George Kamel - 5 Tax Myths Broke People Believe

Episode Date: January 26, 2024

In this episode, we’re looking at five common tax myths broke people fall for so you can save time and money when you get right with Uncle Sam this year. Links: Can’t pay your taxes this year? Read This Article Check out the Ramsey Solutions Tax Hub Order George Kamel’s new book, Breaking Free From Broke EveryDollar budget deal: I love a good deal, and when you sign up using this link, I’ll hook you up with a 14-day free trial and $15 off your first year of the premium version of EveryDollar. Learn more about your ad choices. Visit megaphone.fm/adchoices

Listen, nobody likes doing their taxes. And I get it, taxes can feel like another language, like Mandarin or the metric system, or that weird gibberish the telitubbies use. Puffy. Puffy. Puffy! Poffing! The little baby in the sun? It's going on there.

It's not okay. And if you're a rookie when it comes to personal finance, it's going to be real easy for you to get confused and fall for tax myths that wealthy people tend to get right. So today, we're looking at the five most common myths broke people fall for so that you can save money, time, and your sanity when you sit down to get right with Uncle Sam this year. But first, there's someone else possibly even more powerful that you need to get right with. And that's Uncle Al, Garrhythm. So click that like, subscribe, and share before Uncle Al screws you over with a waterfall of cat content

because of that one time you got curious about what Suds the Kitten had to say. We've all been cat curious at one point in our life. All right, myth number one, a tax refund is reason to celebrate. No, it's not. It's not free money that's been gifted to you, for that Traeger Timberline you've been eyeing, which is unfortunate considering you prematurely bought that apron that says the Grillfather, with the Godfather font, so clever.

You see, a refund is actually just your hard-earned dollars that the government's been holding onto all year long. And all that means is you've been giving them too much money, interest-free. What if you had that increase in income each month instead? Think about it. The average refund is about $3,000, aka about $250 bucks a month.

That's $250 too much you've been sending to the IRS every month. With that money, you could pay off debt, save for a down payment, invest it, or finally take your pilgrimage to Branson. What are you doing in Branson? None of my business. But let's face it, when you get $3,000 back, you're not going to want to do any of those adult things with it because it will feel like you've got a YATSI. YATSI! So retrain your brain. A tax refund is not the goal with taxes. The goal is to get as close to zero as possible with your tax liability. So if you're used to getting a big refund every year, change your withholding on your W-4 form so you can have more control of your money all year long. Myth number two.

It's bad to be in a higher tax bracket. Okay, this is a downright terrible myth, right up there with Old Icarus, both of which are honestly real downers for us Enneagram Wing-3s. You see, the reason I don't like this myth is that it makes people afraid to earn more money. They think that if they make more money, they'll get bumped into a higher tax bracket, which is kind of true, but most people don't understand what being in a higher tax bracket actually means.

They think, well, if I'm in the 22% tax bracket, all of my income will be taxed at 22%. Nope. What they're missing is that the U.S. tax rates are marginal, which means they're not real butter. Wait, that's margarine. But similar here, you see, margarine isn't really butter, and marginal isn't really what you end up paying in taxes. Marginal just means that each tax rate applies to only part of your income. So some of your income is taxed at 10%, another piece at 12%, and so on, depending on how high your income is. So let's take a look at how this breaks down for a single filing household with a taxable income,

of $75,000. So as you can see here, we make 75,000 a year. Now the first $11,000 we make is taxed at 10%. That's $1,100. The next $33,275 we make is taxed at 12%. Then the next $30,275 is taxed at 22%. So the total adds up to $11,807 that we actually ended up paying in taxes. Now, if all $75,000 was taxed at 22%, we would have owed $16,000,000,000.

