Life Kit - A First-Timer's Guide To Filing Taxes

Episode Date: March 16, 2021

Is unemployment taxed? What about stimulus checks? The pandemic has changed a lot when it comes to filing taxes. In this episode, we break down the filing process and tackle common COVID-19-related tax questions with a CPA.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

A heads up. Since this episode first published, the IRS has delayed the 2020 tax filing deadline to May 17th due to COVID-19. This is NPR's Life Kit. I'm Sarah Gonzalez. And in this episode, we're attacking taxes. Are you ever surprised that we don't get taught this, like in high school when we turn 18? I remember being 18 like, what am I supposed to do with this information? You know what? I like that question so much because many people, as you stated, they're not familiar with the tax code. They don't understand what's going on. And so it's the norm that many people do not understand taxation. That's Kimberly Washington, a New Orleans-based CPA and financial expert. And so it's the norm that many people do not understand taxation.

That's Kimberly Washington, a New Orleans-based CPA and financial expert. I actually learned about taxes and accounting by working for my dad who owned his own business. So I'm probably one in a million person who actually was exposed to this type of information. And Kimberly, tax expert, wants to help us get through the tax season. Her first piece of advice for us? I would just say one thing, organize. Organization is key. So start getting all your documents together.

But even if you've got the whole tax filing thing down, this year is still going to be a little different. So Kimberly is going to break down the basics for us, but we're also going to talk about how filing your taxes for 2020 will be different because of the coronavirus. Like, can you get a tax break for that home office you had to set up? How to handle taxes if you received unemployment checks last year? What Biden's stimulus plan will mean for your taxes? And how you can maybe still get a stimulus check retroactively. Okay, before we get into it with Kimberly, let's define some terms. You might

already know this, but if it's your first time filing taxes, let's just make sure we're all on the same page. You're going to hear us talk about a W-2. That's just a tax form that your employer sends you at the beginning of each calendar year. Your W-2 tells you the amount of taxes withheld from your paycheck, and you'll use this form to file your federal and state taxes. When we talk about deductions, think of them as tax breaks. Deductions just lower your taxable income. And the lower your taxable income, the lower your tax bill or the higher your tax refund. And just to give you an idea, you can get deductions for things like if you pay college tuition or if you have certain medical expenses. All right, now that we've got the technical terms out of the way, let's start

with the basics. So we have to file taxes every year because it is a requirement by the Internal Revenue Service, and it actually depends on your personal income. So you may be surprised that everyone may not need to file a tax return. So for instance, if you are a single individual and you earn less than $12,400, you're not required to file a tax return. Give or take, generally speaking, those are the rules. Okay. So if you make less than $12,400 a year, you do not have to file taxes. If you're single, $24,800 if you're married. And I say give or take because there are some other small rules that also you have to adhere to. The threshold may increase a little bit more, but give or take, those are the thresholds. One of our producers on the show said that when they were 18, they threw away their W-2 when it came in the mail. Like, what is this information? I don't need it.

So because, you know, I mean, no one tells you like this is the thing that you need to file your taxes. So for the first timers out there who are filing their taxes for the very first time, what documents do you need? What should you not throw away? What do you need to know about your situation? Right. So I think the biggest thing is understanding that most of the income that you receive is more than likely it's going to be taxable. That W-2, wages, even your tips, if you're working at a restaurant or in type of service

industry, those are all taxable income. And many people for the first time around, especially young workers, they may not understand what's taxable and what's not. So the first thing is any document that's mailed to you, you want to make certain you put it off to the side. And then you want to use those documents. For instance, you may have a W-2. You may have some interest if you have money in the bank. You also may even have a college document, which stated the amount that you pay for your tuition, all of those documents you'll need. And so the first time around, I always recommend that people not only gather their documents,

but also look for free ways to file. I often talk about the irs.gov free file program that's on irs.gov website that many, especially if it's your first time around, you may qualify for. And these are for individuals who earn less than $72,000. And particularly if your adjusted gross income is less than $72,000, you may qualify to file your taxes for free, completely free. So your options are you can either try to do your taxes yourself. Yes. You can pay like a TurboTax or one of those kinds of services to do your taxes for you. Or you can just get them done for free.

If you go to irs.gov website and you search for free file, you'll find that those same tax online providers, the many of the popular names are listed there. But once you go through the irs.gov website, you can actually file for free, completely free. But if you go to Turbo Tax or any other of those providers directly to their website, they may have a free version, but it's limited and it will upcharge you on certain type of forms. So but if you go again back to the IRS.gov website, completely free because it's a partnership with the IRS to encourage free file and help taxpayers who earn less than a certain amount of income. OK, so it's not like someone does your taxes for you. It's just you don't have to pay the fees for filing your taxes. I'm going to say yay and nay.

And the reason why I'm saying that is because you can actually go to the free file. You can choose to do it online yourself, or you can actually select what's called the VITA program, and that's the Volunteer Income Tax Assistance Program. And you can actually schedule an appointment for a site within your area. And you can bring your documents that we just mentioned, like your W-2 interest statement, maybe your college statements too as well. They'll actually prepare and file your taxes for you. So it's two ways you can go about the free file with the IRS.

