General Tax Advice For The 20-Something Just Starting Out

[Penn42]

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?

[terran]

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]

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]

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]

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]

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]

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!

[Penn42]

Sitting down to do a first draft 1040a for 2017 and I've got a question.  I received a 1099-INT from both Chase and Wells Fargo.  Chase because I received a $300 bonus for opening a checking account with direct deposit and Wells because that's where I cashed some US Savings Bonds I had.

The total interest (I don't need to include anything but the interest, correct?) is well over $1500 on line 8a so I need to attach a schedule B.  For the Chase bonus I think it's safe to assume the payer is Chase, but for the bonds who do I put as the payer?  The United States or Wells Fargo?

[catccc]

The total interest (I don't need to include anything but the interest, correct?) is well over $1500 on line 8a so I need to attach a schedule B.  For the Chase bonus I think it's safe to assume the payer is Chase, but for the bonds who do I put as the payer?  The United States or Wells Fargo?

Wells, because they issued the 1099.

[Heroes821]

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. 

Good work keeping up with this, but I want to clarify here, since you seemed to have it right in earlier posts.  Being $1 into the 25% bracket only taxes $1 at 25% not all $40,000.  Also the standard deduction and personal exemptions cut of the top first.

So Single filer: 40k - (6350+4050) = $29,600 taxable before you even get into retirement accounts and health insurance and all the stuff already handled on your W2. That puts you deeply into the 15% bracket.


Also, a poster here SeattleCPA or SeattleCyclone... I should know, but I forget has this blog post that I think hits the point about brackets excellently:  https://evergreensmallbusiness.com/income-tax-buckets-not-income-tax-brackets/

[Penn42]

Looking at my State taxes now and they've brought up another question.  I think I found the answer online, but I want to make sure. 

I took the standard deduction last year, so when my state taxes ask for my Oregon income tax refund included on my federal return I can write zero.  Correct?  I'm actually filing a 1040A, which doesn't even have a line for state income tax return in the income section.  Basically, I don't have to report my state refund last year because I didn't itemize last year, right?

[MidWestLove]

"I took the standard deduction last year, so when my state taxes ask for my Oregon income tax refund included on my federal return I can write zero.  Correct?  I'm actually filing a 1040A, which doesn't even have a line for state income tax return in the income section.  Basically, I don't have to report my state refund last year because I didn't itemize last year, right?
"

 Did you receive income tax refund or not?  If you did receive it and if 1099G was issued, no you can not write zero regardless of which form you used or type of election of chosen last year, unless you want to get nice letter from IRS a year and  half from now saying here is your tax and penalty now since numbers did not match..

generally, it is your situation (type and nature of income streams received) that determines whether you use simplified forms or not. the forms you elect to actually file under do not erase reality on the ground. if you received income that 1040A does not have space for, then 1040A is not the right form for you to use.

[Penn42]

"I took the standard deduction last year, so when my state taxes ask for my Oregon income tax refund included on my federal return I can write zero.  Correct?  I'm actually filing a 1040A, which doesn't even have a line for state income tax return in the income section.  Basically, I don't have to report my state refund last year because I didn't itemize last year, right?
"

 Did you receive income tax refund or not?  If you did receive it and if 1099G was issued, no you can not write zero regardless of which form you used or type of election of chosen last year, unless you want to get nice letter from IRS a year and  half from now saying here is your tax and penalty now since numbers did not match..

generally, it is your situation (type and nature of income streams received) that determines whether you use simplified forms or not. the forms you elect to actually file under do not erase reality on the ground. if you received income that 1040A does not have space for, then 1040A is not the right form for you to use.

Ok, sounds like the conclusion I came to was wrong.  I did receive a state refund last year and have not been issued a 1099G (maybe it just hasn't shown up yet).

My next question is I came to my conclusion from reading the instructions for line 10 (Taxable Refunds, Credits, or Offsets of State and Local Income Taxes) of form 1040 which says "None of your refund is taxable if, in the year you paid the tax, you either (a) didn't itemize deductions, or (b) elected to deduct state and local general sales taxes instead of state and local income taxes."

I meet requirement (a).  To me that sounds like even if I was filling out the normal 1040 I would put zero on that line.  What information am I missing or misinterpreting there?

[grantmeaname]

If you didn't itemize deductions, you wouldn't just have 0 deductions. You would be taking the standard deduction instead. It's about $6k single/$12k married filing jointly, and you get it "for free" without any recordkeeping. If you incur and can substantiate higher itemized deductions, including state and local taxes, you can use those instead.

[MidWestLove]

"

Ok, sounds like the conclusion I came to was wrong.  I did receive a state refund last year and have not been issued a 1099G (maybe it just hasn't shown up yet).

My next question is I came to my conclusion from reading the instructions for line 10 (Taxable Refunds, Credits, or Offsets of State and Local Income Taxes) of form 1040 which says "None of your refund is taxable if, in the year you paid the tax, you either (a) didn't itemize deductions, or (b) elected to deduct state and local general sales taxes instead of state and local income taxes."

I meet requirement (a).  To me that sounds like even if I was filling out the normal 1040 I would put zero on that line.  What information am I missing or misinterpreting there
"

your conclusion may actually be right - do you use tax program and if yes, what does it say? I use H&R item and it has what they call mini worksheet going over the same information and asking me for previous year detail

[NorthernBlitz]

Advice I'd give to the 20-something starting out:

1) Pick up the HR Block deluxe fed+state. You can usually get it on sale for ~ $20-30. Start looking on between Dec 20 - Jan 1. I have found this is when you can get the best sale price.
2) Open & install software when you get it. If this is the first year using the software, enter all of your info. This is why I buy software because I want this info on my own hard drive (not the cloud).
3) Keep a folder / bin easily accessible to where you open mail. Every time you get a tax form in the mail, put it in that folder / bin.
4) Sometime that day (or the next day) enter the data from that form into the software. Doing it daily means many very small sessions on taxes instead of one annoyingly long session. Saving everything for the last day makes it stressful and annoying.
5) File electronically once you have all your information. I try to file as early as possible to reduce stress and get my return as early as possible.

Notes:
- The tax software is pretty simple to use. It's value increases in year 2 because it just knows some things (i.e. your name DoB, SS#, state taxes last year, etc). I use HR Block because I think it's a good combination of trustworthy brand name and cost. Turbotax seems to be much cheaper for my use case (might be better for those with their own businesses...and it apparently comes with access to accounting software if you have a business?)

- I might be paranoid, but I only use tax software that saves the information locally on my computer. I know that there are free cloud based services. But, I feel like it would then be easier for really important info to get out into the wild (i.e. easier for someone to steal your return next year once they know your AGI from the previous year or something).