PETE: You’re listening to How Not to Move Back in With Your Parents on the IU MoneySmarts radio network. I’m your host, Pete the Planner. Alex is here.
ALEX: Good morning.
PETE: Do you co-host? Did we figure this out last season? Are you the sidekick? Do you co-host? Are you actually the host and I just talk too much? What are we doing? I think you’re the co-host.
ALEX: Let’s do anything but sidekick. I’m not up for that.
PETE: All right. We’re like peanut butter and jelly. Which are you? This week’s episode we’re going to deal with filing taxes. Filing taxes, all right, are we in a safe place? Can I make a confession?
ALEX: Go for it.
PETE: So I was a financial planner for a really long time.
ALEX: And you did a lot of tax fraud in your own.
PETE: So many tax frauds.
PETE: I still find taxes really difficult. I’m in the financial world, I know what I’m doing. Taxes are a really difficult thing. And I think the assumption that someone knows what to do with taxes is an absurd assumption. I’m trying to think, there’s a major politician, it’s escaping my mind who it is. Every year when they file—Donald Rumsfeld, so former Secretary of Defense—every time he files his taxes, every single year he includes a cover letter that says, “Despite my two ivy league degrees, my several accounts and lawyers, I’m representing these taxes to the best of my knowledge, given that the tax code is thousands of pages long. And no one can actually understand what’s happening.”
PETE: It’s an amazing letter, and I always wanna send it with mine, but I think it would cause an audit.
PETE: But the point is, taxes are really hard to understand.
ALEX: Yeah, it’s inherently confusing, and it’s—
PETE: Off the air, you and I were having a discussion, hey, what’s my tax rate gonna be when I graduate?
ALEX: Yeah, I have no idea. Right. That’s the most basic thing you can know.
PETE: But it’s a hard answer. I mean, cuz you know it’s a graduated scale, right?
PETE: The first amount of your income goes at this rate, and then anything over that goes to that rate, and then over that... it gets nuts.
PETE: So we’re gonna do a couple of things. Number one, let’s talk about filing taxes as an undergrad, and then we’ll talk about what you should do tax-wise post graduation. So as an undergrad, you got some interesting options. You’ve been filing taxes as an undergrad?
ALEX: Yeah, so I’ve filed my own taxes since I got my first job in the beginning of high school.
ALEX: So I’ve been doing it myself for years now.
PETE: So, in what way?
ALEX: So I honestly just go online and use free Turbo Tax every single year for that.
PETE: In the free Turbo tax, cuz it’s really not too complicated, you’re gonna W2 or 1099.
ALEX: Right, you get your W2 from your employer. And they have the employer ID and stuff, but it walks you all through that. And it pretty much goes step by step. It’s really easy for beginners to do it. They walk you through what area on your W2 you need to insert to specific task form and all sorts of stuff.
PETE: The good news is, IU students have some options. The Department of Financial Literacy has some arrangements, I guess we could say. Relationships that allow you to get some tax help. So if you just go to moneysmarts.iu.edu, you can get information on that.
ALEX: Which is super nice. Definitely take advantage of that.
PETE: So I think we need to start here with a kind of... a life’s lesson. I don’t like to make big ranging statements here. But you don’t wanna mess with taxes. You don’t want to get in a position ever where you’re not filling your taxes or you get behind on them. It’s ugly.
PETE: Alex, I’ve seen so many professionals throw away good situations because they’ve tried to avoid taxes in not a good way, or they’ve just ignored them all together. And then, when you get that letter from the IRS that says, hey, you owe 10,000 bucks and you got 90 days to come up with it, what are you gonna do?
ALEX: Yeah, there’s just no way around it. Just don’t try and cheat it. Pay your taxes and just get over it.
PETE: I don’t know. I think that is a hard concept, frankly, for a younger professional, a younger adult, to understand is that it is not a good situation. I mean look, we want to fund our municipalities and the services we get. But at the same time, you’ve gotta understand what you’re doing.
ALEX: And as a younger new grad too, it’s easier for us to get pissed off about it, like why do I have to give all this money? What is this going towards? If you don’t really understand what it’s all going towards, and you just get angry about it, without really knowing very much—it’s a very easy thing for us to do, is get angry without knowing things.
PETE: And I would say the good news, if there is some good news, based on being a student or having student loan payments, or the levels of income you have, a lot of times you’re gonna be getting a tax refund anyway. You know what I mean? Which means you’ve paid, over the course of the year, too much in taxes, and then they pay you back what you paid over the amount you owed.
ALEX: Which can also cause trouble.
ALEX: Because people will say sweet, tax refund, let’s buy something crazy.
PETE: Sure, what would be crazy?
ALEX: Let’s go to Cabo, I don’t know.
ALEX: Yeah, sure.
