💸 So, Let’s Talk Taxes 💸

In this Issue

• This Week's Money News

• So, let's talk taxes

• Weekly Tidbits

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A curated selection of money news from the week

This Week’s Money News

So much interesting money news came out this week. It was hard to choose just three pieces, but here’s what I landed on.

• Q4 is underway! Keep these key dates in mind 🎃🍁☃️

• More Black women are investing. Why? To build generational wealth. Read more here.

• Curb your money stress this holiday season. Here’s how.

Taxes

So, Let’s Talk Taxes

Last week, we discussed all the important money dates for Q4. One of the first dates we pointed out was regarding taxes. The term ‘taxes’ is almost ominous for many of us, and understandably so! Many of us don’t really understand taxes. I hope to clear that up a bit in this week’s issue.

Taxes: A Brief History 
You all know I like to start with some historical context. Let’s take it back to about 5,000 years ago. Egypt was levying some of humanity’s earliest taxes back then. Egypt wasn’t the only empire to do this. Rome and other major civilizations implemented taxation. Why were taxes implemented? The short of it is that it’s expensive to run an empire. Whether it was paying for weaponry and wars for further expansion or investing in the development of the empire in the homeland, money (or before currency, traded goods) was needed to accomplish these goals and sustain these activities. Thus, taxes were born. This 2-minute video does an adorable job of exploring some brief tax history in case you want to learn more.

Direct vs. Indirect Taxation
Let’s fast-forward to the present day. Our country has gone through a myriad of variations in how we tax our citizens. Our tax code is pretty complex. The following few pieces of this column highlight some foundational tax concepts, starting with direct and indirect taxes.

Direct Taxes 
According to the IRS, taxes can be either direct or indirect. We, the taxpayers, pay a direct tax directly to the government. The critical thing about direct taxes is that they can not be shifted to other individuals or entities to be paid on your behalf. You have to pay them directly. A great example of a direct tax is one you’re very familiar with: income tax. Income taxes are taxes imposed on the income generated by businesses (business income tax) and individuals (personal income tax). For those employed by companies, we often see these noted as income tax withholdings in our paychecks during each pay cycle. The federal government and most states impose income taxes. These taxes are paid at each pay period, and as long as you’re paying them and paying enough of them, you’ll be spared a huge tax bill at the end of each tax season. Here’s an example of what income tax withholdings might look like on your pay stub.

I know many of us look forward to getting a tax return every tax season, but here’s why that’s not ideal, as well as a few other ideas of what to do with that extra cash you’d typically be sending to the government. 

Other examples of direct taxes include:

• Property taxes

• Corporate income taxes

• Estate taxes

Indirect Taxes

Ok. On to the next: indirect taxes. As you may have guessed, indirect taxes can be shifted to another person or group by the person or business that owes them. Common examples of indirect taxes include import duties, which the importer of the good pays once it enters the country. Because import duties are indirect taxes, importers can pass the tax liability onto the end consumer. If the importer resells the imported good to a customer, the cost of duty (tax) on the imported good is typically included in the end consumer's purchase price.

Other examples of indirect taxes include:

• Sales taxes (can be direct, depending on the situation)

• Excise taxes, which are taxes imposed on a specific good or activity like soda or gasoline

• Value-added tax (VAT), which refers to a consumption tax on goods and services levied at each stage of the supply chain where value is added

What’s Important for You to Know This Tax Season

Given all of that, what’s most vital for you to know this tax season? I think there are a few things.

Thing 1:

Double-check your withholdings. Ensure you’re paying the appropriate federal and state income taxes so you’re not hit with a huge bill or a considerable refund next April. The only states that don’t impose a state income tax are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you don’t need to pay a state income tax, but you should still be aware of your federal withholding. The federal income tax has seven different tax rates, which change depending on your taxable income. If you’ve changed jobs, moved, or found a new income stream, check with a tax advisor on where you stand. Use calculators like this one from Smart Asset to ensure you go into these conversations with questions about your standing.

Thing 2:

Be aware of potential capital gains taxes. I didn’t cover capital gains taxes in detail, but these taxes are imposed when a sale or exchange of an asset, like stock or property, happens. They differ from income taxes in that income taxes are levied on your earnings from employment, interest, dividends, or royalties. Capital gains tax rates depend on how long the seller has owned the asset.

Thing 3:

Know that you don’t have to go at tax season alone. Many of us are used to doing our taxes alone, which can be fine in cases where we have simple tax returns. Taxes can get more complicated as we make more money and acquire more assets. There’s no shame in asking for help. If a larger company employs you, you may look into referral networks or company benefits that could help you find the right tax professional. If you’re not sure you need a tax professional yet, your first question should be, ‘At what point should I consider hiring a tax professional?’ The answer to that question will differ depending on your personal situation, so having a tax professional in your back pocket may be wise. If you’re in the market for one, here are a few things to ask a potential tax professional to help decide whether they’re who you want to work with. The IRS also allows you to double-check credentials here.

1. What type of tax preparer do you need? The IRS has a whole video on this. Additionally, you can cross reference credentials here.

2. Ask them about their fee structure. The cost of preparing your return should never be based on your refund amount.

3. How many years of experience do they have? You decide how seasoned you’d like your professional to be.

4. How will you receive your refund? You should always receive your refund directly via direct deposit or, if you prefer, a check from the IRS mailed directly to you.

5. Can they assist if someone from the state or IRS contacts you about this return? A good tax preparer should be able to support you in this regard.

6. Will they provide you with a copy of your completed tax return and all the original documents you provided them? The answer to this question should always be ‘yes.’

7. Will they be signing the tax return as your preparers? The answer to this question should be ‘yes.’

8. Are they affiliated with a professional organization? This is just good for you to know. Some preparers work within larger firms, while others work independently or in their own practice.

9. How do they stay up-to-date about new tax laws? Your preparer should be involved in the details and constantly learn about the evolution of the U.S. tax code and laws.

I hope this was helpful! Have questions about anything here? Feel free to respond to this email. In the meantime, happy tax season!

Weekly Tidbits

A Few More Things….

💬 Money Vocabulary: Are you experiencing tax terminology confusion? Here’s a solid list of terms and definitions to help you navigate the season.

🧘🏾‍♀️ Mindful Money Prompt: As we enter the holiday season, what two new boundaries would you like to set to help you establish a more loving relationship with yourself and your loved ones?

📠 Money Quick Fact: $50 billion of Monopoly money is printed each year, and more interesting money facts.