it catch on fire on the desk behind them.
Nina: [00:10:19] That’s not how I treat most of my money. That’s how I’m treating my taxes.
Lillian: [00:10:22] Yes, your taxes. The great news is that you might actually get money back. The thing about unemployment 1099s is they can be kind of scary because you’re like, “Ugh, did taxes get taken out of that?” Most likely, taxes were taken out of your unemployment insurance. You would have to choose to opt out.
Nina: [00:10:38] That feels rude that those are taxable.
Lillian: [00:10:41] Yes, and that’s a much bigger discussion about whether or not they’re taxable. But it is income, right? So, it is-
Nina: [00:10:47] That I guess that I paid for out of previous paychecks …
Lillian: [00:10:51] Out of previous paychecks, as did we all, right? It all goes into this pool. There’s a greater discussion to be had there.
Nina: [00:10:59] I have a lot of thoughts about unemployment …
Lillian: [00:11:03] Yeah, so you might end up with a handful of those. We’ve talked before, on this show, if you have a lot of 1099 income, where taxes aren’t getting withheld – you run a business like I do – but you also have a day job, one of your strategies you can do is you can withhold even more at your day job so that you don’t end up owing.
Nina: [00:11:23] Mm-hmm.
Lillian: [00:11:23] So, if you do have a side hustle but you have a day job, what you can do is essentially lower the amount of exemptions that you give yourself. Usually, you give yourself- if you’re a single person, you’ll give yourself one exemption in each category. I know we’ve all filled in that fun forum with 1-1-1. They actually changed it this year, and now it’s dollar amounts, and I feel like it’s actually more confusing, but I think it’s just because I was used to the old one.
Nina: [00:11:47] I still don’t entirely know how it works. I just know that my mom yells at me what number I should put in.
Lillian: [00:11:51] Right, right! Which is like … In the long term, this is why you’re the perfect person to have in the studio because-
Nina: [00:11:56] But also bad because I handle money daily.
Lillian: [00:12:00] Right. You’re the perfect person to have in it because let’s get you to the point where you have a better understanding of what is. Those numbers on the line, the zeroes or the ones that you’ll put in, are based on the number of exemptions you’re taking. So, if someone else can claim you as a dependent, you would put zeroes on every line. If you have a dependent, you would up the number you’d put. You probably put two and two. The new form has you deduct $1000 for each dependent. The form is actually clearer, I think; it’s just that if you got used to the old form, you’re going to be like, “Where do I put my zeros and ones?” Now, it’s a dollar amount. So, if someone else is claiming you as a dependent, that means you would fill in zeros on each line, which might be what your mom is yelling at you.
Nina: [00:12:43] She shouldn’t be at this point. That would be news to me.
Lillian: [00:12:47] Well, and that’s the thing with being claimed as a dependent. A lot of people don’t realize that they might be. A lot of adult children, their parents might still be trying to claim them as a dependent because, often, they will be more valuable as a dependent than the other person’s, too … If you have higher-income-earning parents, and then they have an adult child that’s like, say, maybe in school and only working part-time, then the amount that they’re going to pay in taxes is actually going to be a lot lower than the deduction that their parents are going to get, taking them as a dependent.
Nina: [00:13:19] Oh, yeah, that’s definitely why she was yelling at me a while ago, but it shouldn’t be now.
Lillian: [00:13:23] Right. Shouldn’t be true now. It’s always an awkward conversation to have with someone. This is also true, generally, for spouses. Sometimes, if a spouse, one of them doesn’t earn very much money, it’s almost always an advantageous to do married filing jointly. The sole exception to when it makes sense to not do married filing jointly would be if you’ve got some sort of income-based repayment plan going for your student loans-
Nina: [00:13:51] Okay.
Lillian: [00:13:51] -because married filing separately is the only way that you can count your individual income for income-based repayment.
Nina: [00:13:57] Okay.
Lillian: [00:13:57] Which is a situation that you should work out at the time that you’re doing IBR and setting up IBR and ICR for your student loans. Hope that doesn’t sound too confusing.
Nina: [00:14:09] Well, see, I’m in this fun thing where I went to a school that gave me a lot of grants, so I have no student loans.
Lillian: [00:14:14] Which is excellent!
Nina: [00:14:15] Yeah.
Lillian: [00:14:15] As far as I know, you’re not married. So-
Nina: [00:14:18] No, I am not married. I do not have children.
Lillian: [00:14:21] The great news is that your taxes are going to be relatively uncomplicated from the situation of both. You’re not going to have to worry about someone else as a dependent, so you’re probably going to put ones in all of those categories.
