Hey folks! It's September already and before you know it, Christmas will be here. Then guess what! Tax Filing Season, and while exciting for some (those getting a refund check) it’s a dreadful time for others (those who owe taxes - oops!). Yet there are those who don’t file their taxes out of fear. Did you know that, Forosophobia is the fear of taxes and the IRS? “Foros” is the Greek word for “tax,” and “phobia” of course comes from the Greek word for “fear.”
Interestingly, an estimated 52% of U.S. adults find the tax-filing process stressful, according to a TaxSlayer survey, conducted in 2018. But a lot of these sentiments boils down to feeling unprepared and ill-equipped to handle ones returns accurately. Also, as many as 33% of Americans procrastinate doing their taxes and wait until the last minute, for varying reasons, according to a recent survey by IPX 1031. Further, there are those who are confused as to who is supposed to file their taxes, about what will qualify as a deduction and/or credit.
“Did you know that, Forosophobia is the fear of taxes and the IRS? “Foros” is the Greek word for “tax,” and “phobia” of course comes from the Greek word for “fear.”
If we could start from the basics, here is what you need to know, regarding who is required to file a return, the IRS uses the following three criteria: your age, your filing status, and your income. Generally, once you reach a certain income level, the law requires you to file. Please note, the amounts are adjusted annually due to inflation.
For example, for tax year 2020 returns, individuals younger than age 65 must file if they had an income that was at least:
• $12,400 as single filers.
• $18,650 as head of household filers.
• $24,800 as married couples filing jointly and both spouses are younger than 65.
The income threshold amounts go up a bit for those age 65 and older individuals:
• $13,850 for single filers
• $20,000 for head of household filers
• $25,700 for married couples filing jointly where one spouse is age 65 or older
• $27,000 for married couples filing jointly where both partners are 65 or older
A common query for parents, they ask will minors pay taxes. The answer is yes, dependent on whether they received earned income from working or unearned income from investment earnings.
Example 1: Morris Matata a 16-year-old dependent child, worked part time on weekends during the school year and full time during the summer. He earned $16,000 in wages during 2019 but no unearned income (investments). He must file a tax return because he has earned income only and his total income is more than the standard deduction amount for 2019 of $12,200.
Example 2: Felicia Lethabo a 18 year old dependent child, received $2170 of taxable interest and dividend income during 2019. She must file a tax return because she has unearned income, even if she did not work and her total income is more than the unearned income threshold for 2019 of $1100.
At this point it is important to emphasize that all income is taxable including investment income. Moreover, the IRS requires that you declare all income on your return. This can include:
• Wages or Salaries (reported in W2 form)
• Strike pay
• Rental income
• Royalty payments
• Stock options, dividends, and interest
• Alimony (for divorce decrees finalized before 2019)
• Self-employment income (reported in 1099-NEC)
Investing is the process of buying assets that increase in value over time and provide returns in the form of capital gains or income payments. Moreover, to achieve this, investing requires spending time or money to improve not only your own life but the lives of others. Additionally, in the financial realm, investing involves the purchase of securities (such as stocks, bonds, options, and warrants), real estate property and other items of value in the pursuit of capital gains or income. That said, without a shadow of doubt investing has a myriad of benefits that include:
• Building wealth (by growing assets and reducing debt)
• Investing Can Help You Save on Taxes (deferring taxes such as 401k & IRAs)
• You Are staying Ahead of Inflation (earning inflation beating returns)
• Invest To Meet Other Financial Goals (Buy a House in Muthaiga or Runda)
• Investing Will Get You to Retirement (Imagine an Early Retirement @ 47yrs)
Investing certainly is a sure way of growing assets and wealth that will potentially support you into your classical days and beyond. Also ask yourself - Do l so and so desire to create financial stability, grow wealth, and stay on track for retirement? If so, then you need to come up with an investing plan that suits your needs best. Then once you start investing you need to understand the two major occasions your taxes are affected by your investments:
1. The first is when you receive income from the investments.
2. The second is when you sell the investments for a gain or loss.
Types of Investment 1099 Forms you'll Receive
When any of the aforementioned occurs, come January of the following year anticipate receiving any of the following 1099 forms.
a) A 1099-INT from a bank entity indicating that you received an interest income of over $10.
b) A 1099-R if you received a distribution or payout such as pension, retirement, IRA, certain annuities, or life insurance.
c) A 1099-B, from the sale of stock, securities, bartering and other commodities.
d) A 1099-S, for real estate transactions, such as closed sale or an exchange during a tax year.
e) A 1099-DIV for dividend income earned through-out the year.
Now that we have this on the table, one should not shy away from investing. If anything, this should empower you to invest more, equipped with the knowledge that now you generally know what to expect taxwise when you invest. For an in-depth understanding of your taxes and investments do not hesitate to consult with your tax accountant (such as Thanga Investment LLC). To know how to build your wealth and benefit from investing for years to come, register with PeteandPete Investors and polish your skills.
By Cyd Nzyoka, PhD
Cyd is an independent researcher, writer & HR consultant. She’s versatile, passionate about investing, taxes, teaching at the tertiary level, corporate training and dissertation coaching. She’s involved in writing on multicultural education, social justice and careers among other topics. You may read her works under IGI Global Publications. Cyd is a graduate of Capella University - School of business and technology. Email thoughts and comments to Cydnz@yahoo.com
This blog is written for educational and informational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. They author may or may or may not have positions in Financial Instruments discussed in this blog. Future results can be dramatically different from the opinions expressed therein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.