How to

How To File Your Tax Return In 2021 Online For FREE! (Step By Step)

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so ben franklin once said that there are two things that are certain in life the first one is death and the second one is taxes taxes are something that nobody enjoys talking about nobody wants to spend their time dealing with it but it's what we call a necessary evil so since we are coming up on tax season of 2021 i decided to put together a comprehensive step-by-step guide on how to file your tax return as an individual in 2021 and if you happen to be watching this video years down the road not that much really changes year after year so this video is still probably relevant but i'm gonna try to do an update video on this topic every single year to remain current but that being said guys i'm gonna be showing you how to file your tax return as an individual who earns w-2 income from a job but i'm also going to be showing you if you have any kind of freelance or gig work and you have any 1099 income we're gonna cover that as well and in addition to that a lot of deductions and expenses that you should be aware of if you are in fact a freelancer more and more people are doing gig work and side work and side hustles so this is becoming more and more common and that's going to be a big focus of this video is how taxes work as both an individual w-2 employee as well as somebody who has a mix of w-2 income and some extra freelance income on the side do keep in mind however though that everybody's tax situation is unique and if you have any doubts about the entire process you should probably just hire a tax advisor yourself i have a very complicated tax situation because i have like four different llc's i have rental properties investments all over the place i got a very complicated return so i personally utilize a tax advisor but if you're pretty savvy with the computer and you know you have a pretty simple return i would say the majority of people 90 percent of people could probably do their tax return themselves with relative ease and that's pretty much what this video is geared towards is your average run-of-the-mill tax return with a mixture of some investment income w-2 income and maybe some 1099 stuff from freelance so what we're going to be covering in this video are the following topics first of all why you need to file a tax return and whether or not you actually have to because i actually get that question quite a bit we're going to cover how to file a tax return yourself step by step i'm actually going to do a dummy tax return live on this computer for you guys so you can see it we're going to cover the crucial thing you need to understand about tax brackets that the majority of people actually do not understand we're going to cover the formula for calculating exactly what your taxes will be that way there's no surprises we're going to cover how to take advantage of deductions and credits to reduce your tax bill as much as possible and lastly how to actually collect your refund or pay the taxes that you owe at the end of the year that being said guys i have a couple of favors i want to ask here first of all guys if you are watching this on your computer and you have your cell phone next to you go ahead and put your phone on silence just to minimize those distractions um i'm going to teach you guys everything you need to know about tax returns you're not going to have to watch like 15 different videos but i do need your undivided attention here because we're going to move pretty quick and if you miss one thing you might miss the entire video and be totally lost also guys uh pause the video grab a drink if you need it and also i would recommend a pen and a pad of paper because you might want to jot some of this stuff down and lastly guys i just asked that if you enjoyed this video at the end of the video or at any point in time if you find it to be valuable just drop a like for that youtube algorithm and maybe leave me a comment with your thoughts on this video that always helps this video to be shared with more people that being said guys my lawyer has me have a couple disclaimers here quick number one i am not a financial advisor and i'm not a tax advisor this is not financial advice this is not individual tax advice do your own research before filling out any legal documents i'm not here to sell you anything i don't have any courses or anything i'm trying to sell you related to tax returns nobody has sponsored this video i do have e-file which i am going to mention and that's what i'm going to use for the tax preparation and i am affiliated with e-file so if you want to give back to me for putting this video together if you use that link down below i earn like a dollar or something for every free tax return so if you want to put a dollar in my pocket for this video guys it is very much appreciated but never expected um lastly guys i have been getting a lot of spam comments lately on my channel so i've been making this disclaimer in all of my videos um if you're seeing comments down below make sure they're actually from me uh let me show you right now this is a comment that's from me this is a legitimate comment and this right here is a spam comment so a lot of people in the comment section are trying to get people to send them money and they're pretending to be me and other people i'm never gonna ask you to send me money over like you know paypal or cash app or anything like that so if you are having somebody communicate with you it's probably not me if they're asking you for money so just you know take a look and make sure you're not talking to a scammer i hate to waste your time on that guys but it's getting out of hand so i have to mention that