Taxes. They really should have taught me about taxes.
We didn’t discuss finances much in my household.
Here’s what I knew growing up: my mother was a chiropractor and my father was in promotions. I did and still do not know what a promoter does, but I knew that we grew up in a nice neighborhood, I never wanted for necessities or most excesses, and the subject of money was absolutely never at the forefront of the familial conversation. This, I understood, was a good thing. If you are talking about something, it probably means that something is wrong with that something so therefore, you should hope you never have to speak something. Or anything, really.
And speak of money we never did.
This extended from my childhood into my college years where, to my understanding, things were taken care of. I went to one of the most expensive universities in the country (because more money means better!) and surrounded myself with individuals who, I would come to learn, really didn’t ever have to worry about money. Surrounded by true wealth and seemingly well acclimated, my naivete assumed that everything was positively positive.
Since then, quite a bit has changed and I regret it all.
You see, even if things appear structurally sound at the time, stability is ironically fragile. My 20s have been a graduate class in the lesson that more often than not, the facts surrounding your adolesence are a facade. Your parents, far from having a well thought out plan, are often struggling to keep their lives together and your life alive. They do what they can to get by and often leave a lot of things out of the curriculum. It is up to you to fill in those gaps. So now, on the cusp of my third decade on this earth, it has become nothing if not a requirement that I learn everything that my parents never taught me about all the grown up things that they assuredly knew little about themselves.
Knowledge is insurance. We don’t always purchase insurance with the affirmative notion that disaster is imminent. Instead, we purchase insurance in order to hedge our bets. It is often superfluous. It is often a waste. But we take a chance that we’re investing in something that will pay some measure of dividends at a later date. We’re protecting ourselves from an unforeseen change in condition.
As it turns out, insurance is one of those things my parents never taught me about. Topic for a later installment.
Here, I will review my knowledge around taxes. I’ll try and be as expressly dumb as possible in order to mirror my own grasp of these concepts, which look an awful lot like the dumbest person in the world learning about taxes! My phrasing will be incorrect. I will totally misrepresent certain foundational elements of American taxation. But by the end of this article, you will have a complete handle of my own handle on taxes which is better than no handle at all.
Let’s dive in.
What Are Taxes?
Websters Dictionary defines taxes somewhere, I’m sure. Never checked. Start with “S” and proceed from there.
As far as I know, taxes amount to the money you have (have!) to pay the government. You, dear citizen, get a lot of stuff from the government. You get some schools. You get some crap cleaned up in the streets. You get bridges? Anyway, you get stuff from the government that you may or may not be conscious of. In order to fund these things, the government huddles up the team (the citizenship) and asks for a couple bucks to get these programs going. This occurs both at the state and federal level, so you’re paying up not only to the people who run the United States of America, but also the people who run whatever state you call home. Two different sets of taxes. That’s important and unintutive. I guess that’s because of our federalist system, which distributes authority in the country amongst the state and country level. I feel like Alexander Hamilton had something to do with that but I didn’t see that musical and I forget. But just trust me on the two taxes thing because it increases your tax requirement.
How Much Are Taxes?
I’m phrasing it comically for effect. How much do you owe in taxes? Boy, does it depend. From a certain perspective, your taxes are collected as a reflection of your income with varying brackets encompassing the percentages. That’s sort of the basic idea and the intermediate ideas are not really relevant for this level of understanding. If you make $100,000 per year, you pay a different percentage of your income than people who make $50,000 per year. More, actually. That’s called “progressive taxation” which basically says that if you make a ton of money, you can spare to give up a little more and live a perfectly happy life than someone who doesn’t make as much. Some people hate that for reasons of fairness and capitalism and blah blah blah but if you’re into that argument, go read Ben Shapiro or Rand Paul or some other intellect of whom I’m not even aware. Fact is, progressive taxation is the law of the current land and that’s what you’ll do if you’re an American, dammit.
