Tax season is almost upon us, and tax brackets are shifting higher by 7% this year—so what better time to continue the Money Taboos mini series with a focus on all things taxes? In this episode of Making it Count, Randy and Cristina welcome Andrew Griffith, CPA and associate professor of accounting, and Ricky Laviña, CPA and founder of TaxFyle. From tax brackets to audits and everything in between, they cover all the basics you need to know to file taxes without fear.
Randy asks Question 1: “Andrew, can you walk us through the different tax brackets? What determines which tax bracket you’re in?”
Andrew responds: “Your tax bracket depends on two things primarily: your filing status and your income. And I like to break income down between the nontaxable, the taxable, and what I call the quasi-taxable, such as your Social Security benefits. The filing statuses we have to select from currently are single, head of household, married filing jointly, married filing separately, and qualified widower.”
“To determine your filing status, we typically go to whatever your status is on the last day of the calendar year, but again, that's a typical statement. It's not always true 100% of the time. Once you determine your filing status, you can determine your tax rate by looking at your taxable income range, which you fall under and looking at the tax bracket specifically.”
“If you have a CPA or an enrolled agent, they can certainly help you determine your filing status first by asking appropriate questions. And they will also be able to determine the precise tax bracket that you fall under while preparing or reviewing your tax returns.”
Randy follows up: “I’m currently trying to figure whether or not I should be filing jointly with my wife or filing separately. Can you help me figure that out?”
Andrew responds: “Well, for a married couple, if their income is roughly equal, then there's really no tax advantage by filing jointly or separately. But that is a function of the income level. There are some tax credits that are actually denied if you're filing separately. Of course, you have an issue where if one spouse itemizes, the other spouse has to itemize. It's the little nuances in there, but the general statement is still true. If your income is roughly equal, it will work out to be roughly the same.”
“But for married couples filing jointly, one of the risks is that one of them has some hidden tax issues that the other spouse doesn't know about. And it could come up with a situation where a couple that filed jointly, the spouse without the issue could become liable for that tax return’s tax issues that may arise later.”
Cristina asks Question 2: “Let’s move on to some happy stuff: deductions and credits. Ricky, will you walk us through those?”
Ricky responds: “Everyone likes these because they reduce your tax liability. It reduces the amount that you end up paying the government. Little do people know that if you're a W-2 employee, you're paying the government throughout the year and therefore they give you your money back. We all end up paying the government. It's not like they're giving you money out of the goodness of their heart."
“Let's say you're fine, you do [your taxes] yourself on TurboTax. These are the things that make that number either red or green. Red meaning that you have to end up paying the IRS or green whether you get some money back. So there's two main categories, deductions and credits. Deductions are the stuff that we usually hear throughout the year, like I could deduct my kid’s child care, so on and so forth.”
“There's two subcategories there. One is the standard deduction, which is the amount that everyone on your 1040 that you file with — we each come with essentially a dollar figure and that dollar figure when you add up all the people in your household will give you your total standard deduction. And then this number is compared against your itemized deductions."
“So let's say you donate everything, right? Those are obviously considered charitable contributions and they each have a value behind it. And when you add them all up, if they're more than your standard deduction and the total standard deduction for your household, then you're going to be itemized filing. And those itemized deductions will then be reduced by your tax liability and then you'll get a refund.”
“The other main category is going to be the tax credits. And these are things that you'll get regardless of which deduction path you take. Some common credits are the child tax credit, the adoption credit, and the lifetime learning credit.”
Randy asks Question 3: “Let’s get into the nitty gritty. We want to hear from both of you guys. What’s the best way to file your taxes?”
Andrew responds: “I'm a big fan of the e-filing process, largely because it minimizes the risk of data entry errors into the tax authority’s system. And then we get feedback usually within a few hours, specifically from the IRS e-filing our tax return. It's important to note for those who have to file state and local income taxes, sometimes it takes several days for that to happen.”
“As far as the topic of self filing or working with tax professionals, self filing comes under the TurboTax umbrella. Returns with low income levels, W-2s, 1099 for interest — so the 1099-INT — or retirement income or Social Security benefits... a lot of people don't know, but they can get that e-filed and prepared for free through a volunteer income tax assistance site, what we call a VITA site, where they use the online free filing services that are promoted by the IRS. For that typically your income level cannot exceed $60,000.”
“If you exceed that $60,000 income level, they're supposed to turn you away and you have to go to the paid sites or you get to go to a paid preparer. If your income is complex, like you got cryptocurrency transactions, brokerage accounts, self employment, rental income, multi-state returns, typically you need to go find a tax professional to help you with that.”
“For those who are looking at tax professionals, I highly recommend that they choose somebody who's highly qualified, who's a CPA, a certified public accountant, or an enrolled agent. About 60% of the tax professionals out there don't have any licenses or qualifications of formal training to substantiate their experience with this.”
Ricky responds: “Well, I have to agree here with Andrew that you definitely should e-file. I think that the paper filing days are well behind us, and at this point, they just add a nuisance to the process and delay your refund if you have any owed to you.”
“Overall, though, what we're seeing in the market is that over the past few years, you've had a lot of people pick up side businesses, side hustles. I run a gig economy company, TaxFyle. And different from a W-2, side work is usually accumulated with a 1099. And 1099s, unlike W-2s, don't have any withholdings. So what that means is you're not paying the government throughout the year on the income you're earning. You should be, but it's up to you to do that quarterly.”