every single video that being said guys let's jump into it now and start off by talking about why you have to file a tax return what is the point in the first place well i'm sure this comes as no surprise to you guys but the tax return and the collection of income tax is actually a really big revenue driver for the united states government in fact fifty percent of federal revenue comes from individual income taxes and this is funding things such as health care education defense spending social programs and paying for government employees so we all like having things at our disposal like roads and um we like to be able to reach the police when we call 9-1-1 and these are all services that are paid for out of our taxes so yes we do have to pay taxes and by paying your taxes each year you are allowing the country to function now that being said uh some people would argue that in some states especially taxes are getting really high like california for example so you know i think you're it's a very polarizing topic the subject of taxes but we just identify this as a necessary evil and something that we all have to pay but i am going to show you guys the steps you should follow to make sure you're paying the minimum taxes that you need to be because you don't want to be overpaying and giving the government more money than you are entitled to now as an employee you're actually paying into your taxes through tax withholdings throughout the year and then on april 15th that is the day that you have to square up with the irs as far as your taxes go now some people end up putting too much money aside in their withholdings and they get a tax refund that's actually probably the ideal situation to be in other people get it right on the line there that way they don't owe or have to pay in very much money at all and then some people don't pay enough with their withholdings or they bump up a bracket and they have to pay a lot more money in taxes than they expected to but you actually prepay your taxes through your withholdings throughout the year and you want to make sure that that number which is on your w-4 is as close to how much you actually have to pay as possible so right now through your employer you're actually already setting aside money for your year-end taxes now when you get a new job you get a document called a w-4 which is where you indicate your withholdings from each paycheck and if you're not familiar with this this is where you indicate one or zero or a different number as far as your number of qualified dependents now the strategy that i've always followed for that is no matter what i always claim zero because i want them to withhold as much as possible because personally i would much rather have a tax refund rather than finding out that i owe money to the irs so when in doubt guys on that form you should probably just put a zero that way as much as possible as being withheld and you're not stuck at the end of the year having to pay a bunch of money towards your taxes because you claimed too many dependents and maybe you didn't have that many dependents so you ended up owing more money because not enough was withheld for taxes now the problem is if you're self-employed or you're a gig worker or you have any kind of side income no money is being withheld for taxes um once you get your business to a point where it's bigger you start paying in estimated quarterly taxes and that's what somebody like me does but let's say you're somebody who has a w-2 job and on the side you do a little graphic design work and maybe you make 2-3 grand a year well nothing is being withheld for taxes and so it's this freelance income where you can start to get into trouble and have a big tax bill waiting for you that you may be unaware of because that's kind of a luxury you have through your job is the setting aside of money for your taxes automatically which no such system exists for freelance work now one thing that i recommend as a strategy is that you should set up a separate savings account called a tax savings account that's what i call that's not the formal name but set aside a separate account where you're putting money in there in order to pay your taxes at the end of the year so a good strategy that i've followed in the past is i would take about 25 to 33 percent of all the money i received from my business and i stuff it over there in that account um and then i use that as my tax savings account and then if at the end of the year i have money left over it's just kind of like bonus money so you can do it yourself and set aside money for taxes i would highly recommend that as a freelancer but unfortunately there's no such system set up to automatically withhold money with your freelance income so now let's go ahead and talk about how to file a tax return and you basically have three different options available to you number one first of all you can fill it out by hand and mail it into the irs this is pretty much a bad option all around it's slow uh it's prone to error and there's another free option available which i'm going to show you a lot of the tax prep websites including e-file.com which is linked up below offer free federal tax returns so assuming you have a computer there's pretty much no reason to do a tax return by hand and mail it to the irs unless you're just looking to do something that's going to cause you stress and waste a lot of your time second of all your next option is to hire an accountant or a tax professional this is going to be the most expensive option but it might be worth it for a complex tax situation so me personally i spend about two thousand dollars per year on tax prep with my tax advisor which that's a lot of money but i have a very complicated tax return and