Author Topic: General Tax Advice For The 20-Something Just Starting Out  (Read 599 times)

Penn42

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General Tax Advice For The 20-Something Just Starting Out
« on: November 04, 2017, 08:42:10 AM »
This is a sister thread to the thread I started in Investor Alley found here https://forum.mrmoneymustache.com/investor-alley/investment-advice-for-the-20-something-just-starting-out/

Meant to click preview: the rest is forthcoming!

The last couple weeks is the first time I've actually looked into taxes' nuts and bolts.  So I want to make sure I'm understanding this correctly. 

First you file federal taxes. 

-Let's pretend Bob makes 40k, does not own a house or other property, and is single (i.e. strikingly similar to me). 

-The 40k would puts him in the 25% federal tax bracket unless he contributed at least $2051 dollars to a Traditional IRA or 401(k), then he'd fall to the 15% tax bracket, so he does this. 

-Now that he's in the 15% bracket he will pay 10% of the first $9,325 ($932.50) plus 15% of everything over $9,325 and up to whatever is left not contributed to his tax advantaged account. 

-In this case he put $2051 into the account leaving $37,949.  Subtract 9,325 and you have $28,624 x .15 = $4,293 of federal income tax on top of the $932.50.

If all that is correct you take what is left over and file state taxes, right?  You don't file state taxes with your full gross income to you?

State taxes

-Bob lives in Oregon

-The total taxable income Bob is now working with is $37,949 - ($932.50 + $4,293) = $32,723.50.

-Oregon income tax is 5% up to $3,350, 7% from $3,351 to $8,400, and 9% $8,401 up to $125,000. 

-Then we'll do the same as above except with three steps because there are 3 bracket's Bob's income falls into.

-After doing all that math Bob pays $2,710.045 in Oregon income tax. 

Aaaaand it's just as easy as that?
« Last Edit: November 04, 2017, 09:08:03 AM by Penn42 »

terran

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Re: General Tax Advice For The 20-Something Just Starting Out
« Reply #1 on: November 04, 2017, 12:07:49 PM »
No, it doesn't really work that way with state/federal taxes. You can generally deduct state taxes (among other things) from your federal taxes if you itemize, but often taking the standard deduction is better anyway. For your federal example I think you're forgetting to subtract your standard deduction and personal exemption.

You can play around with https://www.taxact.com/tools/tax-calculator to get an idea. If you want to get a really good idea, run a demo with this years numbers in last years tax software (like taxact or turbo tax) and see what happens.

Also remember that your W2 income will likely be less than your salary because you generally won't pay taxes on income used to pay for things like health insurance.

MDM

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Re: General Tax Advice For The 20-Something Just Starting Out
« Reply #2 on: November 04, 2017, 12:15:07 PM »
Probably the best thing for you to do is print paper copies of 2016 Form 1040 - f1040.pdf and 2016 Form OR-40, Oregon Individual Income Tax Return for Full-year Residents, 150-101-040 - form-or-40_101-040_2016.pdf, then fill them in by hand.

Use your best guess for 2017 numbers, even though these are 2016 forms - this is just for educational purposes.

You may then want to cobble together your own spreadsheet, for the portions of those forms of interest to you (e.g., all the non-zero entries).  Examples exist if you go this route.

kingxiaodi

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Re: General Tax Advice For The 20-Something Just Starting Out
« Reply #3 on: November 04, 2017, 02:24:58 PM »
State taxes
-Bob lives in Oregon
-The total taxable income Bob is now working with is $37,949 - ($932.50 + $4,293) = $32,723.50.
-Oregon income tax is 5% up to $3,350, 7% from $3,351 to $8,400, and 9% $8,401 up to $125,000. 
-Then we'll do the same as above except with three steps because there are 3 bracket's Bob's income falls into.
-After doing all that math Bob pays $2,710.045 in Oregon income tax. 
Aaaaand it's just as easy as that?

It seems Oregon did allow you to subtract your federal taxes liability from your federal AGI in 2016 (page 13, bubble 10), , subject to some income caps (I have no idea if that will be allowed in 2017). Not all states allow you to do that, and it is the perfect evidence to back up MDM's suggestion; go read both the federal and state instructions for yourself.

I ran through your numbers very quickly, and obviously came up with different numbers (as terran states, you appear to have forgotten about federal deductions!) I'm not a tax expert, but if you want to compare numbers when you're done, I'm happy to share my work. I seem to remember seeing at least a few posters from Oregon on here, and they likely have more precise knowledge.

As a final note, I'd suggest considering a Roth IRA over a tIRA given that you're already in the 15% bracket. I'm sure you've already seen the Investment Order thread, but just in case you haven't...

Penn42

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Re: General Tax Advice For The 20-Something Just Starting Out
« Reply #4 on: November 05, 2017, 09:02:14 AM »
Thanks for the replies guys.   I have seen the investment order post and I went back to rescan it and found where it talks about traditional vs. roth.  Gonna have to read those linked articles further. 

On Tuesday, when I have access to a printer, I'll print out those forms and fill them in by hand.  Should be a good learning experience.  Thanks for the suggestion MDM.

When I'm done and have grown my knowledge I'll pop back in with all the new questions I didn't even know could be questions!

Penn42

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Re: General Tax Advice For The 20-Something Just Starting Out
« Reply #5 on: November 12, 2017, 06:27:22 PM »
Sat down just now and filled out the 1040 using my best guess for this years numbers.  Not really as daunting as it looks.  Just had to wade through the instruction booklet as I went and it all worked out. 

If my estimated numbers through the end of the year are anywhere close I'm actually gonna be closer to jumping into the 25% taxable income bracket than I thought I was going to be.  I've got enough padding left in my IRA that I could dump a bit into pretax to get just below, though. 

Haven't done the state one yet.  Will get back once I do.

MDM

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Re: General Tax Advice For The 20-Something Just Starting Out
« Reply #6 on: November 12, 2017, 06:37:27 PM »
Sat down just now and filled out the 1040 using my best guess for this years numbers.  Not really as daunting as it looks.  Just had to wade through the instruction booklet as I went and it all worked out. 
Congratulations!  Keep up the good work!