Nina: [00:14:31] Yeah, which is- My mom’s been telling me to not put one.
Lillian: [00:14:35] So, the other thing is that, sometimes, people will try to make you a dependent, when you don’t fit the legal definition of a dependent, because more than half your income and support needs to be coming from them, and you have to live in the same household as them to be counted as a dependent for at least- I believe it’s nine months of the year. So-
Nina: [00:14:55] It’s six months, I learned.
Lillian: [00:14:56] Six months. Okay, it’s six months of the year. It’s been awhile for me. That’s one of the things where some people will … Like their parents will still try to claim them, when they’re out of state, and earning income, and they’re just out of university, or something.
Nina: [00:15:12] Mm-hmm.
Lillian: [00:15:12] Just be aware that that isn’t the legal definition. Be aware, you might have to have a conversation about tax evasion with your parents, if you’re in the situation where this is happening. If anybody’s listening to this and going, “Oh, that me,” that would be a conversation to have with your parents.
Nina: [00:15:28] I feel like a lot of people I know have had that happen-
Lillian: [00:15:31] You’re also probably not going to go to W-4 jail, just so people know.
Nina: [00:15:36] No.
Lillian: [00:15:36] This is one of those things where- we use this term a lot on the show. There’s a thing called audit priority, and this is the list of people the IRS has the capacity and care to go at. Usually middle-class parents claiming their adult children, who are still in college, as dependents is not an audit priority.
Nina: [00:16:00] I would hope not.
Lillian: [00:16:00] Yeah … That being said, disproportionate effect, of course, as always, on working-class families, and if people are receiving state income of some sort, either SNAP, or any other kind of benefits, then you might find yourself more at risk, or with Social Security disability, you might find yourself more at risk because your finances end up being more under scrutiny. Unemployment is another one of those cases where it’s not that the IRS is necessarily putting you under scrutiny, but if you’re receiving unemployment, especially if you’re in the case of people that got multiple unemployment extensions, back in the days when Oregon had no jobs, and I think our maximum extension was 84 weeks or something-
Nina: [00:16:41] That’s a long time.
Lillian: [00:16:44] Well, it was real hard to find a job for a long time.
Nina: [00:16:47] Oh, I can certainly believe that, having searched for a job in this damned state, but it’s still-
Lillian: [00:16:51] That was when unemployment was over 10 percent for years at a time. We had gotten to the point where we had the maximum extension. Those are the kind of people that you’re more likely to have a higher level of scrutiny from both the unemployment agency, and then your income is going to be looked at, including are you claiming that you have 10 dependents, and they’re all your cats? You cannot claim cats as dependents, no matter how cute they are or how much you are annoyed that you have to take care of them all the time-
Nina: [00:17:22] Whether she acts like a baby?
Lillian: [00:17:23] Even if she acts like a baby, annoyingly, you cannot do that. All right, what happens if you don’t get enough tax withheld? You know what happens?
Nina: [00:17:33] You have to pay the tax?
Lillian: [00:17:33] You have to pay. You have to pay the taxes. Do you know when you need to pay it by?
Nina: [00:17:38] April 15?
Lillian: [00:17:39] April 15. Here’s the thing – you can file starting now. So, whenever this show airs, you can file starting from January 1, theoretically. Very few people have it together enough to do that-
Nina: [00:17:49] Don’t have a W-2 yet.
Lillian: [00:17:49] Yeah, most people are waiting on their employers to send stuff. If you file, and you go, “Oh crap, I owe money,” and you’re like, “Oooh, I don’t have that money.” You’re like, “Hmm, they say I owe $2,000. Don’t have $2,000 just sitting around to pay extra taxes.” You do not have to submit your check at the time you submit your return. So, if you do this in February, discover you have $2,000; think you can get it together by April 15th, then you can submit your return. You don’t have to send in the check with your return or put in your ACH number online, because the vast majority people e-file.
Nina: [00:18:24] Yeah.
Lillian: [00:18:24] Then what you can do is try to get it together by April 15. If you can’t, it’s okay. We’ve talked before about how the IRS is pretty much the best creditor to have. There are people you don’t want to owe money to, and the IRS – while not my favorite of creditors – I will say that they are some of the easiest to deal with. They’re not going to charge you outrageous interest rates and, quite often, if it’s your first time where you’re not going to be able to pay by the date, they will not charge you any penalties, or whatsoever.
