Home XQ Forum Adulting and your future Adulting 101: Taxes 101 and the Basics of Filing Them

Adulting 101: Taxes 101 and the Basics of Filing Them

    • Adulting 101: Taxes 101 and the Basics of Filing Them

      Every time you earn money through your paycheck, you also have to pay money to the government. These are what you have likely heard your parents complaining about – taxes. The government always collects these taxes on your income during tax season, so you have to know how to plan accordingly.

       

      What are taxes?

      The government is responsible for conducting many activities that require money to be able to keep running. These range from services you may already use like the Post Office or building the roads you drive on, to more specific services like funding Medicare/Medicaid or Social Security. To finance these public services, the government collects money from individuals and corporations by generally levying a percentage of your income (and other taxes we will talk about) to be directed towards the government budget.

      What type of taxes are there?

      There are several kinds of taxes and you have likely already had to deal with some in your life.  

      1. There is an Income Tax in which a percentage of your earnings is taxed to fund the federal government.
      2. There is a Corporate Tax which is similar to income tax except it is on the profits of a corporation.
      3. There is a Sales Tax which is applied to most consumer purchases (like the tax you pay on an amazon order) and the rate varies state to state.
      4. There is a Property Tax which is a tax on things like owned land and real estate.

      There are certainly other taxes out there, but these four are some of the most common ones you will have to deal with. It is also important to note that there are taxes from both the federal government and your state government.

      Who pays taxes?

      Almost everyone will have to pay taxes at some point in their life. However, there are certain criteria that will require you to pay taxes.

      The most important one, that applies to many high schoolers, is that you do not have to file taxes if you earned less than a certain income (which changes each year). For example, in 2019 if you earned less than $12,200 you did not have to file taxes.

      Why file taxes?

      There are two important reasons why you should file your taxes while you are employed.

      • The first being that if you earned more than $12,200 and do not file taxes, you are committing a crime called tax evasion that can result in you being fined or even imprisoned.
      • The second reason is that taxes come with things called deductions and tax credits, so you can actually get something called a tax refund based on the calculations of your income, withholdings, tax credits, deductions, and several other factors.

       

      What are withholdings?

      When you start employment at any establishment, you should be asked to fill out a form regarding your withholdings. It is critical that you pay attention to this form (and as someone who has filed taxes for others, many people are not even aware of this form).

      Essentially, filling out this form allows you to choose the rate at which you withhold a portion of your income to cover the cost of your taxes.

      In other words, you can choose whether you want to withhold a high amount, the standard amount, or a lower (or 0) amount of withholdings.

      Withholdings allow you to take a small portion of your income away automatically so that when you file taxes, you will have already paid your taxes.

      For example, let’s say you earn $2,000 a month and have your withholdings set to 5%. You would pay $100 a month in withholdings, or $1,200 a year. When you go to file taxes, depending on your circumstances, you could have owed more than $1,200, such as $1,350, and you will have to pay the difference ($150). In this scenario, you should probably increase your withholdings for the next year if you do not want to owe money upon filing taxes.

      You could also owe less than $1,200 in taxes, such as $1,050, and you will get a refund from the government for $150. In this scenario, you could keep your withholdings the same so that you do not end up owing money next year, and likely will get another refund when it comes time to file again.

      What are tax credits?

      Tax credits are something you can earn to subtract from the amount of taxes you owe to the government. There are non-refundable tax credits, that will only subtract from what you owe until the amount you owe reaches $0; and refundable tax credits, that will bring the value you owe below $0 which essentially becomes a tax refund. There are many tax credits out there, but one of the most significant ones is the Earned Income Tax Credit (EITC). The resources listed below will have a link to a chart of the requirements for the EITC but depending on your specific situation it can get you a refundable tax credit between $500 and $7,000.

      What are deductions?

      Deductions are an amount of money taken out from your tax liability. This means it reduces your amount of taxable income to reduce the amount you ultimately owe. There is a Standard Deduction which is the standard amount taken off based on your marital/filing status. If you file as single then your deduction in 2019 was $12,200, if married filing jointly it is $24,400 ($12,200 if married filing separately), if head of household it is $18,350, and if you are a qualifying widow it is $24,400.

      There are a number of other deductions that you can receive from doing more complicated things like itemizing, but most of these have become obsolete in recent years because the standard deduction is almost always greater than the deduction you would receive by taking one of these other routes.

      What does it all mean to you as a student?

      Again, almost everyone who works has to pay taxes, and even if you do not have to right now, you likely will have to within a few years. It is important to know where to access important resources and that you have the knowledge to ensure you owe as little as possible come tax season, or hopefully get a decent tax refund.

      To do this, it is important to ensure you maintain adequate withholdings at the start of your new job, that you are aware of what credits you are eligible for, and that you file for the correct deduction you are eligible for. If you know all of this, it is more likely that you will be prepared for the dreaded tax season and can avoid any unnecessary punishments from the government. You can also take up a fun opportunity like I did and volunteer at a tax assistance site where you can learn to file taxes for others (and ultimately earn more experience to file your own taxes!)

      Additional Resources

      • IRS: The best place to get updated tax information for each year is the IRS.  The IRS is the federal government’s Internal Revenue Service so it is the safest place to get accurate information without giving out your personal information to a sketchy site!
      • To access the questionnaire and find out if you are eligible for the EITC visit: https://www.irs.gov/pub/irs-pdf/p5334.pdf or use the IRS’s EITC Assistant
      • To read more about what taxes are or find financial literacy advice, you can use a popular site called Investopedia.  
      • Visit TaxSlayer to learn more about teen tax information and even a way to file for free if you have a simple tax return like most high school students or you can listen to this episode of the Next Gen Personal Finance (NGPF) podcast, that also have podcasts about personal finance more broadly!

       

      Reply
    • @kjcoleman Thank you so much for sharing this information! I wish I was gifted with a stronger financial literacy education before I graduated from high school. My personal financial net worth would be so much more! Jokes aside, had I had a deeper understanding of taxes, especially since I’ve been working and paying taxes since I was fifteen, I would have been able to make much more sound financial decisions which would’ve helped with paying for college, buying my first car, and buying my first house.  I am so happy that young adults have access to such great information and they can make much more sound financial decisions earlier – even if they don’t have access to formal financial literacy instruction. Kudos!

      • Thanks for reading and engaging.  As someone going through making a lot of those decisions and having financial expenses right now, I definitely wish I had someone or something to teach me instead of learning more independently.  I also started paying taxes with my first job when I was 14/turned 15.  An early start is a huge advantage, so hopefully these posts can be of some help!

Viewing 1 reply thread

Was any of this advice helpful to understanding your own taxes or ensuring you do not owe money to the government?

Reply To: Adulting 101: Taxes 101 and the Basics of Filing Them

Mention or reply to a member by tagging them using this format: @username