Generally, the VITA program, where someone does your taxes for you for free, is for people who make less than $57,000 a year. But if you make less than $72,000 a year, you can still avoid the filing fees and the form fees, things like that. Kimberly, do you have a sense of how many Americans qualify for the free programs? I do. It's about 70% of Americans who actually qualify. And there was research that showed only 3% of Americans actually take advantage of this program.

3%? 3%? 3%. Because many people, they'll go to TurboTax and they'll put in their information and they're paying for their taxes and not realizing that they could probably still use TurboTax through the IRS free file program. So it's two different things. And many people just, they're not aware. So most of my life, I could have been filing my taxes for free and I just was unaware. All right.

Some people who file their taxes get a tax refund where they actually get money back at the end of the year. But some people don't. Some people end up owing money to the IRS. What if you choose not to file your taxes because you're afraid that you won't be able to pay the bill at the end of it all? That's a good question. And the answer is you should still question. And the answer is you should still file. And the reason why you should still file your taxes is because the penalties are based on the amount that you owe. And also if you fail to file, now you're exposing yourself to a failure to file penalty and a failure to pay. So that's why I would encourage you just to file your taxes anyway and pick up the

phone and contact the IRS. You can create what's called an installment agreement plan. So it's just a payment arrangement. So you can pay what you can afford even after you file your taxes. Okay. So if you don't have the money to pay your taxes at the end of the year, file anyways and maybe just get the non-payment penalty. And you can also get an extension, right? Like if you are really, really busy. And I mean, you know, at least for me personally, I'm kind of like a do it right at the last minute type of girl. But you can get an extension. Yes, you can. And you should. If you know that you're not going to have your taxes filed by April 15th,

file an extension. Then you avoid the failure to file penalty. And then also, if you expect that you may owe by April 15th, send some money, whatever amount that you can, because that way, when you do file late in the year, which will now be due October 15th, that can reduce any failure to pay penalties at that time too as well. So that's why you want to file an extension and pay what you can even at that point if you do file an extension. All right, let's get into some of the weedy stuff now. I think the basic stuff, I think, first is your filing status, right? Why is it important to get this one right? Your filing status determines so many other

different things. For instance, it would determine the tax bracket or the tax rate that you're taxed. It also determines which tax credits that you may be eligible for. So it's really, really important to get it correct. To give you an idea of different filing status, you have single, married filing joint, head of household, that's someone who's taking care of maybe a dependent within their home. And that could be some exceptions to that rule, of course. Qualifying widower is another one, or qualifying widow, someone who has just lost a spouse. And then married, fallen separate, someone who might say, okay, I'm married, but I don't want to file a joint return with my spouse. And so then that's

why we have married filing separate. But that gives you an idea of the different filing statuses that's available. Okay. And now let's talk about deductions. There's a standard deduction. There's an itemized deduction. What is this? And what should we choose? What is this, right? What is this? This is the amount that, of course, you can reduce your taxable income on your tax return. If you choose the standard deduction, it means that the IRS will give you a set amount you can claim on your tax return. For instance, you may be single, so the IRS may say you can deduct a certain amount. You may be married, the IRS again say you can deduct a certain amount. You may be married. The IRS, again, would just give you a certain amount.

So you are given a certain amount, no calculations, just what the standard deduction is. However, if you choose itemized deductions, which is a little bit different, what you're doing, you're actually taking your actual expenses and you're taking as a deduction. Some examples of itemized deductions are medical expenses, amounts you give to charities, mortgage interest, state taxes paid, real estate taxes paid. Those are examples of itemized deductions. So what a taxpayer must do, they must determine which one is higher, a higher amount for me. Is it my standard deduction that the IRS would give me? Or is it these different expenses that I've added together? Will that be more?

Because of course, you want to take the higher amount to reduce your taxable income. Once you're preparing a tax return, let's say for instance, if you're using a tax software provider, it's going to kind of guide you into choosing one or the other. So based off of your filing status, if you don't put in or enter rather your actual itemized deductions, they're going to choose the standard deduction on your behalf, but you're going to take one or the other. Okay. So one example of a deduction is if you have student loans, you can deduct some of the interest or some of your student loans from what you end up paying at the end of the year. I remember hearing kind of a while ago

that you can write off things like your internet bill or your electricity bill if you work from home, if you have a home office, meaning like you need the internet to do your job. And so you can get like a little bit of a tax break on that. Is that something that we can still do now with the pandemic with so many people working from home? If you are an employee, that means someone you're working for a company, you're not able to take the home office deduction. And that's because after the tax cut and job act of 2017, that deduction went away. However, if you are someone who has a side gig, let's say you're driving Uber or a freelancer, or you have a small business, self-employed, working from home, you can, in that case, take the deduction

on your tax return. So it really depends on your job status. So if you're just an employee, the answer would be no. But if you are self-employed, then the answer is yes. Okay. So the home office expenses deduction went away in 2017. That's correct. Perfect timing for COVID, right? I said that the other day, I'll say, wow, out of all the deductions, this is the one that's most needed now. Let's talk a little bit more about taxes in 2020. Specifically, what should people know about filing in 2020? Like if you received unemployment checks, for example, or if you received a stimulus check? Some of the big things, number one is unemployment. We know that more Americans actually