[00:18:55] Here’s the thing, though. This is the key with all this tax stuff. I know a lot of people that get scared that they’re going to owe money, so they don’t do any filing, and they don’t file a return, and they kind of decide that maybe, if they bury their heads in the sand, it will all go away. That is the worst-
Nina: [00:19:13] That is not true.
Lillian: [00:19:14] No, and it is literally the worst strategy with the IRS. So, pretty much, the IRS will be extremely forgiving to you, as long as you’re making some payment, or some good faith effort. But not filing your return is actually a federal offense. If you need to file a return, which is you have more than $12,000 of earned income for last year, you need to file a return. If you only had $12,000, great news – you’re going to get money back.
Nina: [00:19:39] I would hope so if you only made $12,000.
Lillian: [00:19:42] Yeah. Just remember that, but you do have to file. I know a lot of people that are like, “I’m poor, and I had taxes withheld. Why would I- why would I file at all?” Well, one, you often get a refund because we have this excellent thing called the earned income tax credit.
Nina: [00:19:57] I thought they got rid of that.
Lillian: [00:19:58] EITC is still around, but we also have, now, the standard deduction is $12,000 under the new tax plan. That means that, essentially, your first $12,000 is tax free, except if it’s all self-employment income because you still need to pay your employer portion on that first $12,000. But there’s this thing called the earned income tax credit, which essentially is one of the few government programs that actually is named for what it is, which is that if you have earned income, and you are low income, you will get extra money back at tax time.
[00:20:32] It is pretty much the coolest program we have because it’s pretty much a Robin Hood tax program. It is taking money from rich people and giving it to poor people, so the EITC is … You get more back if you have dependents, and you have to be over the age of 25, no matter what. The EITC is extremely helpful, if you do have a lot of dependents, and you’re low income because you might end up back with quite a lot of money. You still have to file that return, though. If you’re like, “Oh, my gosh, I can’t do it. I cannot come up with this money by April 15,” talk to the IRS. You will automatically get put in a payment plan if you owe less than $40,000, but you have to tell them.
Nina: [00:21:12] How do I tell the IRS?
Lillian: [00:21:14] How do you tell the IRS? You go online to the IRS’s website. You can google ‘IRS payment plan.’ Only go to IRS.gov websites. Don’t go to some sketchy website that looks like … I mean, you’re probably on the IRS’s website, if it looks like it was made in the ’90s, but don’t go to anything like on GeoCities.com. Go to IRS.gov ,and they will have really great payment plans.
[00:21:38] I will also say, while they are very understaffed because they keep cutting their staff, if you can get them on the phone – which you can them on the phone a lot more right now than you will be able to the week of April 15 – they are actually delightful humans to talk to, believe it or not. I don’t know what it is. I think it takes a certain kind of person to work at the IRS, and I think they just know that no one is calling them because they’re excited about calling them, and I think they compensate.
Lillian: [00:22:07] If you are in the case where you’re like, “Oh, crap, I didn’t file last year,” if you missed filing your return, and it was your first offense, you will owe a penalty, but they will waive that penalty the first time; but you have to talk to them. So, those penalties for not filing, they really do start adding up. If you’re like- you were a nanny last year; you didn’t get any taxes withheld – even though you should, because you should be considered a household employee; there is a part of the tax code for you, but didn’t happen – and you’re like, “Oh, crap. The calculator says I owe a $3,000 in taxes.” One, do a couple strategies on figuring out what you can deduct – mileage, things like that – get the amount that you owe down a little bit. But talk to the IRS. I’ve known quite a few people that are afraid of having to get the money together for their taxes, and then, guess what they do? They don’t file for seven years.
Nina: [00:23:03] I feel like I know a lot of people that would do that.
Lillian: [00:23:06] It doesn’t work. It’s a bad strategy. There are people- really awesome people – we should have one on the show at some point – that are tax resisters that are explicitly not paying their taxes because they are resisting the money that we spend on war. Those people are making choices – informed, in order to do that – and a lot of those people lose their houses, their homes, their passports, things like that because of it, and it is a political choice they’re making. Don’t be-
Nina: [00:23:33] That’s a bold one.
Lillian: [00:23:33] Yeah! Don’t be one of those people, though, that decides to be an accidental tax resister because-
Nina: [00:23:41] Are you resisting, if you don’t know it?
Lillian: [00:23:43] Yes, because you probably have a general sentiment that it is. What a lot of people don’t know is that student loan income, like if you are living off student loans, right now, because you’re in school, and you’re getting checks cut on them, that is not taxable income. That’s important to know [crosstalk]
Nina: [00:24:00] -I’ve never misfiled.