PETE: I love Canada. I think the issue here too, the first couple years upon graduation is getting that sweet spot between maximizing your take-home pay versus getting a big refund. First, let me give you tactical, financial planning answer to this. You’re supposed to not get a refund, right? That’s what you’re supposed to do. You’re supposed to not get a refund because you’re efficient with your tax status and you get exactly every month what you should. And then you’re good with the government come April 15th. That’s the technical answer. Now, let’s be real. [LAUGH] The practical answer to this is, it doesn’t really matter, as long as you’re making good decisions. If you get a tax refund check at 2,500 bucks in April, fine. Just do some good with it. I don’t buy into, you’re gonna let the government keep your money tax-free for free. Who cares? I mean, what are you gonna, put it into a 30% account? You’re not going to get anything on your money anyway, so.
ALEX: Yeah. Just make sure you don’t squander that refund if you do get one.
PETE: Have you gotten a refund?
ALEX: Yeah, I’ve gotten refunds, pretty much every year.
PETE: Few hundred? Getting into the thousands?
ALEX: No, not thousands yet, it’s been a few hundred.
PETE: And what you’ll find, and this will rock your brain. This should be a heavy metal song, it’s called Rock Your Brain.
ALEX: Sounds like 80’s hair metal.
PETE: That’s what I was thinking. What will rock your brain is the fact that your state taxes will sneak up on you. You’ll be good with fed, and you think, well, my work here is done. And then you’ll get your state tax bill, and you’ll actually owe. People always somehow underpay on their state taxes. I don’t know how it works. But it always seems that way.
PETE: And depending on what state you live in, upon graduation, it’s not like everyone just settles in Indiana because you go to Indiana University. Depending on what state you go in, you might not have state income taxes. You might just have state sales taxes. Or you’ve got to understand those situations, so let’s do a couple of things. Number one, upon graduation, probably the best thing to do is to start, if you’ve got a simple tax situation, E-Turbo Tax, an online tax system would, you know, be good.
ALEX: Looking at IU’s resources.
PETE: Yeah, absolutely, but when things get more complicated, there is no other reason to go cheap and forego the opportunity to get good advice. Having a professional file your taxes, especially the first few years of your career can cost you where between 50 bucks to a couple hundred. And not to suggest that a professional can get you a better return or tax refund than a computer can, but to me, it’s not worth the risk of computer error. Or let’s say you’re on TurboTax. I’m sure you’ve been there before or whatever the software is. And a term has popped up that you’ve either had to Google or click the “What Is This?”
ALEX: Yeah, so that’s one of my points, too, is when you’re young, high school or college, make sure you can ask your parents about certain things. Because if they’re claiming you as a dependent, then there’s a bunch of stuff that you might need to know comparing their taxes to your taxes. So that’s something you wanna keep in mind, as well: how your dependency with your parents plays into your tax situation.
PETE: Yeah, and I guess sometimes we’re actually in this territory where you don’t even know what you don’t know.
PETE: Right, so when I say Turbo Tax is a company, it’s a business, and it’s a very common, it’s like people say Kleenex, right? So say the word Kleenex, but Kleenex is nose tissue.
ALEX: It’s a brand. Facial tissue.
PETE: It’s called facial tissue. That’s really strange. It’s what is called bathroom tissue.
ALEX: No, I understand.
PETE: I’m uncomfortable right now. But so, Turbo Tax is that for online tax kind of software.
PETE: If you went in person to a store, you see places like H&R Block would be one of those, at one of those sorts of tax preparation businesses. And again, this is where you get in that grey area of, man, I don’t even know how to be an adult. And I say that respectfully, you know what I mean?
ALEX: 100%, most of us don’t know how to be adults.
PETE: And we’re gonna talk about it on a future episode. But one of the best ways to deal with the tax situation is by taking advantage of all the tax deductions and tax credits you can. And one of those is certainly contributing to your employer sponsored retirement plan. When you start your job, and we’ll go into a different episode with this, but if you start your job, your employer’s going to come to you and say, hey, we have a 401K, or we have a 403B, or whatever. And you’re like, okay, I have a bunch of student loans, so.
PETE: Yeah, yeah. So we’ve got these things. But here’s the idea. A retirement plan can help you reduce the amount of taxes you owe in any given year, which can increase your refund, which is a good thing, right? Yeah. What is the takeaways, Al?
ALEX: So to summarize, don’t not pay your taxes. Pay your taxes.
ALEX: Don’t try and get around it. Don’t mess around with it.
ALEX: Get them done. Once you get into more, I guess, complex tax situations, don’t be afraid to consult a professional to help you out when you do it. Yeah, those are the two big ones for me, honestly.
PETE: Yeah, nice. All right, if you want more resources, including some preferred partners, I guess, for tax preparation, go to moneysmarts.iu.edu. This has been How Not to Move Back in With Your Parents. You’re on the IU MoneySmarts radio network.