When people hear I am a CPA or that I have worked for the IRS, I usually get questions. Taxes are a universal thing that many people worry about, and few people understand how they work. In this article, I’ll do my best to demystify some common tax concerns and misconceptions.
- Tax rates are likely going to go up in the future. The Tax Cuts and Jobs Act (TCJA) of 2017 created a set of lower tax rates that will expire after 2025. It is likely your tax rates will go up in 2026 unless Congress passes new tax laws(s) before then.
- Getting a tax refund does not mean that you won. When I worked in public accounting preparing taxes, sometimes clients would get upset that they didn’t receive a big refund or one as big as the previous year. We always had to explain the following. If you paid less in taxes to the government, and your tax bill was the same as the year before, then you came out ahead. Getting a refund or paying money at tax time is generally based on how well you anticipated your tax bill for the year. If you went to the store and your bill was $200 and you gave the cashier $300, you wouldn’t brag that you got a refund of $100. Typically, you want to make your refund close to zero because that means that you didn’t overpay the government, providing an interest-free loan for the year.
- Your tax rate is not a flat rate across all your income. Tax brackets are progressive, meaning, the more you make in income, the more you pay. The first portion of your income is taxed at 10%. Then, if you make more than the 10% tax bracket income limits, the amount over that limit is taxed at the next level – 12%. Then if your income goes above that, the amount over that limit is taxed at 22%. And so on.
One of the strategies that advisors can help with is determining how your income will be taxed so that you can make choices on whether you accelerate income into the current year. You may not have much control over your income if you are a W-2 employee, but if you are a business owner or a retiree or debating whether to sell something in the current year that will net you a taxable gain, this can be useful.
We will be working on tax planning for clients over the next two months, and your advisor will contact you and/or your CPA if we have tax saving ideas to discuss.
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