There are some additional nuances. The amount you pay is impacted by your marital status, your home ownership, and the amount of “dependents” you have, which are people you’re on the hook for in some capacity. Basically, the amount of taxes you owe is broadly individualized and in some cases, totally flexible. There are, in fact, whole humans out there who make a career out of figuring out how to lessen the amount of money you are meant to owe in taxes, with methods ranging from “creative” to “downright devious”. Accountants are probably the best nerds for that. You know how you always hear about rich people not paying taxes? It’s because they get dickish nerds to figure out how to make it look like they don’t owe anything. If you were making that much money, you probably would want to avoid that tax bill too. It’s not that cool but it happens all the time.
Anyway, taxes can be a lot or a little or in between. The specifics of your career, your life, the state you live in and your financial year all have an impact.
When Do I Pay Taxes?
All. The. Time.
Ok, let’s see if I even know what I’m talking about here.
If you have an employer, good news. You know how you get regular paychecks? Well, that paycheck is actually adjusted slightly. See, you owe taxes on that money you made and from the government’s perspective, you can either pay them now or pay them later. If you make $52,000 per year ($1,000 every week, just to make this simple), you are, theoretically owed $2,000 every two weeks. At the same time, your employer has you fill out a form (a W-4) which helps them figure out how much you will owe in taxes, based on all of those life attributes referenced in the previous section. When pay time comes, your payroll department butts in and says “Alright, we know how much someone like you owes in taxes from what you told us on that W-4, so we’re gonna take that money out of your paycheck, send it to the IRS and give you the rest to do what you want with”. That means that the check is technically a little light when you get it, but it also means that your company just did you a serious solid by playing taxation middle man. So that’s either a win-win, a lose-lose or a win-lose in some order depending on your feelings on these things.
If you’re self-employed, you obviously don’t have a payroll department and it’s all on you, playboy. The expectation there (I think) is that you pay quarterly and use the “estimated tax” method which you should really just Google. I work for “The Man” so they hook that shit up. Not tryna’ learn your life.
What Is A Tax Return?
This is what “tax season” is all about.
Frankly, I didn’t totally understand this concept until very recently, either because I wasn’t totally paying attention or because I never allowed my brain to think about it for long enough to connect dots. Anyway, remember that W-4 we spoke about above? Well, it turns out that the assumptions that your employer makes based on this form may end up being incorrect. That’s right. The tax return is predicated on the idea that the taxes you’re paying throughout the year might not be exactly right, which is itself predicated on your potentially inaccurate expression of your tax filing status in that W-4.
You and your company really want these things to be as smooth and accurate as possible but you someone might fuck up. How did they fuck up? I guess they didn’t really fuck up, but things changed. Maybe you got married or divorced. Maybe you lost or bought a home. Maybe you donated a ton to charity, which makes you a Good Person and Good Persons deserve to pay a little less in taxes. Karma still matters, right? In any case, the assumptions your employer made about how much to deduct could either be spot on accurate come tax time or dead ass wrong. The direction of that mismatch could mean you either get some cash back (yay!) or owe more cash (boo!), but you won’t know until you A. Figure out how much you paid in taxes last year and B. Figure out how much you were supposed to pay in taxes last year, all factors considered.
So that’s what you’re doing every year, come April. You’re hoping that your company fucked up so bad they they sent the IRS wayyyyyyy too much money and now, thanks to your “Accuracy” super power, you have corrected the injustice of this mistake and will receive a big fat check from the government for your post-annum financial woes.
Tons, but I feel good about this! Don’t you? And yes, CPA Who Happens To Be Reading This, I of course got some stuff wrong and left even more stuff out. But I seriously didn’t understand the concepts mentioned above until, like, yesterday so I have to assume that if I’m that ignorant, there must be others of my kind who can learn from my process.
If you are dumb like me, please feel free to ask additional questions and I will answer them in the dumbest way possible. If I don’t know the answer, then you are obviously smarter than I am and should go look for answers elsewhere, wise sage. In any case, I find concepts are the stickiest when you are forced to explain them so I would totally benefit from the opportunity to play the role of Tax Teacher. This is, after all, a truly important topic and knowing is half the battle, as it were.