Lillian: [00:24:00] The other thing to know is most scholarships and fellowships are not taxable income. So, if you look at the years that I was in college, I had W-2 jobs, but my income, overall, looks really low because each summer I worked on a fellowship. That income is just … You don’t have to pay social security taxes, or income taxes on it. It just kind of exists in the ether. I’m still a little confused about why that’s true.
[00:24:26] There may be situations where your scholarship money is taxable. You will – if it is – be getting a 1099 from your school, or whoever gave it to you. One of those cases is, quite annoyingly, AmeriCorps Education Awards provided by our federal government for doing civilian service are actually taxable in the year that you use it, and they’re taxable at a different rate than your overall tax rate. That’s a different rant.
Nina: [00:24:51] Oh, AmeriCorps …
Lillian: [00:24:51] Oh, AmeriCorps … One thing you need to know is that even if you are a dependent – we talked about those zeros and ones – you can’t file on someone else’s return. This is a phrase I hear my kids say all the time, when I’m out teaching kids. They’ll be like, “Oh, yeah, no, I don’t have to file because I filed on my mom’s return,” or, “I file on my foster mom’s return …” and I’ll be like, “You can’t file on someone else’s return. If you had earned income for the year, over $12,000, you do need to file a return.” The one thing you want to make sure is that when you both file your returns, they’re not a mismatch. You don’t want to claim yourself as head of household, when you’re claimed as a dependent on someone else’s taxes.
Nina: [00:25:30] Yeah.
Lillian: [00:25:31] That is one of those things where, suddenly, the IRS will start investigating a little more, because they’ve got a mismatch on two Social Security numbers or EINs. Another common myth is that you need to be a U.S. citizen in order to file taxes, or you need to have a social security number. Not true.
Nina: [00:25:46] No.
Lillian: [00:25:46] You need a TIN, or an EIN. EINs are for LLCs, and TINs are taxpayer identification numbers. Essentially, if you earn money in this country, we’re going to find a way to take taxes out of it.
Nina: [00:25:57] Of course.
Lillian: [00:25:59] Regardless of whether or not you get the benefits of those taxes. A lot of people don’t realize they’re going to do that. I will also say IRS is … Things may have changed slightly under this administration, but the IRS is pretty agnostic about immigration statuses. I know a lot of people that will try to hide from paying taxes because they’re undocumented, and they’re worried that they’re in this situation where, if they start filing taxes with a TIN, then it’s going to be obvious where they work, this kind of thing.
Nina: [00:26:28] Yeah.
Lillian: [00:26:28] The IRS is not a reporting agency. It does not report to Department of Homeland Security, or ICE, so that is an important thing to know. A lot of people also work under other people’s security numbers, which I don’t recommend because that’s like super-illegal, but it does happen to a lot of people that are undocumented.
Nina: [00:26:49] Would this administration potentially push the IRS to report?
Lillian: [00:26:55] Do that? I don’t think we’re at current risk of it, but I am not an expert on that. I do think, over the long term, it could be a thing that we see. What I will say is the IRS is extremely understaffed, so the concept that that would be a thing they would be worried about, right now, is almost impossible to believe because they just don’t have the resources to do that.
Nina: [00:27:18] Maybe a good thing.
Lillian: [00:27:20] As long as they keep underfunding the IRS and don’t provide them the number of people to process taxes … Last type of taxes you need to file is state taxes. You may have city taxes, as well. If you live in a big city, in a liberal place, you might have city taxes.
Nina: [00:27:38] Yeah, I found that out late last year.
Lillian: [00:27:39] Yeah. The good news is that, in Portland, we don’t really have taxes at the city level. We do have this thing called the TriMet tax, but most people pay it through their employer.
Nina: [00:27:50] There’s a weird arts tax.
Lillian: [00:27:50] Oh, yes-
Nina: [00:27:52] They keep threatening to send me to collections, but …
Lillian: [00:27:54] We do have an arts tax. I could get into that … It does not apply to 99 percent of listeners because it’s a bizarre Portland thing. It’s one of those, we didn’t really think through the administration of it, when we have it, but it’s $35 a year, which sounds like-
Nina: [00:28:10] I thought it was fake when I first got it.
Lillian: [00:28:12] Yeah, I know, because it doesn’t look real. They also tried to claim it against a name that never even existed when it got passed into the law and tell me that I was delinquent on it even though I had paid on it. But they were like- my old legal name that didn’t even exist when … I had way changed my name years earlier. I don’t know what their data source is … Arts tax aside, state tax.
Nina: [00:28:34] Yes.
