Money, Honey: Demystifying Tax Season

You can do your own taxes! It's really true! And it's a lot easier than you think!  Filing your taxes and maximizing your refund (or minimizing your liability) can be crazy complicated.  But if you're an amateur adult it probably isn't.  The forms are confusing and the language makes no sense, but it's actually much simpler than you think.  Today, for my fellow procrastinators, a guide to the basics of how taxes work so you can get it all done by the 15th.  Or spend the next year ruminating on your new knowledge and do em yourself in 2016.  If you want to know what the scoop is with taxes (I think it makes doing them easier) read this whole post.  If you're in a big hurry skip to the last half, where I explain what you personally need to do. 

If you take a peek at your check on payday, you'll see that several types of taxes are coming out.  Social Security tax and  Medicare tax are Payroll Taxes that you share with your employer.  You put 6.2% of your income towards Social Security and 1.45% towards Medicare, both of which your employer matches.  These are both gone, you don't get this money back as part of your refund.  Instead, these contributions make you eligible for these programs when you're 65.   Pretty much every person who works above the table pays these, though you won't have them taken out of a work study paycheck.  

The Income Tax is primarily what we are dealing with when it comes to your refund.  If all of your income comes from your job (rather than say, renting out property you own or successful investing) a big chuck of the tax filing process just got real simple for you.  The rate varies by how much money you make. It starts around 10% and goes up to about 40%.  So you pay a chunk to the Federal Government.  You probably also pay a State Income tax.  In Massachusetts the rate is flat, everybody just pays 5.15% all the time (unless you pay the optional higher rate.  Which, I mean, I love roads and stuff, but who does that?)  New York has brackets like the Federal system that range from 4% to almost 9%.  Some states have no income tax at all. 

So basically, your income (tax bracket) determines your tax liability, basically your total bill for the year.  A large portion of the process of doing your taxes is figuring out how much you should have paid for the year.

Lucky for you, you don't need to come up with all this money right now, because an estimate of what you'll owe each paycheck has been withheld throughout the year.  The basic thing you're doing when you do your taxes is figuring out how your liability compares to what you've already paid.  If your liability is lower than what has been withheld over the course of the year, you get a refund.  If it's higher, you owe money.

You can also use deductions to lower your tax liability.  This is why people get receipts when they donate to goodwill.  Things like charitable donations, business expenses and interest paid on a mortgage can be used to lower your liability.  You probably don't need to worry about this. Some people (usually with more money and/or more complex financial pictures) used itemized deductions, where they basically list all the qualifying things and add them up.  It is more likely that you'll get the best results using the Standard Deduction.  For a single person it's $6,200 this year ($6,300 for 2015).  So unless you have more than that in charitable donations and other deductions you don't need to worry about all that, you can just plug this handy number right into your formula.  If you made less than this, expect a nice refund!  If  you made $10,000, you only have to pay taxes on $3,800 of it.  

So now I hope you're starting to see taxes are not as mysterious as they seem.  But the forms are still wicked confusing.  I am not going to even talk about them because they are evil.  Don't do your taxes on paper my friends, it's 2015.  

Doing your taxes like a grown up:

Here's what you need:

A secure Internet connection 

The W-2 your employer sent you

General knowledge about your life (Are you married?  Do you have kids?)

MA Residents- Form MA1099-HC, which your Health Insurance Company will send you 

You can use a free service to file your taxes!  If you have a complicated situation you may need to buy software, but almost all amateur adults can do theirs just fine online.  I used Turbo Tax, other companies have similar services.  They make it super accessible and even ask you friendly questions about your feelings.

Then you plug in the information from your W-2 which is a summary of your income and taxes paid that your employer should have sent you early in the year.  Contact HR or Payroll if you didn't get one (or lost it.)  If you worked several jobs that's no problem, it will ask if you have another W-2 whenever you finish entering one. One thing I like about Turbo Tax is you don't even have to know what anything means, because it specifically tells you the location of each piece of information you need to plug in. It also does all the math for you.  So just go through all their prompts and questions.

They're going to ask you if anyone else claimed you as a dependent.  What does that mean? If someone else pays more than 50% of your being a person expenses they can claim you as a dependent.  Contact whoever this person might be and ask them if they claimed you as a dependent this year.   Even if you're pretty sure you mostly or totally support yourself you should ask, because saying a wrong thing on your taxes can be Very Bad News.  Plus, you should probably call your parents anyway.