file for unemployment benefits in 2020. So they're going to receive probably for their first time in life in many cases, the form 1099-G. And what the Form 1099-G is, it's just a document which lists out the total amount of unemployment benefits and also any amounts that you had withheld as it relates to taxes. You're going to use this form and you're going to use this form in order to prepare your tax return. You will have to report this amount on your tax return unless you're not required to file a tax return, then you You will have to report this amount on your tax return unless you're not required to file a tax return and you do not have to report it. So that's going to be a big thing for so many people. But Kimberly, President Joe Biden does have some relief for people who are

getting unemployment, right? Right. So what people are going to experience this time around is that the first $10,200 can be excluded from your taxable income. So which means you do not have to pay taxes on that part of your unemployment. How much money do you have to make in order to qualify for this little kind of tax break, I guess? A good question. Actually, your income has to be less than $150,000. And it's actually your adjusted gross income, which is simply mean it's your income minus certain deductions. That's what you're going to use to determine whether or not you qualify or not. What about stimulus checks?

Are those taxable? Stimulus checks are not taxable. If you are a person who did not receive your stimulus payment, meaning that diarist missed you altogether, either in the first round or the second round, you can actually claim it and request it rather on your 2020 tax return through what's called a recovery rebate credit. Also, if you are a person who received a partial stimulus payment, for whatever reason, you may be entitled to get more stimulus money when you file your 2020 tax return. And that's some other reasons why you may be entitled to additional stimulus money when you file your 2020 tax return. And that's some other reasons why you may be entitled to additional stimulus money. For example, maybe if you're a college student

and previously you were claimed as a dependent, then you may be entitled to additional stimulus payment by claiming again, the recovery rebate credit. Or if you are a family who had the birth of a child or adopted another child, you may also claim additional money through the recovery rebate credit. So there are a couple of different instances where you may qualify for additional stimulus monies. So if you did not receive a stimulus check in 2020 because stimulus checks were based on your 2019 tax returns, you can still get a stimulus check retroactively? That's correct. And also under Biden's new COVID relief plan, people are getting a third stimulus check now. What tax year will it be based on? Will it be based on how much income you made in 2019 and 2020 and 2021? So how it works is that the IRS is going to use your 2019 or your 2020, whichever one is

filed, but it's actually an advanced tax credit from your 2021 year. So if they use these prior years and you make more money in 2021, in either case, you will not have to pay the money back. Anything else we need to know about the stimulus plan and taxes for this year? So in Biden's plan, he's increasing what's called the child tax credit. He's increasing to $3,600 for children ages six and under, and then $3,000 for children who are seven to 17. So, Kimberly, I personally am not a huge fan of doing my taxes. I just feel like there must be a better way. The government knows how much money we all make.

And yet we still have to go in and manually input all this information that they already really know about us. And by the way, other countries do not have such a complicated tax situation. It's like very much more like automatic. So what is a good mindset for us to go into tax season with? One great tip I would say, especially since last year was such a different year for so many of us, set up an IRS online account. I've been telling people to do that all last year since the pandemic. This is an online account where you can actually go onto the irs.gov website, set up an account. You can actually find onto the rs.gov website, set up an account.

You can actually find all of your documents, your tax documents from previous years and also, more importantly, from 2020. So that way, in case you moved, in case you missed the documents sent to your house, everything is right there and use that information when filing your tax returns this year. So that's one way to help you get organized and kind of just take some of the anxiety of doing your taxes this year with all of the changes. Kimberly, thank you so much for joining us and sharing all this really useful information with us. Thank you, Sarah. Thanks so much for having me. So let's recap. If you're filing your taxes for the first time remember most income is taxable so hold on to your w-2s and any other documents related to jobs that you have held you can get

help doing your taxes often for free if you make less than seventy two thousand dollars a year check out the irs's free file program You're going to want to file your taxes even if you can't pay. If you don't, you'll get penalties for not filing and for not paying. So file, hopefully you can for free, and then pick up the phone to call the IRS to set up a payment plan. If you filed for unemployment this year, the first $10,200 is not taxable if you make less than $150,000 a year, but you will have to pay taxes on any additional unemployment money you receive. Stimulus checks are not taxable, and if you didn't get stimulus money for whatever reason, you still might be eligible for it. You can claim the

recovery rebate credit on your taxes if you've had a financial change that makes you eligible. For more NPR Live Kit, check out our other episodes. I hosted one on how to boost your credit score, and there's a lot more on personal finance, but also parenting and health. You can find those at npr.org slash life kit. And if you love Life Kit, we have day planners. Visit shop.npr.org to start organizing, planning your days and writing your to do lists. This episode was produced by Claire Marie Schneider. Megan Cain is our managing editor. Claire Lombardo and Beck Harlan are our digital editors. Beth Donovan is our senior editor. And I'm Sarah Gonzalez.

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