they're helping me to make sure that i'm maximizing um all of my deductions and different things like that so if you're in a complicated situation like me where you have different businesses and you got rental income and you have a lot of investment income and all kinds of different stuff that's when a tax advisor or professional is well worth it but if you just have a simple basic return it's probably just going to be a waste of money option number three is to utilize online tax software which is now available on the internet so you don't even have to download anything i remember back in the day when my dad would go out and buy turbo tax on a disc to actually do his taxes we're far beyond that now you just do it right on the websites but anyways guys my top pick here is e dash file dot com like i said i have a link down below and i chose them for a couple of different reasons number one it's free to file your federal return and for your state return it's going to cost you just 28 or if you use a discount code that i'm going to show you it's just 21 and the whole process for filing guys is really quite simple so that being said guys let's dive into my computer now and do a dummy tax return with fake information just so you guys can see the whole process then we're going to talk more about tax brackets and different things like that that you should probably be aware of related to the tax return alrighty guys so now i'm going to walk you through the step-by-step process for filing your tax return using efile.com e-file.com i have an affiliate link down below if you would like to support my channel i may earn a small commission if you use that link but no pressure whatsoever if you guys don't want to the reason i recommend efile.com is because it is free for federal filing so if you don't have to file with your state then it would be completely free and for state filing it is going to be 21 if you use that coupon code 25 off right here which is pretty reasonable compared to other tax software so if you want to get started and follow along feel free to click that link down in the description below so now i'm going to jump into my e-file account and we're going to do some dummy steps here to show you what it would be like if you were actually filing your tax return yourself so let's go ahead and click continue with this dummy 2020 tax return all right so the very first thing we have to do here is write down our name and today's date so we're going to go with the alias of john smith for this dummy um filing just for demonstration purposes and of course it is january 6th and we're going to be filing singles so i'm not going to check that box so i'll go ahead and click continue now so now i've got to go ahead and fill out some personal information here so i'm just gonna fill out random information like i did before for john smith so now we have to fill out some information so let me go ahead and do that now with fake information for john smith and i'm not actually going to process this return because this is not a real person all right so there we have my information here for john smith i put in a fake social a fake date of birth and said that john smith is a cashier so now i'll go ahead and click continue next we fill out a mailing address which is pretty self-explanatory so let me go ahead and do that now so here we are with the fake address this is 123 main street apartment one in chester springs pennsylvania and then this box right here is pretty important this is your residency status you have to select whether you are a full-year resident of this state a full-year resident of another state or a part-year state resident so if you spend time in two different states this is where you would put that information in here but for most people you're going to say you're a full resident of this state and so we're going to go ahead and click continue now and if you do have a military address you're going to want to check that box here so now let's continue this is where you can enter your phone number i'm going to go ahead and skip it just because i don't want to link my real phone number to this since this is a fake filing so at this point you're going to want to check these boxes which is going to help you to understand what things you may need going forward throughout the tax return so first of all john can be claimed as a dependent on someone else's return if you are claimed as a dependent on someone else's return so if you're like a college student or a high schooler who's filing you would want to check that box but john is a older cashier so he wouldn't do that john was over the age of 18 and a full-time student eligible for educational institution that i don't need john is not blind he's not deceased i'm not going to contribute has not served in a combat zone during the current year was not affected by natural disasters did not receive sell send exchange any financial instruments uh this right here is a cryptocurrency related question which is interesting because this is uh changing very quickly with taxes on bitcoin so this says john received sold sent exchanged or otherwise acquired financial interest in virtual currency during the current tax year i'm going to check that box because a lot of people did this year so we'll see what it asks us later on and then john prefers to receive written communications from the irs in language other than english that's not the case the only box i checked is the cryptocurrency related one so now i'll go ahead and click continue so at this point here we have to choose our filing status and i'm going to go ahead and choose single for john smith and click continue dependents or qualifying persons this is going to be if you have dependents um such as