The health insurance aspect is new this year for most Americans, but old news for Massachusetts residents.  Now that we're all required to have health insurance, you have to verify that you're covered when you do your taxes.  The federal government takes your word for it, you just check the "Yes, I'm insured" box.  If you live in MA you need that other form.  I was in a situation that many of you may also be in, which is that I'm a resident but didn't get that form, because my health insurance hails from New York.  The good news is you can track down that information other ways. It will ask for the name of your insurance company and your policy number (both are on your insurance card) and the federal ID  number of the company, which you can get by contacting your insurance company.  You can even google it.  

 When you finish, review all the info, save the document as a PDF for future reference, and click the final submit button!  Your federal return will be free.  I've done my state return on paper before, which you can certainly do, but this year I sprung for the $29.99 to have them submit it for me.  I was done with the whole process in about an hour. Both were free this year!!

Edit for 2015-Deducting Student Loan Interest 

If you're making payments on your student loans, part of that money (a good chunk of it if you started paying recently) is going to paying off the interest.  The bad news is that this feels like just taking your hard earned money and throwing it in the garbage.  The good news is the money you spend on student loan interest can save you money on your taxes. Whoever loaned you the money has to provide you with at 1089-E.  This form will say how much you've paid in interest during the year.  You don't need to itemize your deductions to take advantage of this, it's technically an "income adjustment" aka "above the line deduction" aka free money for you.

What I've Learned about Adulthood from Preschoolers

Working with kids for a living is the hardest, easiest, best, worst, most fun, super boring job I've ever had. People tend to react to the poop/spit up/snot factor, but dealing with bodily discharge doesn't bother me (that time I got puked on was the exception.) The hardest parts of my job are working with difficult parents and the fact that it's just constant, constant, constant.  Like Chinese water torture, children never do or say something just once. Or twice. Or three times.  Get it through your head dude, we will NEVER watch Caillou.   The best parts of my job are helping out families, doing kid centered activities and playing all day, and watching children use or do something that I taught them.  And the hilarious things they say. I have a theory that every three year old in the world has what it takes to be an Absurdist playwright.  Alluding here to the general wisdom of the five and under set, I'm consistently astounded by what they teach me, and how much my perspective has changed from working with little ones.

As you might expect, children have some Hot Takes on grown ups and their mysterious ways. Their ideas about adulthood have helped me more than most things to reach the place where I feel confident that I am, in fact, a grown up.

A five year old once asked me "Are you a grown up or a kid?" now I wouldn't hesitate to say "a grown up" but when I got this gem it was even more relevant, I was a 19 year old college sophomore.  I didn't really know.  What, exactly, is the difference between a grown up and a kid?   I said what I always say when I don't know the answer to a kids question, "what do you think?" she said "well you're tall like a grown up, but you have a mom like a kid." So there you have it.  We eventually decided I was "practicing to be a grown up," an amateur adult if you will.

I recently had this excellent and flattering exchange with a three year old...
"You don't smell like a grown up."
"What does a grown up smell like?"
"Bugs"
Self explanatory.

An excellent compliment I received from a two year old "You're not a grown up, you're my friend!" Kids are constantly thinking about the gaping difference between themselves and grown ups who have boring things like newspapers, and work, and "discussions."  An adult is an entirely different thing than a kid.  They know they'll be a grown up someday, but adulthood is literally ten lifetimes away.

When a favorite toy was lost, a five year old confidently reassured his sister "Julianna knows where it is, because grown ups are...grown ups." Yes, I knew exactly where it was.  Not because of my mysterious powers of Adult Omnipotence but because I had watched them put it down twenty minutes before.  They are astounded when I say "You need to go back to your bed now" when we can't even see each other, not realizing that I can hear them "sneaking" around or playing in a silent house.  Related- "My daddy can do anything, because he's big"

This is the most crucial lesson I learned: To a kid, adults know everything and can do anything.  They can drive cars and find places on maps.  They know how to make cookies and write every single letter, what will happen when you mix different paint colors, how germs work, basically any question you have a grown up knows the answer.  They can even predict the future.  How did I know that your pants would get wet if you sat in that puddle?  Because I'm a grown up. Those of us who had the good fortune to grow up with great parents and adults probably remember thinking about them as superheros.  When I babysit, I'm the ultimate authority, the person who seems to know everything.  When I talk to their parents (and mine!) as an adult, they don't have all the answers either.

I think a lot of us trip up as we move into adulthood because for so long we've imagined that the Real Adults are how we saw grown ups as kids.  That adults have all the answers and can do pretty much anything.  What I learned working with kids is that the adults we looked up to, though amazing, never actually had all the answers.  They were winging it, and just had more experience and knowledge to build on.  So let go of the idea that you won't be a grown up until you have it all together and don't need to learn more and ask questions.  We just need to keep building our toolkits and getting better and better at adulthood.  Someday, we might even start smelling like bugs.

