At Vincere, we talk a lot about achieving a “Work Optional” lifestyle where you can pursue your passions on your terms.
To achieve this lifestyle as quickly and efficiently as possible, you need your finances to be optimized. One of the biggest inefficiencies and drags on money for most people is taxes! That’s understandable! Taxes are a confusing mess!
Taxes are accompanied by a slew of tax queries, many of which go unanswered. After helping thousands of clients, we’ve seen similarities in the tax questions that come up over and over again..
We prepared this guide to assist you in obtaining answers and clarity as you navigate the tax ambiguity!
Let's jump right in!
1. How can I pay less taxes?
This is a loaded question. There are lots of ways to lower taxes that are going to be relevant to different people based on factors in their financial life. Your income, deductions, and credits are the main factors that influence your tax bill:
i) Income: Reducing or deferring your income can drastically lower your tax liability.
ii) Deductions: Increasing your deductions can help you save money on taxes, but there are limits and complexities to how much you can save.
iii) Credits: Increasing your credits can help you save on taxes.
2. Why does my tax bill change so much each year?
Life changes so much each year! Yes, the tax laws will change also, and that is undoubtedly a factor, but most commonly, your tax situation changes because of your income, deductions, or credits you qualify for. Read more on the ‘Tax Changes and Key Amounts for the 2022 Tax Year.’
3. What are the tax implications of my investment gains?
Investments can be taxed in two ways: as ordinary income or at preferential rates called Capital Gains Rates.
- Income Tax Rates: If you sell a stock at a profit after holding it for less than a year, you will be taxed at ordinary income tax rates.
- Capital Gains Tax: If you sell a stock at a profit after holding it for a year and day or longer, you will be taxed at preferential rates (0%, 15%, or 20%).
4. Even if I don't sell anything, do I have to pay taxes on my investments?
Possibly, yes! Mutual funds and ETFs can have taxable events in the form of interest, dividends, or capital gain distributions.
5. How is the income from my investments taxed?
Money in a savings account earns interest, which is taxed in the same way as regular income (ordinary tax rates). Depending on the investment, dividends may be taxed as regular income or as a "qualified dividend." Distributions will also vary depending on the investment, so be careful to discuss your specific investments with your advisor.
6. How much do I have to pay in taxes?
The Internal Revenue Service (IRS) intends to tax all of your earnings, regardless of where they are earned. So both your "earned" (salary, bonus, stock awards) and "unearned" income are combined (like investments or rental).
7. What are tax brackets, and how do they work?
Tax brackets are arranged in a tier system. The percentage rate will increase to the next marginal level when you earn enough money to reach the next level, similar to a ladder. However, income earned on the lower rungs is still taxed at the lower rates.
8. What is the difference between marginal and effective?
The marginal tax rate is the tax rate applied to the last dollar of income (the highest point on the income ladder), whereas the effective tax rate is the actual tax percentage applied to all of your taxable income (average).
9. Is it better to take a tax credit or a tax deduction?
A tax deduction reduces your taxable income dollar for dollar. A tax credit is a one-for-one reduction in the amount of taxes you owe. From a mathematical standpoint, lowering your taxable income has a more significant benefit. However, because a tax credit reduces the final tax payment, it can be more thrilling emotionally.
10. When do my retirement savings have to pay taxes?
Yes, unfortunately you do need to pay tax on some retirement savings. If you're taking money out of your pre-tax retirement account such as a 401K or IRA, you'll have to pay regular income tax on the distribution. This will be taxed just like any regular income. If you remove money from a Roth retirement account that has been kept for five years, the withdrawal will be tax-free. Remember that taking distributions before the age of 59.5 will usually result in a 10% penalty as well as taxes.
11. Do I have to pay taxes on the sale of my holiday home?
Holiday homes like any other property can be taxable if you had financial gains. So, You may owe capital gains taxes if there is a profit between the purchase price and the sale price of your vacation home. However, there are ways to reduce the taxes you owe. For example, Keep track of any renovations you make to your home, as they may lower your taxable gain.
12. To which state do I owe tax if I work from home?
It's possible that you owe taxes to all 50 states! The essential elements are your residence, the states in which you earn money, and the number of days you work in each state. Once you've figured out those details, your tax expert at our affiliated partner Vincere Tax, can assist you in determining which states you need to file taxes in.
13. Why is it that the government refuses to inform me how much money I owe or how much money I owe in taxes?
This is a great question, and I wish we had a better answer :)
Basically, blame centuries of complex webbing of politics, lobbying, lack or resources…etc. And, The Internal Revenue Service (IRS) enjoys a good test. The government has basic information about you, such as where you work, your W-2 earnings, and any interest or dividends you have received because employers and brokerages are required to send that information to the IRS. However, they will need you to fill in the blanks, such as the number of children you have and how much their care costs, as well as your medical bills. It's a collaboration.
14. Will the IRS arrest me for filing my taxes incorrectly?
It's highly unlikely. The IRS is interested in tracking down people that are knowingly and willfully evading taxes. They’re also human, and understand people make mistakes. If you make a tax error, you can remedy it by filing an amended tax return. If you interpret the tax codes in a way that the IRS disagrees with you also have the right to appeal it with the IRS. They can always still make you pay more, but you’re likely not going to end up in jail for trying to comply, but interpreting laws a different way. If there are differences between what you put on your return and what they have on file, the IRS may send you a letter.
15. Do charitable gifts qualify for a tax deduction?
Probably! You can deduct the first $300 you donate to a charity. If you make more significant donations and itemize your deductions on your taxes, you may be able to deduct all of them. Of course, there are conditions, such as the donation must be given to a 501(c)(3) organization, and receipts must be provided.
16. How can I tell if I'm a dependent or not?
There's a potential that you'll be classified as a dependent if you don't support yourself financially. If you are a child under the age of 19 (or under the age of 24 if you are a full-time student) or a qualifying relative who earns less than $4,400 per year, you may be eligible (the tax year 2022). Qualifying dependents may have a job, but they are unable to support themselves for more than half of the year. Read more on this here.
17. What is the definition of adjusted gross income?
Your adjusted gross income is the figure on which many tax calculations are based. It's your entire revenue less any modifications (student loan interest, contributions to retirement accounts, etc.).
18. Does my stock option compensation appear on my W-2?
Yes, stock options are taxable, and your employer will record them on your W-2 box 12V. Equity compensation is taxed differently depending on the kind. Stock options, restricted stock, and restricted stock units, as well as stock appreciation rights, phantom stock, and employee stock purchase schemes, to name a few.
19. What effect does student debt have on my taxes?
Fortunately, you can get a reprieve by deducting the interest paid on student loans up to a limit of $2,500 each year from your taxes.
20. Is it possible to deduct donations from a 529 college savings plan?
Although you cannot deduct this from your federal income taxes, most states allow you to do so. There are certain restrictions. For example, in New York, a married couple can deduct up to $10,000 provided they invest at least as much in a 529 savings account.
Summary of Tax Issues
Only by aligning your plan with your priorities can you truly win the tax game. Our goal is to provide you with all of the information you need to understand and navigate your taxes.
If you're ready to start tax planning, be sure you're working with someone who is on your side of the table and has your best interests at heart.
If you're interested in connecting with us, you can schedule your free 1:1 consultation here.