children uh so if you have children you'd click yes here if you don't have any dependents you're gonna go ahead and click no so we're gonna go with no irs identity protection pin this is where you need to set a six digit pin next they ask about an irs identity protection pin if you received this uh you would hit yes i have not since this is not a real account so we're actually just going to click skip and go right past this step covet 19 tax relief okay did you receive an economic impact payment stimulus check in 2020 or 2021 this is unique to this year's tax filing so something else to be aware of we're going to go ahead and click yes and then we're going to enter the total amount um this is going to come on some form of documentation called notice one four four four or notice 144-b so i did not get a stimulus check because i was over the income limit so i personally did not receive this form but if you did receive an economic impact payment slash stimulus check you would want to keep that form and fill this out here so i'm just going to put in here twelve hundred dollars and uh we're going to put this here as six hundred dollars because i believe that was the standard amounts for these stimulus checks and then i'm going to click continue so now they have gathered a lot of information about us and they can tailor this tax return to our unique situation so we go ahead and click continue now it's going to be asking me about quick file i'm not entirely sure now it's going to be asking me about quick file which i believe is importing your forms directly from websites since this is a fictitious return i'm going to click no and press continue so now as far as entering my income goes you have two different options if you're pretty savvy with this you can select your own forms to fill out or if you're new to this you can go ahead through a guided process that's going to show you what forms you may need based on your different types of income so i'm going to go ahead and go with that option since most people will probably want a little bit of hand-holding to understand what forms they need to fill out so first of all wages and salary do you have any w-2s to enter well yes we do that's going to be very common so i'll click continue so now we're gonna go ahead and fill out this w-2 here and we're going to pretend this is john's salary here as a cashier so let me go ahead and fill this out right now so at this point what you would want to do here is look at the actual w-2 that your employer mailed you and you're just going to copy this information down word for word with what you have written on that document since i don't have a legitimate w-2 i made up some fake information here this is a fake ein which is basically like a social security number for your employer i said the employer was walmart i did another fake address and then i copied this information down here again from the previous example now these boxes right here are going to correspond with your w-2 of course i don't actually have one so i'm not going to fill these out i just put 50 000 worth of wages and i'm not going to fill the rest out because i have no idea what these numbers would be it's all based on percentages of your income withheld so i'm not going to fill out anything else here i'm just going to go ahead and click continue but you're going to want to make sure you fill out all these boxes here based on what is written on your w-2 i am not going to so i'm just going to go ahead and click continue so we're assuming that my job at walmart that doesn't exist pays me 50 grand and i have zero dollars in taxes withheld which is why i owe the federal government about 4 400 but most people would have wages withheld automatically so this would not be the case now we're going to go ahead and click continue and do some additional forms here so prior year state and local refunds did you receive a state or local refund for tax year 2019 let's say no we didn't and then go ahead and click continue but if you did you would receive those forms the next popular one here is the interest and dividend income so if you received any form 1099 interest 1099 oid or 1099 div you're going to want to click yes so if you have any investment income you probably got this so click yes and press continue now they have a couple of other questions here for us to follow this process first of all interest or dividend income and then you have did you have an interest in a foreign bank account and then exclusion of interest from series double e and u.s savings bonds that is because treasury bonds do not have federal tax so if you have any series double e or these specific savings bonds and you received interest you would want to specify that here because they most likely have some type of special tax situation so we're going to go ahead and click begin here for interest or dividend income and follow this process so first of all we have to choose what type of form we received and we're going to say interest income form 1099 interest we're going to check that box most common one and press continue so let's say for example this was a bank let's say it was uh you know cherry bank was the name of this uh institution and they paid me 35 of interest income this year from my savings um let's assume i have nothing withheld so we're just going to put 35 there and we're going to ignore the rest of this and we're going to press continue and again you're probably going to see this number start to go up or maybe it's not going to budge because it's such a small amount of money but anyway i just added a item here for interest income from cherry bank and now i'm going to go ahead and click continue obviously if you guys received a real form 1099-int you're going to want to