Lillian: [00:28:35] 40 out of 52 states, or districts have state income tax. You do have to file with your state. State is one of those cases where you might not be able to file for free. So, that brings us to our next thing, which is you should not have to pay to file taxes. There are reasons why you might want to pay a tax preparer; namely, you run a business; once you have a business with employees; if you have a business that has a lot of expenses, or COGS, then you might want to pay a CPA to do it; or if you’re in a very high income, two earner sort of situation, there might- or if have rental properties, you may want to pay a tax preparer.
[00:29:16] However, the average person, middle-class/working-class, you can do it online for free; maybe get someone to hold your hand with you. A lot of working-class people get preyed on by tax refund- like payday loans, essentially. So, a lot of people … You know, you see those people standing out on the corner with a sign, wearing an Uncle Sam costume, that are like, “File your taxes here!” Nina’s got a face like, “I’ve never seen this before in my life …”
Nina: [00:29:42] I have seen them, but I’ve … They kind of equate themselves to a guy dressed as a sandwich in front of a Subway, to me.
Lillian: [00:29:49] Yep. Well, what they are actually doing is advertising for tax-prep services, and the tax prep is probably quite legit, right? You have to be licensed in most states to provide tax prep. The way that those businesses, those franchises, make money is by offering these things called ‘refund loans,’ which is essentially same-day refunds because people that tend to get refunds tend to be lower income, right?
Nina: [00:30:15] Yeah.
Lillian: [00:30:15] Because you get either the EITC, or whatever it is, and you’re going to get more money back. One of the ways they’ll prey on you is they say, “Oh, you have to wait up to 20 days to get this back from the government,” but for the low, low cost of 110-percent interest, you can get essentially what amounts to a payday loan.
Nina: [00:30:37] Yeah.
Lillian: [00:30:37] There are choices. Some people will choose to do that because they really do need the money now. I will say, if you e-file, usually money appears much quicker than that. I would say, my experience is-
Nina: [00:30:48] Yeah, I was going to say; it’s not long.
Lillian: [00:30:48] -the state takes forever to get me my money back because they mostly just take my money, but usually federal government, if you file early, you’ll get that money back real fast. Once you file, if you file at 11:59 p.m. on April 15, e-file, yes, it might take up to 20 days to get that back just because they’re processing a really high volume. You aren’t required to pay a fee to file, though, if your income is below about $60,000. You should go to the IRS’s website. They have a list of free e-file.
[00:30:48] Once again, you can only get the free e-file if you follow the links from the IRS’s website. This is the secret. Free e-file, if you just log into TurboTax, H&R Block, Intuit – any of those online tax-prep software things, they’re going to lure you in and be like, “You might get free e-file …” but if you don’t follow that link from the IRS’s website, you’re not going to get it.
Nina: [00:31:43] Interesting.
Lillian: [00:31:43] Sometimes, what they will do is they will prepare your state tax return for you, and most states don’t necessarily have free e-file, so they’ll say, “For $20, you can just e-file it now,” your state tax return, after you’ve done your federal, but if you print it off and just mail it in with a check, you won’t have to pay that fee. That’s one way you can do it. Another way you can do it is a program we’ve talked about a lot. Have you heard of Tax-Aid?
Nina: [00:32:11] No.
Lillian: [00:32:12] Tax-Aid … We actually have had a lot of listeners who’ve ended up volunteering because I’ve talked about it on the show. It is the largest volunteer program in the country, and it exists purely to get more low-income people their tax refunds back. What it does- a lot of people don’t want to bother to file because they’re like, “I know I paid all my taxes. I got it withheld from my paycheck. I have uncomplicated things.” Tax-Aid does free tax prep, and they will do it if you’re below like $60,000-ish a year.
Nina: [00:32:40] That’s a pretty high bar to set for that.
Lillian: [00:32:42] Yep, exactly, and they will also do it … It’s a joint program with the AARP, and they will also do it if you’re a retired person. Sometimes, they might turn you away if they say it’s too- if your taxes are too complicated; if it’s out of scope. That being said, vast majority of tax situations, they are prepared to handle, and a volunteer will sit down with you. So, if you’re like, “Oh, my God, the idea of doing taxes is the most stressful thing in my life,” just get together your forms, anything you might need, book an appointment with your local tax preparer.