Money, Honey: Bills, Bills Bills: Loans and Debt Edition

Sometimes, you gotta borrow money to do your thing.  Like lots of money.  Like more money than you can imagine having.  Almost every young person I know owes student loans to the tune of twenty, forty, or eighty thousand dollars.  There's tons of great writing on the student loan crisis and its impact on the economy so I'm not going to rehash that here, but it's worth checking out.  I personally have student loans to the tune of about $20,000 and an auto loan I owe $7,000 on.  I use a credit card but don't have credit card debt, though a lot of amateur adults do.  Many of us started borrowing money before we fully understood the whole process, but if you're getting a handle on your finances in your early 20s, you're still in pretty good shape.

Wait a minute!  I want to be responsible and stuff, but this stuff is so confusing!  There are so many WORDS what do they even mean? Fear not, I've done the Googling for all of us.

Interest is simply the money you pay to borrow money. Your rate is determined by your credit, but different types of loans have different general ranges.  The average credit card rate is around 15%, while the average 15 year mortgage is currently at 3.15%.  So although great credit can help you get decent interest rates, some kinds of debt cost much more than others.

APR stands for Annual Percentage Rate.  Basically, it's how much interest you will be paying on the debt each year.  So let's say we're looking at a credit card debt of  $3,000 (compared to the US average of $15,950 according to creditcard.com) and a "reasonable" 17% APR, if you carry that balance for a year (keep owing the dough without paying) you'll owe $3,510 at the end of that year.  That's assuming that you aren't adding to that debt at all.

Compound Interest means paying interest not only on the principle (how much money you borrowed the day you signed the papers) but also paying interest on the interest you've already accrued (literally means "built up", but is finance-themed). Interest is typically compounded annually or quarterly (there are four quarters in a year, so they last 3 months).  Ideally, money you owe will be compounded infrequently, and money you are saving will be compounded as often as possible.

Skip this next paragraph if you can't even with numbers right now.

Let's revisit our imaginary credit card debt.  If your interest is compounded annually you'll owe that $3,510 at the end of the first year, and then after the next year it will be up to $4,106.70.  The picture is even uglier if it compounds quarterly. 

Seventeen percent annually works out to 4.25% quarterly.  After your first quarter $3,000 becomes $3,135.  Because of the magic of compound interest, you also have to pay interest on that $135, making your total for the next quarter $3,276.08.  By the end of the first year you owe $3,543.44, and after two years you're up to $4,185.33.  The difference between compounded annually and quarterly  isn't huge in this example, but the longer you carry your debt for, the more it matters.

I'm not trying to overwhelm you here, so if you can only take one thing out of this have it be this: The nitty gritty details of your loan and carrying debt from year to year make a huge difference in how much money you will pay.

Credit card debt is the the nasty one.  If you don't have any, avoid building it up.  If you do, start working immediately on paying it down.  No more making the minimum payment, often it won't even keep you ahead on interest.  So though you're paying each month you're still going deeper into debt. Although they often offer a decent introductory rate near 2%, after the first year you'll be paying crazy interest.  The average on new cards is just over 15% and without established credit you can expect closer to 20%.  After my first year ends, my AAA Visa jumps to 24%.  I'm talking here about rates for stuff you buy, but transfers and cash withdrawals often have different rates.

Obviously in an ideal world, we wouldn't have debt. But we already do, and we sometimes need to take on more. So work to not take on debt you don't need, and to live a lifestyle you can afford.  But here are my top tips for paying down the money you owe:

1. Make paying your debt a priority.  Cultivate a sense of satisfaction that you're building your financial future whenever you make a payment, rather than throwing money into an endless hole. Listen to Grown Woman when you write checks.  If you can't afford to stay on top of your debt, you need to consider some lifestyle changes.  I promise future you will thank you.

2. Always pay extra.  Even if it's just rounding up from $237 to $250 a month you'll be done sooner which means paying less interest, and it's a great habit to get into.

3. If you are still in school or deferred while doing an eligible job/fellowship or working on a graduate degree try to pay off the interest as it accrues.  This won't be a ton of money, you can swing it.  This way, you can escape much of the cost of compound interest, and will significantly lower your debt when you start paying it off.

4. Set up direct pay for federal loans.  If you didn't pay attention during your exit interview you may have missed it, but if you set up the direct pay option on FedLoan (or whoever your servicer is) your interest rate will decrease by .25% over the life of your loan (they give you 10 years) that's big money, plus it's easy and convenient for you.

I know how easy it is to feel like you're drowning, even when your debt is completely under control.  But, as my Dad recently mentioned, consistency is key when if comes to paying you debts, so just set yourself on a good path and all you'll need to do is keep chugging along.