fill out all those boxes in the e-file website or whatever tax preparer software that you're using and then we're going to click continue let's assume that's the only income i didn't have any dividend income it was just that one thing but if you did have a form 1099 div you would add that as well next here we have interest in a foreign bank account we're going to say i did not have any interests in a foreign bank account because that is very uncommon so we don't have any interest in a foreign bank account and we don't have any exclusion of interest from bonds so we're going to skip those steps we did add some interest income here and now we're going to go ahead and click continue so at this point this is where you can add any additional forms that you may have received in the mail and it's also possible that these forms have been emailed to you so even if you didn't receive a form in the mail what you should do is write down any investment accounts that you have any retirement accounts and you should log into those portals and see if they have any forms available for you to input another common one we're going to cover the w-2 is income from your job 1099 div is from investment income int is from the bank if they pay you interest and then oid is for distributions another common one that you're going to see is the 1099 nec and the 1099 miscellaneous now 2020 is kind of a unique year because they actually replaced the 1099 miscellaneous with the 1099 nec for freelance income or non-employee compensation so for example all of my freelancers that work for me if i paid them over 600 this year i mailed them form 1099 nec so let's assume you have some freelance income let me show you how you would add that to your return so the same as before you're just going to fill out all this information as it reads on the form so let me go ahead and do that now all right so i just went ahead and filled out this form 1099 non-employee compensation the payer here is jack's deli on 123 main street in lee arizona all made up information fake tin or ein again guys none of this information is real so if you are trying to like copy this down or something it's totally useless so you're gonna have to find something else to uh do with your time if you're looking to scam here with a fake tin or ein or any of that then we have the previous information that auto filled and let's say there was two thousand five hundred dollars of non-employee compensation and very rarely will you have any withholdings here because this is just gig work and most freelance you're not going to have any withholdings so we're going to say zero and then we're going to go ahead and click continue and most likely that number is going to start to climb as we owe some more money in taxes so now we actually have to create something called a schedule c which makes things a little bit more complicated but e-file is going to set this up for you so it gives you this notification that you need to set up a schedule c so now we're just going to click this box and create that schedule c at this point you have to fill out some information about your business uh so if you have a business for john smith like an llc for example this is where you're going to fill out that information here uh and as you can see our federal taxes went up a little bit as well because we're assuming that john smith has 2500 worth of freelance income that he hasn't paid any taxes on so i just filled out fake information here for john smith's business called john smith llc um if you already have an llc and that is who you're operating under for your business this is where you would fill out that information and then you're going to have a business code here as well if you don't know what this is you can click here for a list of business codes and if your business fits under one of these descriptions you would type that code in i'm going to skip that because we're assuming that john smith just has a freelance company here on llc for the purpose of his freelance work and he doesn't have like a code so description of business we're just going to say freelance writer and then we're going to click the continue button and that's going to set up our schedule c so now there's a lot of information that you would input here for your schedule c uh and this is where you'll be getting into things such as your operating expenses business deductions and all kinds of things like that this is where you're going to want to write down anything related to how you made money for that freelance income so things like your internet bill your utility bill home office write-offs this is where you would include different things like that um so let me go ahead and show you how i would add some of those items so we added 2500 worth of income and you're going to want to fill out the other stuff here as well if you're actually doing this tax return for example questions about operation of your business you'd fill out things like your accounting method whether it's cash versus accrual method used to value closing inventory different things like that this you're going to want to fill out yourself if you're doing this most people probably use cash type accounting which means you're keeping track of things as they flow into your account not when you actually earn that money it's when it actually shows up in your account that's the type of accounting that i personally recommend and follow so you would fill all this information out yourself on your schedule c but for now i'm just going to skip that you're also going to want to fill out cost of goods sold and then that's going to be more pertinent if you actually sell a product if you don't then you really wouldn't have anything to add there because you're not