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The 2017 tax season officially began on January 23, 2017. The deadline for filing taxes this year is Tuesday, April 18, 2017 (traditional deadline of April 15 falls on a Saturday and Monday is Emancipation Day, a legal holiday in D.C., observed on Monday).
Filing taxes is something we only do once a year, so most of us don’t get much practice. Some people just send any tax documents to our parents and have their accountant file everything. My goal for this post is to provide a quick lesson on income tax for millennials and to provide some practical information on filing taxes for those new to filing.
The IRS expects over 153 million individual tax returns this year. They are expecting over 80% of the returns to be filed electronically. I highly recommend electronically filing with a company such as TaxAct or TurboTax. They guide you through the process step-by-step, and the price is very reasonable considering the value they provide. You will also be able to get your refund (if you’re getting one) relatively quickly through direct deposit should you choose that option.
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Let’s talk numbers. In 2016, there are 7 marginal tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Your marginal tax rate is not the tax rate you pay. For example, if you fall into the 28% bracket, it does not mean you will pay 28% of your income in taxes. Marginal means that each extra dollar you earn will be taxed at the marginal rate. Here’s a quick rundown of the actual brackets:
I’m only going to post the Single and Married Filing Jointly brackets as that’s what most people will use. You can look up Married Filing Separately / Qualifying Widow(er) and Head of Household if you need those.
- If you earn between $0 and $9,275, you owe 10%
- If you earn between $9,276 and $37,650, you owe $927.50 plus 15% of the amount over $9,275
- If you earn between $37,651 and $91,150, you owe $5,183.75 plus 25% of the amount over $37,650
- If you earn between $91,151 and 190,150, you owe $18,558.75 plus 28% of the amount over $91,150
- If you earn between $190,151 and $413,350, you owe $46,278.75 plus 33% of the amount over $190,150
- If you earn between $413,351 and $415,050, you owe $119,934.75 plus 35% of the amount over $413,350
- If you earn $415,051 or more, you owe $120,529.75 plus 39.6% of the amount over $$415,050
MARRIED FILING JOINTLY
- If you earn between $0 and $18,550, you owe 10%
- If you earn between $18,551 and $75,300, you owe $1,855 plus 15% of the amount over $18,550
- If you earn between $75,301 and $151,900, you owe $10,367.50 plus 25% of the amount over $75,300
- If you earn between $151,901 and 231,450, you owe $29,517.50 plus 28% of the amount over $151,900
- If you earn between $231,451 and $413,350, you owe $51,791.50 plus 33% of the amount over $231,450
- If you earn between $413,351 and $466,950, you owe $111,818.50 plus 35% of the amount over $413,350
- If you earn $466,951 or more, you owe $130,578.50 plus 39.6% of the amount over $466,950
But wait! The government isn’t that mean. They let you deduct something called the Personal Exemption, which is $4,050 for tax year 2016. They also let you deduct the Standard Deduction, which is $6,300. Add them up and you get $10,350 in free deductions. This means that if you’re single, you can earn up to $10,350 and pay no federal income tax. If you’re married filing jointly, you can double that amount to get $20,700.
Let’s back up a bit. I said you pay no federal income tax if you earn less than those amounts, but not that’s not entirely correct. No matter what you make, the government will ALWAYS take their Social Security and Medicare tax (a.k.a. FICA or Federal Insurance Contributions Act). Here’s how much they’ll take:
SOCIAL SECURITY TAX
- 6.2% on your first $118,500 of income in tax year 2016 (increases to $127,200 in 2017). These numbers are for individuals. The cap is doubled for married filing jointly.
- This is a flat tax (everyone pays the same rate) up to $118,500 but becomes a regressive tax beyond that point, which means the more you earn, the lower your SS tax rate is since you pay no SS tax on any income above $118,500.
- 1.45% with no wage limit. You pay additional Medicare tax of 0.9% on top of the 1.45% if you surpass the following thresholds: $250,000 for Married Filing Jointly and $200,000 for Single.
- This is a flat tax up to the threshold amount and becomes a progressive tax, which means the more you earn, the higher your Medicare tax rate is since your rate increases as you surpass a threshold and there is no wage limit on this tax.
This adds up to 7.65% of income for most people who work for an employer. The employer also pays 7.65%. However, if you’re self-employed, you pay both the employer and employee portion for a grand total of 15.3%.
STANDARD DEDUCTION VS. ITEMIZED DEDUCTIONS
Should you take the standard deduction of $6,300 or itemize deductions? Data from 2013 shows that about 68.5% of households chose to take the standard deduction while 30.1 percent of households itemized. The remaining households either had a zero or negative adjusted gross income and weren’t eligible to take a deduction. Households with higher incomes were more likely to itemize deductions.
What should you do? If the total of your itemized deductions are greater than $6,300, then you should itemize.
What are some itemized deductions?
- Charitable contributions – money you donated to a qualified charitable organization such as a church or nonprofit
- Mortgage interest – interest you paid on your mortgage. This can include interest on your primary mortgage, a home equity loan or line of credit, points you paid when obtaining your loan, as well as mortgage insurance premiums
- Property tax – this will generally be real estate tax you pay to the county that you live in
- State and local income tax – you can deduct state and local income taxes that you paid on your income during the year
- Medical and dental expenses – you can deduct the amount of medical and dental expenses that exceed 10% (7.5% if you or your spouse is 65 or older) of your adjusted gross income
- Student loan interest – you can deduct up to $2,500 of student loan interest. However, the deduction is gradually reduced (phased out) if your modified adjusted gross income is between $65,000 and $80,000 ($130,000 and $160,000 if married filing jointly). You get no deduction if your MAGI is $80,000 or more (double that for MFJ)
- Miscellaneous deductions – there are many other deductions that any tax software should guide you through
I covered the more common itemized deductions above. You’re more likely to itemize if you donate a substantial amount or if you own a home and have a mortgage. If not, it may save some time and hassle to just take the standard deduction.
For those who are filing their taxes on their own for the first time, here’s what to expect. As I mentioned above, I highly recommend you use electronic filing software available online. I’ve used TaxAct and TurboTax in the past, and they both do a decent job.
First, you’ll create an account. You usually don’t have to pay anything until you’re ready to e-file.
They’ll start asking you a bunch of questions about yourself to establish a profile. Answer them to the best of your ability.
Since it’s February, you should have received all your tax documents from employers, mortgage companies, charitable organizations, etc.
The tax software will guide you through entering the information from your W-2s and/or 1099s and any other income sources such as interest income from a bank account. Then, they’ll ask you a bunch of questions to guide you through deductions.
Typically, they guide you through filing your federal return first. Then, they take most of the information from your federal return and guide you through your state return.
Once you get through all that, you pay them and electronically file your tax returns. They should give you the option to print the tax return. I highly recommend that you save a PDF of both your federal and state tax return and email it to yourself. It may come in handy in the future.
There’s not much more to it than that. You get all your tax documents together, enter your income, enter your deductions, and e-file. You can enter your bank information and get your refund through direct deposit (unless you owe the IRS).
Things get a bit more complicated if you run your own business, own rental property, have investments, or are self-employed.
This turned out to be a little longer than I thought, but I hope it was useful. Happy filing!
Image source: Pixabay