$1,500. That's almost a $5,000 difference. So what you actually end up paying is called your effective tax rate. And in this case, paying $11,807 on a $75,000 income brings your effective tax rate to 15.7%. Not too bad. Now, keep in mind, this is a really simple example and doesn't account for deductions and tax credits, etc. But the bottom line is making more money is always going to be a good thing. So don't be afraid to make more. Taxes won't end up causing you to make less because you made more, if that makes sense. That makes perfect sense. Okay, next myth on the chopping block,

keeping debt around is good for the write-off. How can I say this clearly? No, it's not. I'm sorry. I don't know who told you that or what TikTok you watched, but it's just straight up bad information. And while I wish that were enough to settle the matter, here's how I got there. You see, a tax deduction is an expense that lowers your taxable income,

which ends up lowering your tax bill in the process. Now, what I want you to keep in mind is that a write-off doesn't mean you're getting a dollar-for-dollar reduction, in your taxes. It's more like a discount based on your tax rate, but less like the whole store is 50% off and more like a bogo on Nitz. And that's not a knock against Henley's love a good Henley, but we're just, it's drawing an analogy. That's all I'm doing here, people. Don't come at me. Don't call me. It's just that people get excited about discounts and deductions so they think they can spend money on stuff to just write it off, or keep debt around, like their mortgage,

or an Audi they use for business so they can still claim the deduction. But kids, George is here to tell you that spending a dollar just to save a quarter on taxes is not smart. Even if you're a business owner, you don't just spend money to save money. That is bad business. All right, tax myth number four, you have to pay by tax day. And if you can't, don't even bother paying at all. Listen, if you owe taxes that you can't pay right now, you have options. Think of it like ending up at Mo's for lunch.

You'd rather not be in the situation, but you can still choose your journey and it might be less terrible than you think. But ignoring your tax bill and hoping the IRS magically forget, gets that you exist is about the worst thing you can do. Because the IRS will start charging interest and penalties immediately, even if you filed an extension. And it's not pretty. They can screw up your life.

If for some reason you can't pay off your tax bill by the deadline, you should apply on the IRS website for a payment plan. In good news, you can set up that payment plan online without ever having to listen to hours of the Google dolls adjacent hold music or speak to an actual human. Yay! Now, if this situation applies to you, you're going to need a little more help in this little myth-busting segment is meant for. So I recommend starting with our Ramsey Solutions article on what to do if you can't pay your taxes.

I will link that in the show notes to help you out. All right, final tax myth of the day, you're not smart enough to do your own taxes. If you haven't internalized anything up to this point, hear me say this. You is smart, you is kind, and you can do your own taxes most of the time. You see, online tax software has come a long way in the last few years, as have truffle-flavored things. Not related, but making an observation here. And there's lots of times when filing with online software is a solid option. Here's those situations.

You only have one or two sources of income, something like a full-time job in the weekend gig at Chili's. You have few or no investments outside of tax-advantaged retirement accounts. You haven't taken money out of retirement before you're eligible. You plan on taking the standard deduction. You plan on making simple itemized deductions. You haven't had major life changes that would leave you paying more in taxes, like retiring or receiving an inheritance. And most importantly, you have a can-do attitude.

That's easily the most important. Just do it! But hey, if you're unsure whether you should file on your own with software or work with the pro, I totally get it. Which is why my team created this little number. It's going to help you determine which filing option is best for you in just a few clicks. So let's see here.

I'm comfortable using tax software. I want extended audit support. That's great. I need a budget-friendly solution. And I want the fastest support for my questions. And it's telling me Ramsey Smart Tax Federal Premium is the best option for me. Bada pink, ba'a boom.

If you want to check it out for yourself, I'm going to drop a link in the description. All right, now that we've debunked these myths, are you ready for the truth? You can't handle the truth! Taxes may not be fun, but they also don't have to be a giant drag, like your friend Jared, who's always spamming the group chat with office gifts. We get it, we like the office too. We're done with it. Let's move on, guys. This is the worst.

And I'll tell you what I personally do. Once I have all the paperwork I need, I make an appointment with my tax pro as soon as possible, so I can get the whole thing out of my time. my hair. You see, I got a certain look. I don't need that nonsense ruffling the quaff. So check out our tax hub to help kick things off. Again, I will link that below in the description. And before we go, I want to know from you. Comment below whether you plan on going with a pro or if you're going to self-file through some software. You live your tax truth, but I want to know about it. As always, make sure to share this video with your friends whose tax situation

could be labeled, it's complicated, or anyone who's had that on their Facebook page and you've wondered, give me the deeds. What's going on here? I got to know. Anyways, thanks for watching. filing. I'll see you next time.