[00:33:13] Through Tax-Aid, they will also- they do e-file. Even though they will sit down with you, their goal is to e-file 100 percent of returns. Every year, they get to like 99 percent. It is always free. They are trained volunteers. You have to go through 40 hours of training to become a tax preparer for Tax-Aid. It is totally free, and they will do it in a bunch of different languages. If you’re not comfortable in English, or if you’re looking to get help for someone that’s not comfortable in English, they have a bunch of different sites, and you can search on the Tax-Aid websites. It’ll be administered with a local nonprofit, but there’s over 15,000 different places that can do it. I think it is my favorite option.
[00:33:53] I had one year … I used to be a Tax-Aid preparer. I was a certified tax preparer. I had one year on my taxes were so complicated. Of course, it was the year that I had an AmeriCorps award, and, for part of the year, I was claimed as a dependent on someone else’s taxes. No one understood what was going on. Despite the fact that I was really pretty well-versed on this stuff, I took it to the Tax-Aid office … The great part is they work with the IRS, and we were able to get a phone line with the IRS opened to call, and talk with them about it, and try to figure out what to do. That’s the kind of thing the Tax-Aid office was able to do. Just having someone else help me out with it was really nice, right?
Nina: [00:34:34] Yeah, yeah.
Lillian: [00:34:35] Sometimes, you just want someone else to go, “Yes, this is complicated …”
Nina: [00:34:39] Just a validation.
Lillian: [00:34:43] Are there any big mysteries of taxes that we haven’t covered for you? I mean, besides like the whole system being broken; that’s a different story.
Nina: [00:34:52] Hmm. I probably- I mean, this doesn’t apply to me anymore, but it used to – what to do if you’re filing in multiple states; you’ve lived in multiple states in one year.
Lillian: [00:35:01] Oh, yes. That is an excellent question! That also applies if you earned income in a state but didn’t necessarily live in it. California is notorious for this-
Nina: [00:35:09] Which is … Yeah.
Lillian: [00:35:11] California loves to withhold taxes. So, any income that you earned in that state, you will owe state income taxes for, and you’re going to have to file multiple returns. That being said, almost all states – I think it’s almost 100 percent of the states with state income tax – will let you take a deduction for the amount of taxes that you’ve paid in another state.
Nina: [00:35:35] Okay.
Lillian: [00:35:35] And you only have to file with the state, for income that you’ve earned in that state. So, for example, if you spent half the year living in California and half living in Oregon, you would only have to pay income tax to the state of California for the income that you earned while living in that state. What gets hard is the definition of work, these days, can be real confusing.
Nina: [00:36:00] Yeah …
Lillian: [00:36:00] You might be a remote employee that works for a California company and never sets foot in California. California is kind of the worst example because the one … I would say the agency you never want on your bad side is the California Department of Revenue because they love to take money from … They probably have the broadest “We will take taxes from you” guidelines of anyone, I would say.
Nina: [00:36:25] Sounds about right.
Lillian: [00:36:25] They really like their taxes.
Nina: [00:36:28] They fund a lot of things.
Lillian: [00:36:29] Yeah, right, right. That’s the flip side is that they have a lot more state-supported stuff because they have such high taxes. They are also the fifth largest economy in the world, just by themselves. That is that is evident in one of the ways they collect revenue.
[00:36:44] If you are a worker who lives in a different state but has a California company, if you had California taxes withheld, most likely, then you are going to need to pay California taxes. That being said, if you are domiciled and live in a different state while earning California company taxes in that state, then … For Colorado- that might be a bad example, because I think Colorado doesn’t have income tax. Let’s say Oregon … Oregon, then what you would need to do is you file with Oregon, but you essentially say that you have no income tax in that state.
Nina: [00:37:19] Okay.
Lillian: [00:37:19] You have no income in that state. Depending on the state – every state’s different … This is one of those things you may end up having to file. Like I had one year I had to file three or four tax returns. If you are in the situation- So, I do work in other states, occasionally, where I’ll come in, and I’ll speak for a client. It would be really brutal to have to file a tax return in every state I speak at because, obviously, I’m very fancy, and I speak all over the country.
[00:37:46] Most states, you don’t have to do that if you’re considered that your place of business is in a different state, and you are considered just a guest, or something like that. You usually don’t have to file with the state. So, that’s one of those things where it will be an individual situation, but usually a little bit of googling can help you out.
[00:38:05] If you are in a situation where you have an absolutely super-complicated year … You’re on tour as a musician; you don’t have a home state; you are getting … The stack of 1099s you have is out of control; half your income was cash, and you were sleeping with the person in charge of the cash box, and now you’re not, and you can’t talk to them … If you’ve got a complicated year – hey, all of these are pulled from pretty real situations various people I know have had – then that is one of those cases where it would behoove you to get a CPA that year, and some-
Nina: [00:38:38] Yeah, it’s worth it.