“Most people forget about this and they get penalized. So, if you are new to the gig economy or to side business and you started your own, we highly recommend that you get some professional help with a CPA or IRS agent or simply someone that's done it for a long time because they'll help you sort out all those expenses that went into fulfilling the business that you got into. And hopefully it will end up benefiting you, because all that income gets reported on the other end and you want to make sure that you have all your ducks in a row and that you pay the proper amount.”
Cristina asks Question 4: “Andrew, this question is for you. We’re going to talk about refunds. What are those?”
Andrew responds: “If you electronically file your tax return and you're owed a tax refund, you'll typically get it within 21 days of the IRS receiving your return and processing it. I personally have seen tax return refunds be delivered by the IRS within ten days. So, with that in mind, I do recommend that people avoid refund anticipation loans (RALs) because of the short turnaround time associated with the federal government's legitimate refund processing and also the high interest rates and high fees that are charged by those offering RALs.”
“If you choose to paper file your return, well, it's a different story. You've got a lot to contend with. And you're going to wait a while, too, because it can take longer for the IRs to process it. And you're got a higher probability that errors are going to be made while they do the data entry and they might even lose part of a tax return.”
Randy asks Question 5: “Ricky, what does getting audited mean? And how do I do my best to avoid the auditing process?”
Ricky responds: “Well, there's no way to just avoid it altogether. Because sometimes audits are simply random. But you could start by declaring all those 1099s and all the income you made, because like I said, on the other side of it, it will be recorded by the entity that's paying you, right?”
“Audits can happen a few different ways. It could be in person, which is obviously the scariest. But with the IRS and the limited resources they have, usually they'll simply send you a letter asking for support behind certain transactions. Because people either knowingly or unknowingly may take a deduction or two or fail to report income that they thought was probably tax free or already had withholdings behind it.”
“These things do happen, and the IRS has created a process essentially to make sure that everything is in line. There's no issue if you went ahead and filed properly. Again, that’s why you should probably use some assistance with a professional if you think that your tax situation is slightly more complex.”
Randy asks Quick Question 1: “Andrew, how much does using a tax professional cost?”
Andrew responds: “It's based upon where you live, your financial situation and the tax professional or the accountant that's involved. According to the National Society of Accountants, a simple return starts at $220. And then for the more complex ones, I know they can exceed over $1,10 according to their data set. So you get pretty expensive pretty quick.”
“Some firms charge on a per form basis, some charge a flat rate, some charge an hourly fee. The national average hourly fee is $180 according to that same organization. As far as the way I do things, I like to quote my prices up front. I like people to know what they're getting into. I don't want them to be surprised later when the tax work is done and they get the invoice because they're going to know ahead of time. They're going to have to approve it before I go forward.”
“I also like to use an easy to understand or easy to follow flat rate structure for the work that I do because I don't want to have to track my time and I don't want to surprise my clients. I try to avoid billing on an hourly basis whenever I can because I don't want them to be fixated on the time that I spend or the fact that they asked a question. I might build them for it later. I don't want them to have to worry about that.”
Cristina asks Quick Question 2: “Ricky, what are the most popular tax software options and how can our listeners choose one?”
Ricky responds: “As we mentioned earlier, you’re either going to be doing your taxes yourself, like with a do it yourself app. The most popular ones are obviously TurboTax and H&R BLOCK. And then if you need assisted filing, you could do a lot of those online now, too. Even offered through the same companies like TurboTax and H&R. I personally like — obviously, the best one that's out there — is TaxFyle, which is my company, which is like Uber for taxes.”
“Nowadays, all these companies have apps. So, while you're listening to this, if you have your phone handy, you could download any of these apps and get started. Not a lot of people do the do-it-yourself ones through the phone simply because when you're preparing yourself, there's a little bit more that goes into it. Usually you want to wait till you get home, but if it's as simple as getting a CPA or IRS-enrolled agent in TaxFyle to file your taxes for you, you could just download the app and have them do it for you and not worry about it.”
Randy asks Quick Question 3: “Andrew, what’s your favorite part of working as a CPA?”
Andrew responds: “Building the relationships with my clients. I help my clients with their income tax returns, but I don't just stop there with that one transaction. In fact, I don't even want a transactional client. I answer my clients’ questions all year long. I don't normally charge them for answering. I've even gone as far as to help them with their W-2s or other employment-related documents and even recover unclaimed funds for free.”
Cristina asks Quick Question 4: “Ricky, what inspired you to start TaxFyle?”
Ricky responds: “While I was at [PricewaterhouseCoopers], I was like, ‘Well, the tax filing process is kind of overly complicated.’ And even me as a CPA, I didn't want to really spend too much time filing, right? It's not something that I enjoyed. And if I'm in the industry as a licensed professional with these reservations, I'm sure that there's hundreds of millions of Americans out there with the same.”
“At the time, Uber was getting popular in Florida — I'm based out of Miami — and thought that, you could deliver tax services in a more efficient manner via an app. So I left PwC to start TaxFyle and haven’t looked back since.”
You can find Andrew Griffith on LinkedIn or at andrewgriffith.cpa. You can learn more about Ricky Laviña and TaxFyle at taxfyle.com.
On this episode, Cristina and Randy shared a previous Making it Count episode called Money Taboos Part II: Spotting Predatory Lending. Predatory lending uses deceptive language to rope people in with offers that sound too good to be true — because they are. In this episode, Shelby Lord from Addition Financial and Sarah Paulson, CFP and owner of Valkyrie Financial discuss the key signs of common predatory lending practices, how to recognize sketchy payday loans and what red flags to look out for in real estate lending.