Step 3: Taxes

TL;DR: This one’s hard. Get a lawyer, nobody else (including me) can give you guarantees on any of this.

Taxes are an inevitable part of life. As tax season approaches for 2020, I thought I’d give some big picture advice.

At some point it’s worth a lot to learn how this works. Lowering your effective tax rate by just knowing how the system works can be worth a lot (e.g. just knowing you qualify for some deductions/credits!).

First, know that Turbotax is free if you make under $34k a year, and H&R Block is free if you make under $69k a year. This is extremely useful if this applies to you – they simplify the process a lot (just watch out for those bells and whistles that cost fees, Turbotax is notorious for trapping people with these). Earlier in life you can start by using them and figuring out what a general tax return looks like (keep those copies for your record!). I for one still file with them because the fee is so worth the ease, but that’s a personal choice.

Next think about your state where you live. What is the sales tax, and what is the income tax? Most people live in cities because of other reasons, but if cost of living/money is a factor, in general earlier on when you’re saving more than you’re spending you want to be somewhere with a lower income tax. Later in life you’ll want to be somewhere that has a lower sales tax, especially if you’re retired with much less income.

A big choice most people face on their tax returns is standard deduction vs. itemized deductions. If your taxes are simple you probably want the standard deduction – in 2020 for single filers it’s $12,400, which is pretty high. You want to compare this to how much you’d get back with itemized deductions: big ticket items here are house mortgage interest payments, state/property/local taxes, charitable contributions, and more… a simple Google search can tell you the big ones, as will TurboTax/H&R Block’s programs.

People also miss a lot of free credits out there because they don’t know about it. For example, if you’re a student, check out the American Opportunity Tax Credit and the Lifetime Learning Credit to see if they apply to you.

If you own real estate or run your own business, there are also a ton of great deductions to look into.

These were just ideas on where to start looking. Taxes are complex, and most people just need to know where to start and what’s important so this is what it is.

Happy (or rather, Good Luck) Tax’ing!

TheJKW

P.S. This is in no way official legal advice, and is not guaranteed to be up to date/completely correct. If you have questions/concerns please contact a tax lawyer.