Lillian: [00:38:38] Here’s the other thing – CPAs can be expensive. It can run like a couple hundred dollars to get even just personal income taxes done. That being said that amount that you spend is deductible from your taxes-
Nina: [00:38:53] Okay.
Lillian: [00:38:53] -and it is an above-the-line deduction for anybody that’s a small business owner, so that’s a good thing to know, if you’ve got a complicated situation. If you only have two states, and you don’t have this roadie that ran off with the cashbox, then you’re probably going to be fine doing it yourself. But that would be one of those cases where you may want to call in a professional because, quite often, I think people do end up overpaying out of fear – because they won’t hire a professional that looks at this stuff all the time. No matter how good you are at doing your taxes, if you’re not doing other people’s taxes, you look at, max, one tax return a year, right?
Nina: [00:39:30] Yep.
Lillian: [00:39:30] Versus a CPA that might very well look at 10-plus tax returns a day during tax season. That person’s going to just- they just have a little more experience to help you out with that.
Nina: [00:39:43] Yeah.
Lillian: [00:39:43] They don’t have to be- that’s the other thing. I keep saying CPA. Not all tax preparers are CPAs. CPAs are certified public accountants. It’s a higher standard of certification. You don’t need a CPA to file your taxes. CPAs, they have public in the name because they are required for doing some sort of public accountancy. If it’s just your own taxes, you just need a certified tax preparer, or what is called an enrolled agent.
Nina: [00:40:11] Okay.
Lillian: [00:40:11] If you end up in the case … This is the last-last professional I might mention you need. If you’re like, “Oh, man, I’ve got seven years of taxes that I haven’t been paying, or I’m fighting with the IRS about a payment plan …”
Nina: [00:40:24] You went back on resisting?
Lillian: [00:40:25] You went back on resisting; whatever it might … You’ve been living off the land, and now you want to go to school, and you realize you don’t have any tax returns to get your Pell Grant – real example from people I know. What you need, in that case, is what’s called an enrolled agent. An enrolled agent is like a super tax preparer. What they have is they have a special status with the IRS where they can be your advocate, on your behalf, with the IRS.
Nina: [00:40:51] Okay.
Lillian: [00:40:51] They’re kind of lower than a lawyer, but they’re like a- and they might be a lawyer; occasionally, they’re a lawyer. An enrolled agent, essentially, is someone that has taken enough tests, and blah, blah, blah, and is certified by the IRS to act as an agent on your behalf. The goal with an enrolled agent, which you will … Just to be clear, if you actually are being represented in a case with IRS, you’re going to pay a lot more than that $200-$300 I quoted back there, right?
Nina: [00:41:16] Yeah.
Lillian: [00:41:16] But the idea is that you, at that point, probably have tens of thousands of dollars on the line. So, they are your advocate in that case. Quite often, people will need enrolled agents when they’re in a situation where they get a … They’re a surviving spouse member, and they end up inheriting a pension from their late spouse, and they had a bidness situation, where they’ve got different … Once you get a lot of money, a lot of people want a piece of it, and that can be the situation where an enrolled agent can really save you a lot of money and also take some stress off your back. I think those are the basic cases. I wish you all refunds. Oh, here’s another question – if you get a bunch of refunds, do you know what to do if you’re like, “Man, I got a huge refund, and I would rather not have this happen every year …”
Nina: [00:42:04] I actually put it as savings in a separate savings account.
Lillian: [00:42:09] That is one option, but if you want to prevent getting a huge refund next year and your situation is mostly the same, you can change your withholding. So, just go to your employer and be like, “Hey, it turned out I withheld way too much money last year, and I got this refund back.” If you’re not getting a refund because it’s an earned income tax credit or a refundable credit, so to speak, but you’re getting it because you over-withheld, you can change your withholding.
[00:42:34] On the other side, if you do what’s called under-withholding, usually the IRS will … If you only had a W-2 job and yet you still owe a bunch of money at the end of the year, then you’re probably being what’s called under-withheld, and you can just go change your withholding; but what might also happen is that IRS goes and says to your employer, “Hey, this employee under-withheld, because some people will, you know, write for a bunch of dependents, and then it turns out they don’t have a bunch of dependents because they want more money in each paycheck throughout the year. So, that’s what a refund generally is, is that you gave the government a loan, and then they gave it back to you.
Nina: [00:43:13] I still don’t know if I understand withholding.
Lillian: [00:43:16] Withholding?
Nina: [00:43:16] Yeah.
