Understanding how our tax system works can be tricky for anyone. Whether you’re an adult who never paid much attention to the taxes being withheld from your paycheck or a kid who just got his or her first job, understanding the basics can help refine and define questions you may have.
Many schools don’t teach these tax lessons. This results in many people entering life with a pretty incomplete picture of how taxes work, unless someone else takes the time to explain these tax concepts. Here are some pointers to help you or someone you know navigate our tax maze.
Taxes are mandatory!
While we can have a debate about how much each person should pay, there’s no debating that local, state and federal governments need tax revenue to run the country. These funds are used to build roads, support education, help those who need financial assistance, pay interest on our national debt and defend the country.
There are many types of taxes
When you think of taxes, most think of the income tax, which is a tax on business and personal income you earn from performing a job. But there are also other types of taxes. Here are some of the most common.
Payroll taxes. While income taxes can be used to pay for pretty much anything the government needs money for, payroll taxes are earmarked to pay for Social Security and Medicare benefits.
Property taxes. These are taxes levied on property you own. The most common example of this is the property tax on a home or vacation property.
Sales tax. These are taxes placed on goods and services you purchase. While most of this tax is applied at the state and local levels, there are also federal sales taxes on items like gasoline.
Capital gains taxes. If you sell an investment or an asset for a profit, you may owe capital gains taxes. The most common example of this is when you sell stock for a gain. Capital gains taxes could also come into play with other assets, such as a rental property you sell for a profit.
Estate taxes. This tax is applied to assets in your estate after you pass away.
Not all income is subject to tax
Most, but not all, of your income is subject to tax.
While your paycheck is subject to tax, interest earned from certain municipal bonds is not. And the government often excludes things like benefits from the tax man.
Capital gains taxes have exclusions for gains on the sale of your home and donated stock.
Estate taxes have an exclusion, so only estates in excess of the exclusion are taxed.
This is why having someone in the know can be really helpful in navigating these rules.
The progressive nature of income tax
When it comes to income taxes, the government gets to take the first bite. The question is how BIG of a bite the government gets to take.
For example, if you only have one chocolate chip cookie, the government’s bite is really, really small. If you have 1,000 chocolate chip cookies, the government takes a small bite from the first 100 cookies, a larger bite from the next 100 cookies, and an even larger bite from the remaining 800 cookies.
This is called a progressive tax rate system. For example, if you’re considered single for tax purposes in 2021, the first $9,950 of taxable money you earn gets taxed at 10%. The next $30,575 you earn gets taxed at 12%. The next $45,850 gets taxed at 22%. Money you earn above this point will get taxed at either 24%, 32%, 35% or 37%.
Understanding the progressive nature of our tax system is a key concept in managing the size of the bite the government takes. That is why tax planning is so important!
Deductions can decrease the government’s tax bite
The progressive tax system is complex because it is manipulated in a big way by our elected officials. This is typically done through credits, deductions and phaseouts of tax benefits.
For example, there is a fairly complex deduction for families with children, and the earned income tax credit is an added tax cut for those in the lower end of the progressive income tax base. There are also credits and deductions for businesses, homeowners, education and many more types of taxpayers.
As you can imagine, the U.S. tax system is very complex with many nuances. Please seek help if you have further questions or are facing a complicated taxable transaction.
Do you know what your kids are doing online? That question may seem like it has a simple yes or no answer, but that’s hardly the case. With so many streaming platforms, social media outlets and new gaming options popping up every day, it’s nearly impossible to fully protect your kids from what they can encounter online.
Overcommunicate. How successful you will be with your child’s online safety hinges on communication. Ask them about the newest apps and online trends. Be open about the dangers of the internet and teach them to be skeptical about every website and app. Encourage them to bring concerning items they find to you to have a discussion. The goal is to make your child as concerned about their online well-being as you are.
Limit where and how they use their devices. Most phones, tablets and computers have parental control options that allow you to set age, time and content restrictions. Spend some time to understand what’s available to parents and how it works. It can be hard to know where to draw boundaries for your children, but don’t let that discourage you. A good practice is to start by over-restricting and then becoming more lenient over time. In addition to what your kids can access, set rules about where they can use their devices.
Stress the safe-guarding of personal information. Most kids know not to openly share addresses, phone numbers or personal information online, but there are a few places where it happens inadvertently. One of those is in your profile you set up for a website or app. In some cases, your profile is made public to other users. Another place it can happen is in-app chatting. Most apps and games have a forum that allow users to interact with one another. Frequently ask your kids about who they are interacting with online and follow up on any suspicious online relationships. Never allow photos of your home or address to be shared or posted.
Observe attitude and behavior. Monitor your child’s activity and let them know you are doing so. If your child is struggling with something they came across online, or have found themselves in a dangerous situation, they may show signs through their behavior. If you notice them withdrawing emotionally, looking to access devices in private, or showing signs of anxiety or depression, your kids may need your help.
Discussing the dangers of the online world with your child can be uncomfortable and awkward, but in today’s interconnected world, it’s imperative in order to keep them mentally healthy and physically safe.
Your firm survived 2020. Now you may be asking yourself when will the economy return to pre-pandemic levels? Will it be this fall? A year from now? Longer?
Until the economy fully emerges from the pandemic, small businesses can help one another stay afloat. By collaborating with other like-minded firms, your business can find creative ways to strengthen local markets and encourage consumer loyalty.
