Taxes for Beginners Part 1

I will let you in on a known secret.

Rich people plan for their taxes in November for the year prior, with the goal of minimizing their taxable income and redistributing their wealth for the long term.

Poor people plan to use their tax returns during tax season, to spend as they see fit. The payoff is immediate. The transactions are meant to stimulate the economy.

Middle class people are merely stuck paying whatever taxes they see, or being happy with whatever they get back. They are often stuck fronting the bill for the average lifestyle. As of 2019, the average household of 2.5 brought in $68,000 before tax, and spent $63,000. That doesn’t leave any wriggle room.

Only one group is winning. This is why I want to help you move from poverty mindset group to possibility mindset group.

Get all the Deductions

For all four years of Trump’s presidency, the witch-hunt was on. People were livid about how much they think Trump paid or did not pay in taxes. Some even speculated just $750. In the end, we never found out. So goes the games for decades.

Trump Paid $750 in Federal Income Taxes in 2017. Here’s the Math. PS: if you read the article, it’s all speculation.

There wasn’t any “There, There.“

All that time could have been better spent; learning and understanding their own taxes.

To make it plain, turns out Trump is not doing something illegal; his team is using tax avoidance strategies. It is just fancy footwork while leaning heavily to what’s available for everyone.

Guess what, all your favorites do it, from Beyoncé, Taylor Swift, Kamala Harris, the Rock, the Obamas, the Clintons, every media pundit, etc…

Quick Tweaks You can Do Right Now

If you want to avoid tax complications, the best time window for taxes is February 15 through March 15. While everyone else is distracted with the news of the day, feel free to get your ahead of the curve. Plan your wealth journey for 2022 in November 2021, just like the rich people.
The path to reducing your taxes is as follows:
- Not missing Education, Earned income, and/or Retirement Saver’s credits.
- Understanding your W4 allotment.
- Contributing to your 401k, (Traditional IRA), and/or HSA,
- Owning a Home, or a Business.
- Getting Married, and
- Having kids or dependents,
- Getting a family accountant on retainer, or better yet training a family member to be the accountant.

You can do this too

The last couple years, I’ve been learning and applying techniques and it’s been working. Check out the graphic below – all done by contributing to my 401k, Traditional IRA, HSA, and home purchasing.

At this rate, if you are paying the most in taxes; you have to choose if you want to continue or learn to do it the right way.

Two Quick Last Minute Tax Savings Tips

You have until April 15, 2021 to invest retroactively in an Individual Retirement Account (Limit $6,000 for CY2020) and even make additional contributions in your Health Savings Account (Limit $3,550 if single and $7,100 for families for CY2020).

Depending on your income level, a quick retroactive contribution to both of those accounts can lower your Taxable income. Less taxable income equals fewer taxes. For some, the $12,550 translates to a tax savings of $2,750.

If you are citing on too much saving earning 0.01% for the year, move that money quickly to win. Call up your financial brokerage provider ie Fidelity or M1 Finance, and get started today.

Check the TNFG Tax Estimator for 2020 and 2021. Save a copy to your desktop and play with the numbers.

Dates to remember

January 1	Tax season kicks off but nothing is ready until Mid-January.
February	Most W2s, 1098s and 1099s reported at your local institution. Check your emails and your statement tabs, and start downloading or printing them out. By this time, scammers start popping up at the local strip mall and with online perks. You are better off googling your local VITA tax site or using my preferred method, TurboTax. Don’t worry they walk you through the entire process. Take your time.
March	Crunch time – What are you waiting for?
April 15	Tax Day. Tax filing deadline and the last day to contribute to a retroactive IRA and HSA.

Your Essential Tax Document Checklist

Whether you hire a professional or do it yourself, you need certain information and documentation to file your tax return. Here is a tax vocabulary checklist:

Personal Information

Your social security number or tax ID number
Your spouse’s full name, social security number or tax ID number, and date of birth
Routing and account numbers to receive your refund by direct deposit or pay your balance due if you choose

Dependent(s) Information

Dates of birth and social security numbers or tax ID numbers
Childcare records (including the provider’s tax ID number) if applicable
- The standard Child Tax Credit is worth up to $2,000 per child dependent.
- Same for adoption. You may be eligible for additional tax credits.
Income of dependents and of other adults in your home
- If you are taking care of the majority of your parents’ expenses, this might be worth considering.
Form 8332
- A form that the child’s custodial parent is releasing their right to claim a child to you, the noncustodial parent (if applicable)

Sources of Income

Employed

Forms W-2 and W-4 Allocations (for future planning)

Unemployed

Unemployment (1099-G)
- Especially relevant for CY2020

Self-Employed

Forms 1099, Schedules K-1, income records to verify amounts not reported on 1099-MISC or new 1099-NEC
Records of all expenses — check registers or credit card statements, and receipts
Business-use asset information (cost, date placed in service, etc.) for depreciation
Office in home information, if applicable

Rental Income

Records of income and expenses

Retirement Income

Pension/IRA/annuity income (1099-R)
- This tax document is for accounts who have taken a qualified or unqualified distribution from a retirement account
Social security/RRB income (SSA-1099, RRB-1099)

Savings & Investments or Dividends

Interest, dividend income (1099-INT, 1099-OID, 1099-DIV)
- Your consolidated 1099 will contain this if you have performed sells on your account. This form is used to report gains or losses from the preceding year.
- A common reason for receiving a 1099-DIV form is some of the stocks you own pay dividends. You will only receive this if you have over $10 in dividends.
Income from sales of stock or other property (1099-B, 1099-S)
Health Savings Account and long-term care reimbursements (1099-SA or 1099-LTC)
Record of estimated tax payments made (Form 1040–ES)

Other Income & Losses

Gambling income (W-2G or records showing income, as well as expense records)
Jury duty records
Hobby income and expenses
Prizes and awards
Any other 1099s received
Record of alimony paid/received with ex-spouse’s name and SSN
State tax refund i.e. 1098-G

Types of Deductions

Home Ownership

Forms 1098 or other mortgage interest statements
Real estate and personal property tax records

Charitable Donations

Cash amounts donated to houses of worship, schools, other charitable organizations
Records of non-cash charitable donations
Amounts of miles driven for charitable or medical purposes

Medical Expenses

Amounts paid for healthcare, insurance, and to doctors, dentists, and hospitals
- Deduction is applicable if it meets the threshold.
- If ME equal more than 7.5% of adjusted gross income.

Childcare Expenses

Fees paid to a licensed day care center or family day care for care of an infant or preschooler
Amounts paid to a baby-sitter or provider care of your child under age 13 while you work
Expenses paid through a dependent care flexible spending account at work

Educational Expenses

Forms 1098-T from educational institutions
- Students can claim a deduction for tuition and fees they paid.
Receipts that itemize qualified educational expenses
Records of any scholarships or fellowships you received
Form 1098-E if you paid student loan interest
- Students can claim up to $2,500 for interest paid if they meet the threshold.

K-12 Educator Expenses

Receipts for classroom expenses
- Up to $250 per year (for educators in grades K-12)

State & Local Taxes

Amount of state and local income or sales tax paid (other than wage withholding)
Invoice showing amount of vehicle sales tax paid and / or personal property tax on vehicles