Lillian: [00:43:16] I mean, the thing is that the form is that form that you only fill out once, and then you like never look at it again, and you’re like, “Ughhh!” Essentially, the higher the numbers on the withholding form, the less money the government is taking out of your paycheck. So, if you have fives all down that withholding form, that means that you’re taking five exemptions. If you have zeros all down the withholding form, you’re saying, “Take the maximum amount out of my check.” Does that make sense?
Nina: [00:43:46] I think it’s what qualifies as an exemption that tends to confuse me because I am a single person; I have no children, no dependents, not married.
Lillian: [00:43:56] So then, you’d be one on every line.
Nina: [00:43:57] But I still get a refund.
Lillian: [00:44:00] Yes, which could be because you’re low income, and that might be that you have refundable tax credits.
Nina: [00:44:05] Okay.
Lillian: [00:44:05] So, if you’re below a certain threshold, you will- you might get a refund just because you have refundable tax credits, and generally, refund is a good thing.
Nina: [00:44:16] Yeah … No, I like the refund. It’s just a matter of should I get more in each paycheck?
Lillian: [00:44:19] You’re like, “Should I be getting a bunch more in each paycheck?” I’m on the other end of the spectrum, which is that because I run my own business, I always end up having … I have to shore something up with them. When I need to shore something up with them, one of the ways I avoid it is that whatever W-2 job I have, I actually do, which is extra withholding, which you can set either a percentage, or a flat amount out of each paycheck that you want to be held extra. Some people do it as a savings plan because they have impulse control issues …
Nina: [00:44:50] I’ve definitely- my partner is one of those people, but we have yet to get that …
Lillian: [00:44:55] I do it because I don’t- I often don’t have to do quarterly taxes for my business because my income is relatively low, but having that extra money held out of my W-2 paycheck means that I have less stress sweats in April, when I start needing to owe them for a couple thousand bucks. It’s only like $2,000 instead of $5,000. It’s great.
Nina: [00:45:18] Only $2,000.
Lillian: [00:45:19] Only $2,000. No big deal. Well, I hope you learned some questions about taxes … Uh, some answers about taxes. I hope you learned some answers, not some questions.
Nina: [00:45:27] I learned a lot of things. Am I still avoiding my taxes? A little bit, but …
Lillian: [00:45:33] Yeah … Well, we’re going to check back in, and we’re going to see if you do your taxes.
Nina: [00:45:38] I will.
Lillian: [00:45:38] Hey, you said you’re going to get a refund, probably.
Nina: [00:45:40] Probably, yeah.
Lillian: [00:45:41] So, you’re just delaying getting money.
Nina: [00:45:45] I’m not financially dependent on that refund.
Lillian: [00:45:49] Yeah, but then it’s fun bonus money that you can put in an emergency fund. If you’re-
Nina: [00:45:54] I don’t treat money as fun bonus money, though. It just automatically is going into savings [crosstalk]
Lillian: [00:45:58] That is fun bonus money. I think putting money in savings is fun- a fun bonus, but maybe I have a warped sense of fun.
Nina: [00:46:04] I don’t know if that’s fun bonus or just safety.
Lillian: [00:46:09] Unlike Chase, who was on, I think, two weeks ago, saying that the main thing that he wanted to do with his emergency fund was buy a Porsche … So, you know, we …
Nina: [00:46:18] Oh, this is back from the yacht that he was going to buy.
Lillian: [00:46:21] That’s true. He was about to buy a yacht, a couple weeks ago. So, I feel like we’re in a more reasonable territory now.
Nina: [00:46:26] Well, he toured the yacht. He like full did it.
Lillian: [00:46:31] Great! Glad to know … Send in your concerns for Chase, any questions you have about taxes, anything about that … We will answer your tax questions through April 15, so if you have particular tax situations, let me know. I’ll do the research, if I don’t know the answer. Otherwise, I will answer it for you.
[00:46:51] You can email us your financial worries, or successes, or stories of your taxes at firstname.lastname@example.org. You can also tweet us @Anomalily, or @ohmydollar. Oh My Dollar! is recorded at XRAY.FM Studios in Portland, Oregon and is syndicated through PRX. Thanks, Nina, for joining us today.
Nina: [00:47:09] Yeah, of course. Maybe I’ll do my taxes.
Lillian: [00:47:11] This episode is engineered by Tony Scholl. Our intro music is by Aaron Parecki, and your host and personal finance educator is me, Lillian Karabaic. Thank you for listening, and til next time, remember to manage your money so it doesn’t manage you.