A Crash Course on How to Do Your Taxes, Courtesy of the Money Confidential Podcast
Everyone pays taxes, but not everything about them is easy to understand. So if you don't know your 1040s from your 1099s, this episode of Money Confidential is for you.
We're kicking off our "Taxes in Ten" series with the story of Teresa (not her real name), who started a new job and discovered at tax time that an error in how she was input into the system resulted in no federal or state tax withholding—and a big tax bill at the end of the year.
Money Confidential host Stefanie O'Connell Rodriguez tapped Kristin Myers, editor-in-chief of The Balance, and Caleb Silver, editor-in-chief of Investopedia, to lay out exactly what you need to know to file your taxes appropriately.
Odds are, you may not be aware of everything that you have to claim as income. "If you receive a scholarship that pays for anything other than tuition fees and books, you have to pay taxes on it," Silver says. "If you have an Airbnb and you're renting out a room in your house or an extra house, you have to pay taxes on that income. If you sell your eggs, you have to pay taxes on the amount you receive. If you have gambling winnings, you have to pay taxes on those above a certain amount. If you get canceled or discharged debt, if you owe debt to a credit card company and they discharge it, you actually have to pay taxes on some of that amount. And if you make proceeds from illegal activity, if you rob a bank, if you steal from somebody, the IRS wants you to pay taxes on that. I don't think you're going to come forth and admit it, but that's how they got Al Capone. And the last one that really surprised me—if you find treasure in your backyard, digging up the rose garden and you find a big diamond ring, you got to pay taxes on that, or if you're SCUBA diving in the Caribbean and you find treasure on a ship, you gotta pay taxes on that too."
Your tax situation may be impacted by your employment type—most employees are W2, which means that your employer takes taxes out for you, so you don't end up with a big bill at the end of the year. However, if you're a freelancer (even on a side hustle basis), you'll receive 1099s instead, and will need to pay self-employment tax in addition to the taxes that employees pay. Myers recommends setting aside 35 percent of your total freelance work, so you have funds to pay if you have a tax bill at the end of the year.
Understanding your deductions is essential. For many people, just taking the standard deduction makes sense. "The IRS essentially says, let's make it easy," Myers says. "You can just claim a standard deduction of up to $12,550—you don't have to list every individual deduction that you're going to claim. Depending on your tax situation—whether you have children, if you sold property, if you bought property, if you got married—it might make more sense for you to itemize those deductions if all the money you want to claim back from the government is more than that standard deduction."
And don't forget that you need to file your taxes by April 18 this year, in order to be on time and avoid any penalties.
To get a full look at tax secrets you need to know, check out this week's episode of Money Confidential Taxes in Ten, "I know nothing about taxes. Where do I start?" on Apple podcasts, Spotify, Amazon, Player.FM, Stitcher, and wherever you get your podcasts.