Consider the following ideas of how you can help each other:
Partner with industry peers. One Vietnamese restauranteur in New York City was eager to open his business for in-person dining. Then the pandemic hit. According to a Time Magazine article, two years of careful planning, hard work and sacrifice seemed fruitless. But sympathetic restaurant owners in nearby Chinatown reached out with an innovative idea: offer a punch card to encourage customers to support local businesses. By partnering with this newly-minted entrepreneur and introducing him to like-minded people, established firms kept the restaurant business alive in their locale and helped a fledgling owner pursue his dream.
Donate staff resources. During government-mandated quarantines, some industries enjoyed burgeoning revenues while others were trying to keep staff employed. Why not offer to help if you have excess labor? For example, businesses selling camping gear and recreational vehicles saw an uptick in consumer demand. A company supporting that industry might offer some of its staff on a temporary basis to help another firm meet customer needs. Such a partnership could provide the added benefit of boosting morale and avoiding layoffs.
Leverage locations. Say you’re a company that raises chickens. You might partner with a firm offering other meat products to share a tent at a farmer’s market. Or two dance studios might join forces to enable patrons to attend similar classes at across-town venues. You could team up with others to organize a business fair. Or you might donate space to help another business sell goods at a common location for centralized pickup and delivery.
Share your expertise. Perhaps you’ve experienced great success with your business website, but other firms are struggling to make inroads in the digital marketplace. You could teach these companies how to connect with customers via social media. Train them to build and market a website. If you have remote workers, share your experience about helping home-based employees stay productive.
Cross promotions. Look for businesses that you can help and that can help you. Then cross-promote each other’s services. Customers of dog groomers need veterinarians and vice versa. Accountants need their hair cut and customers of hair salons need accountants. Vacation rental property owners can offer restaurant deals for their renters and restaurants can offer the rental owners coupons for meals. The ideas are endless, you just need to think creatively.
Before making a commitment to help another business, be sure to weigh the pros and cons. Any potential relationship should benefit both parties. Don’t be afraid to consider companies outside your industry or local market, but look first to businesses with services and products complementing your own.
Paying bills is an inevitable part of everyday life, but that doesn’t mean it has to be stressful. Here are some ways to get control of your budget and perfect the art of stress-free bill paying.
Make a budget. Knowing what you are making and what you are spending is essential to proper bill paying. First, find out how much you are making every month and then subtract the static items such as rent or mortgage payments, credit card payments and cell phone expenses. Then, budget out how much you will need for other essentials (such as food and clothing). Once the essentials are accounted for, you can look at the money you have left and decide where to allocate the rest.
Find a budget tool that works. Create a tracking system that works for you. There are many to choose from, but your bank may have a free app to track your spending, so that is a good place to start. You can then choose which tools to use to make a budget and categorize the transactions to be allocated to a certain part of the budget (such as food, car, and housing).
Set up autopay. Put recurring bills such as utilities, internet, and your cell phone on autopay so they will be automatically deducted from your account on their due date. If you decide to use autopay, it is still a good idea to look at the amounts being deducted every month to make sure everything is correct.
Consider your non-regular payments. Don’t forget to account for bills that come due occasionally and plan for the cash outlay. Common examples of this are property tax payments, income taxes, and annual/semi-annual insurance payments. You will need to plan to have enough cash on hand for these expenses when they come due.
Adjust due dates. Paying bills isn’t as stressful when you know that you can afford to pay them, and what better time to pay bills than right after you get paid! The money will be there and you can pay those bills before that money has a chance to go anywhere else. Consider asking if you can change the due dates for some or all of your bills to correspond with when your paychecks are deposited into your bank account.
Don’t forget to pay yourself! One of the best ways to start developing a savings account is making yourself part of your budget! Take however much you think you can spare and set up an automatic transfer to a separate savings account. Use this money to establish an emergency fund of approximately six to nine months of expenses. This extra cushion will come in handy if something unexpected occurs.
Do you rent an apartment or condo? If so, do you have renters insurance to protect your belongings and to cover you against liability claims?
A surprising number of renters don’t bother with insurance. Some assume they’re covered by their landlord’s policy. Wrong! Usually that covers only damage to the building and liability claims against the landlord. Others say their belongings aren’t worth enough to justify the cost. But add up how much it would cost you to replace everything you might lose in a fire and you’ll be surprised. In most cases, the cost of insurance is a small price to pay for the protection you’ll receive.
Typical protection
Renters insurance, sometimes called a tenant policy, typically protects against three things:
Loss or damage to your personal belongings from fire, theft, etc.
Liability claims from someone injured in your apartment
The cost of temporary living expenses if your apartment is made uninhabitable by some catastrophe
When you buy renters insurance, you’ll have to decide the amount and type of coverage. Your agent can help you estimate the value of your belongings. You can either choose “actual cash value” coverage or “replacement value coverage.”
The first pays you the estimated value of items at the time of loss, based on their age and condition. The second pays the cost of replacing items with equivalent new items, up to the maximum value of coverage. The second method will pay you more, but obviously the premium will be higher. Try to identify anything of special value, such as expensive jewelry or electronic equipment. You may need a policy rider to cover the full amount of these items.
A few tips
Bundle for discounts. You may receive a discount if you buy your renters insurance and car insurance from the same company.
Save with roommates. If you have a long-term roommate, ask if you can take out a joint policy instead of two separate ones.
Know when and where kids are covered. If you have children living away at college, check whether they’re covered under your homeowners policy. Once they leave college, though, they’ll need their own insurance.
Take inventory. Create a thorough inventory of your belongings, recording the model and serial number of any equipment and take plenty of photos. This could be invaluable to support your claim if you ever have a loss.
