B (12:22)

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A (12:52)

The benefit to this is if you don't actually qualify for the Direct File program straight from the irs, it's is you can still file your taxes for free. Those are two great options to file your taxes for free, but now we should also understand your potential deductions and credits. Tax deductions reduce your taxable income, essentially decreasing the total tax owed, while tax credits are money that taxpayers can subtract from the taxes that they owe or add to their potential refund. Typically, tax credits are more favorable than tax deductions because they directly reduce your tax liability dollar for dollar, whereas tax deductions just make the taxable amount you have slightly less. Tax deductions are things like charitable contributions or contributions to a traditional IRA or a traditional 401k plan or any other qualified retirement plan. Common tax credits would include things like the Child Tax Credit or the Lifetime Learning Credit. These are both great ways to reduce your tax burden and make sure that you are keeping as much money as possible in your pocket. So I would actually research what deductions and credits you qualify for to help maximize your refund or lower your tax bill. One other thing to call out is that frankly, we should just remember that most people take the standard deduction, which is essentially the government's way of trying to save you time by estimating the average American's deductions for the 2024 tax year, which is the year that you would be filing for this April. The standard deduction is $14,600 for individuals, $29,200 if you're married and filing jointly, and $21,900 if you're head of household. So unless you have more deductions than these numbers, you'd be better off just snagging the standard deduction. Now that you won't be confused with the standard deduction, let's also go into some common mistakes to avoid when you are filing your taxes. First up, I hate to sound like Father Time, but you gotta make sure you are filing your taxes on time or making sure to get an extension or you're at risk of getting hit with some major fees. If you file your taxes too late without an extension request, you are subject to a failure to file penalty. The penalty is 5% of the unpaid taxes for each month or partial month that the return is late, and the maximum penalty is 25% of your unpaid taxes, which can certainly end up being a hefty chunk of change. This penalty can become very pricey very quickly, so please avoid this if you don't think you'll be able to file by the April deadline, or if you'd prefer to file at a later time, you can request an extension by filing Form 4868, but just make sure to file that form before April 15th. Something that you should know about the IRS and the tax filing system. It is considered worse, quote unquote to not file than it is to not be able to pay your taxes on time. The IRS will certainly work with you to get on a payment plan or pay over time, but if you don't actually file, that is the bigger offense of the two and will likely have more negative outcomes. So even if you don't have the money to pay your taxes right away, you didn't do the budget right, you had a little bit of an issue with your W4. Whatever. Just file. They can make concessions and exceptions and help you be flexible with the timing of the payment, but the timing of filing is pretty set in stone, so just don't miss that. Additionally, make sure to file your taxes under the correct filing status. Taxes and all of the forms and acronyms that go along with it can be super confusing and sometimes taxpayers choose the wrong filings status. But this is where you're going to be marking Single married, you have dependents, our head of household and it might seem really straightforward. But more people than you'd realize often misinterpret these filing statuses. So to avoid this, there is a tool that I love. It's called the Interactive tax assistant on IRS.gov which can help taxpayers choose the correct status, especially if more than one filing status might apply. So you need to be making a selection. If you're also using additional tax software or working with a cpa, they can certainly help prevent any mistakes with your filing status. But the key here is to always double check it, especially if you aren't 100% clear. Because even if you have a licensed CPA do your taxes, you are still the one responsible for making sure that it is done correctly. You have to check it. That's why your accountant will usually send it to you before they officially file it for you. Really encourage, if you have a more complex tax situation, to speak to a licensed tax professional or check out the exact explanations on IRS gov. Where else should you go then? Directly to the horse's mouth to make sure you are getting the right information. And now that we know how we are supposed to do our taxes, let's also get into some accounts that you can take advantage of to reduce your taxable income. We all have to pay taxes, but the government puts certain incentives to help you prepare for retirement and manage health care costs by creating these tax advantaged accounts. We want to use these to pay as few taxes as possible because we are legally able to use the tax code to our advantage. I promise you, rich people do. You should not feel bad about this. You are just playing by their rulebook when it comes to retirement accounts. These help individuals reduce their tax liability and save more effectively for specific financial goals. Like I mentioned retirement or health care. So let's talk a little bit about maximizing tax advantaged accounts. So to name a couple of the most popular accounts that you can utilize to lower your tax burden, we'd be remiss if we didn't mention things like IRAs, 5 to nines, HSAs and 401ks. As soon as you are financially able to, you are going to want to try and max out these plans. Because not only does each plan provide a slightly different tax advantage, but the main idea is that you are paying fewer taxes while also using these accounts to invest in your future or for future goals. So let's go over them. First up, individual retirement accounts IRAs. These are such powerful tools for retirement savings. Whether it's a traditional IRA or a Roth ira. Both do offer tax benefits. The difference is at what point. So contributions to a traditional IRA are often tax deductible that year, reducing your taxable income right now. Meanwhile, Roth IRA contributions are made post tax after tax. So you don't get any benefits now, but withdrawals in your future retirement age. Those are typically tax free. By contributing to an ira, you're not only saving for retirement and investing for your future, but you are also potentially reducing your tax burden now or when you retire. So this is a win, win, win. The max contribution for a Roth ira and an IRA in 2024 was $7,000 and $8,000. For those who are 50 or older who are looking to make catch up contributions, the one thing to flag is that once you make over a certain amount, you may no longer qualify to contribute to a Roth ira. However, you can certainly still use a backdoor Roth ira, which is where you contribute to a traditional IRA and then roll those funds over to a Roth ira. But this is certainly something that you can chat with your CPA about to make sure that it makes sense for you up Next we're going to work. 401k plans are a form of employer sponsored retirement account that allows employees to contribute a portion of their pre tax income. You may have also heard of things like a 403B or a 457A tsp. All of these are employer sponsored retirement accounts. It just depends on what your job is. One great thing about these employer sponsored retirement accounts is that a lot of employers also offer matching contributions, which is one of the only cases in finance where you can get free money. By maxing out your 401k contributions, you're not only taking advantage of tax deferred growth, but you're also benefiting from that free money that your employer is providing to you. So you're going to be able to accelerate your retirement savings. Matching often works dollar for dollar or percentage per dollar. So in my first job it was dollar for dollar up to $6,000. So when I would put in $6,000, I would magically have $12,000. That is amazing. At my second job it was a little less generous. It was quarter for dollar. So for every dollar I put in, I would have in total a dollar and 25 cents because my employer would match the quarter. As of 2024, you can contribute up to $23,000 for employee salary deferrals. So that's what you can put in. And 69,000 for the combined employee and employer contributions. I know all of us are thinking about healthcare these days, so let's talk a little bit about the health savings account. They are unique in that they offer a triple tax advantage. Contributions to an HSA are tax deductible. The funds grow tax free and withdrawals for qualified medical expenses are also tax free. HSAs not only help you save for medical expenses that you can then spend on, but they can also serve as supplemental retirement account income if you don't use all the money that you contribute. This is great because as we get older, our medical expenses typically do get higher. And if you are perfectly healthy, this works exactly as a traditional IRA or a 401k would for 2024. Contribution limits for an HSA are $4,150 for self only coverage and $8,300 for family coverage. And last but certainly not least, 529 plans are specifically designed to save for educational expenses. So a lot of parents use these to help save for their kids future college. These plans offer tax deferred growth, meaning your investments can grow without being taxed as long as the funds are then used for qualified Educational expenses. This tax advantage makes 529 plans an attractive option for parents or guardians saving for those future educational expenses for their kiddos. And while there aren't any federal tax benefits for using one, over 30 states do offer state tax breaks for utilizing these 529s. And with the 529s, the exact max contribution limits do differ state to state. One thing I should mention, people ask me this all the time. They're like, well, what about if my kid doesn't go to college? Don't worry, a 529 can cover trade school, beauty school, culinary school, and if your kid happens to be an amazing track star and gets a scholarship to go to college, you can actually roll up to $35,000 from your 529 for your kiddo into a Roth IRA for them. And if you even still have money left over, you can actually change the beneficiary of that account over and over again. So maybe you roll it to their sibling who isn't as star studded of an athlete. Or you can roll it to yourself and you can take golf lessons at the local golf academy or learn Spanish at the local community college in your retirement. It's something fun to do and a great way to put that money to use. Okay, so to kind of wrap up our episode, the takeaway here is that being prepared is going to save you time and money this tax season. Make sure to double check your paperwork and use available tax credits to help you prepare for the future and use the tax code to help you prepare for the future and maximize the money that you get to keep in your pocket. And the final tip that I'm going to leave you with is this. I know it may feel fun to get a windfall of money in April or whenever it happens, but getting a tax refund is actually very bad. You do not want a tax refund. When you file a tax return you are either going to end up with one of two things, a refund or a bill. The reason you do not want a refund is that it means that you you essentially for the past year have given the government an interest free loan. You would have been better off keeping that money yourself, putting it in a high yield savings account, or investing it, or frankly even just treating yourself because that is your money, you let someone else hold it. Again, I also recognize that owing the US Government a bunch of money in April is also not ideal because sometimes it's really hard to pull a thousand dollars out or a couple hundred dollars out. Especially when you weren't planning for that. So once you file your tax return this year, I want you to take a look at the outcome and instead of just being happy you got a little bit money back or sad that you have to pay a little bit more, I want you to adjust your W4 accordingly. I want you to change your withholding if you have a traditional W2 job, or I want you to plan a little bit better if you are a freelancer and set aside a little bit more or a little bit less money for taxes. You want to make sure that your bill or refund is as close to zero as humanly possible. So you are paying $0 on a bill, you're getting $0 a refund. It's much, much harder done than said, but getting close to zero would essentially mean you are paying the correct amount of taxes throughout the year. Good luck. Don't be scared and if you're really out of sorts, contact a CPA that specializes in tax prep. You are going to be able to get through this the sooner you start and the earlier you are prepared the better. Do not let me catch you April 14th scrambling to get all your documents together. I know you've got this. Catch you next week. Bye. Thanks for tuning into this week's episode of Net Worth and Chill, part of the Vox Media Podcast network. If you liked the episode, make sure to leave a rating and review and subscribe so you never miss an episode. Got a burning financial question that you want covered in a future episode? Write to us via podcast YourRichBFF.com follow Net Worth and Chillpod on Instagram to stay up to date on all podcast related news and you can follow me at your rich BFF for even more financial know how. See you next week. Bye.