Episode 25: In this episode, Timalyn goes back to basics as it relates to taxes. She'll discuss some common tax terms people misunderstand. Reviewing the basics will help you be prepared to sign your tax returns with confidence. Today, she'll discuss our progressive pay system and 5 basic tax terms. Let's get started.
Timalyn has a blog post you might find helpful, 15 Tax Terms Every Taxpayer Should Know. She also has a YouTube video on the topic.
Term #1: Tax Return
The tax return is the form you use to file your taxes. For most individuals, you'll use the IRS Form 1040. Businesses have different forms. For instance, a partnership will file using the IRS Form 1065.
These forms are different from a tax refund. Timalyn's heard people confuse the terms. A tax refund is the money you get back after filing your tax forms, if you have overpaid.
Term #2: Taxable Income
A lot of people are confused by this term. This isn't simply based on the income you generate. The IRS allows for a standard deduction. It decreases your taxable income. Timalyn uses the example of a married couple. For the 2023 tax year, assuming they use married filing jointly, the standard deduction they can use is $27,700. Assuming their combined income is $100,000, they will be taxed on $82,300 (after the deduction).
Timalyn's YouTube Channel has several videos about how to properly complete your W-4, depending on your specific situation.
Term #3: Tax Deduction
This is often confused with tax credit. A tax deduction reduces taxable income. There are other deductions including mortgage interest, charitable contributions, etc. The deduction isn't an amount you'll receive as part of your tax refund. It reduces the overall amount on which you'll be taxed.
Term #4: Tax Credit
A tax credit most often is actually better than a tax deduction. A tax credit reduces the actual tax liability. Timalyn uses the following example. Assume someone has a tax liability (after deductions) of $2,000. Also assume that person has a child under 17 years of age. If they meet other criteria, they can claim the child tax credit. For the 2023 tax year, the amount of the that credit is $2,000. Applying this credit would completely offset the tax liability. Tax credits are applied on a dollar-for-dollar basis. They would owe nothing.
Tax Term 5: Tax Liability
Don't assume you don't have a tax liability because you get a refund . Unless you make less than the standard deduction, you actually do have a tax liability. For a single person, or someone who is married filing separately, they have a tax liability if they earned $13,850. If you are filing head of household in 2023, you have a tax liability if you made over $20,800. During the year, your employer is withholding taxes, based on your W-4 elections. So in reality, you're paying the tax liability as you go.
Business owners should be making quarterly estimated payments. These payments are made to cover your estimated tax liability, at the end of the year.
On the IRS Form 1040, page 2, your tax liability is listed. This is before any tax credits are applied. Next, your automatic withholdings and/or estimated quarterly tax payment are factored in. Remember a refund simply means you overpaid. It's not income.
Our Pay-As-You-Go System
We have a "progressive" pay-as-you-go system. As Timalyn explains, assume you're in the 22% tax bracket. Not all of your income is taxed at that rate.
Returning to the example of a married couple earning $100,000. Our current tax brackets show that income over $89,450 and below $190,750 is taxed at 22%. We need to subtract the 2023 standard deduction of $27,700. This results in taxable income of $82,300 (100,000 – 27,700). This would be taxed at the 12% level, per the tax schedules. The IRS taxes the first $22,000 at 10%. Income after the first $22,000, but under $89,450 is taxed at 12%.
Every taxpayer pays 10% on part of their income. Another part will be taxed at 12%, assuming they earned more than $22,000. Income over $89,450 is taxed at 22%.
This can sound pretty confusing. If you have any questions at all, please send them to Timalyn via the Contact Me page on her website. Timalyn's goal is to help fill the tax literacy gap, one taxpayer at a time, not confuse you more.
As we conclude Episode 25, we encourage you to connect with Timalyn on social media. You'll be able to subscribe to this podcast on Spotify, Apple Podcasts, Google Podcasts, and many other podcast platforms.
Remember, Timalyn Bowens is America's Favorite EA and she's here to fill the tax literacy gap, one taxpayer at a time. Thanks for listening to today's episode.
For more information about tax relief options, visit https://www.Bowenstaxsolutions.com/ .
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Disclaimer: This podcast is for informational and educational purposes only. It provides a framework and possible solutions for solving your tax problems, but it is not legally binding. Please consult your tax professional regarding your specific tax situation.
