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.