selling any products next we have general expenses we're going to begin this and this is where you're going to fill out any expenses that you have keeping track of and this is where you're going to fill out any expenses that you've kept track of such as internet bill cable bill uh things like that if it applies to how you derive revenue for this business so let's assume that you did a hundred dollars worth of advertising and then you also had some other things that you wanted to add here such as supplies let's say you spent 200 on supplies and then let's say you had to do a little bit of money on utilities you wrote off half of your utility bills so maybe you put you know 350 dollars here and uh let's say you also have some uh office expenses of maybe one hundred dollars so we'll add these expenses and then we'll click continue and we should see this number come down a little bit by adding these items and it did it's now just 47.21 which is what i owe the federal government uh you would add other expenses here if you have any assets that you're depreciating in your business you would do this here most people probably don't other expenses qualified business income deduction expenses for business use of your home this is going to be an important one for you as well because this is going to allow you to go through that whole wizard that's going to help you through the process of understanding your home office write-offs i'm going to go ahead and click begin and show you what this would look like this is basically going to help you understand what percentage of things you can actually write off associated with your home based on the percentage used for business use versus personal use so no this is not a daycare facility and let's say for example we have a 2 000 square foot house so we're going to say 2 000 and the area used for business let's say it's one room of the house that is 500 square feet and then we're going to have any net gain or loss not reported on the schedule c we're gonna leave that blank and assume we have nothing to add there so now we have this whole section here called direct versus indirect expenses and this is going to be based on whether or not that expense is directly related to your business or indirectly so it says right here direct expenses are those expenses that are paid only for the business part of your home for example if you pay for painting or repairs only in this area used for business this would be a direct expense indirect expenses are those expenses that are paid for keeping up and running your entire home for example insurance utilities and general home repairs you're going to want to break these up here based on whether they're indirect or direct expenses associated with your home and your home office so let's assume here you have a direct expense here where you do home office rent and it's a hundred dollars a month so you do 1200 per year just throwing random numbers here and let's say you indirectly your entire utility bill uh you know for your entire house let's say per year sits at like somewhere around uh two thousand dollars and let's assume that's it there's nothing else so then you're going to go ahead and click continue and obviously guys if you already added utilities in the other section you wouldn't add it here this is simply to help people who have a home office understand how to set up these uh different deductions so we're just going to do that and we're not going to get into depreciation of the home because that is something that you would add here if you own your home or but if you rent you wouldn't be doing this here then we're going gonna go ahead and click continue and just like that our tax bill has gone down a little bit through our business use of the home and so that is how you would fill that out here again if you fill this section out you wouldn't want to add your utilities and stuff to both this section and that one you would just put those down here now we're going to go ahead and click continue and we should be just about wrapped up now with this schedule c so we can be done with that aspect of this tax return so now you're going to be looking at if you have any other documents that you need to fill out we've done the w-2 we've done the 1099 div the interest as well as the 1099 non-employee compensation for the gig work and we set up the schedule c for the business at this point if there's no other forms that you have to fill out you're going to go ahead and click continue so now we've got to go through more deductions and of course i once again want to go through the guided process here that way they can ask me questions that i will answer to help me understand this so first of all family deductions do you want to explore possible credits and deductions related to your family well john smith has no children so we're going to click no and press continue next home and property ownership did you own a home or property at any time in 2020 we're going to say no because we're going to assume john smith rents so we're going to click no and we're going to press continue next we have charitable contributions this is one area that as we said could push you over and make it so you're not going to use that standard deduction so if you've done a lot of charitable donations and you have proof and receipts you'd want to click yes here but we're going to assume that he does not so we're going to say no and press continue then we have medical expenses things like medical and dental expenses health saving accounts msas health insurance for self-employed he has a job so we're going to say no and then we're going to press continue next we have education expenses if you had student loan interest or qualified education expenses such as tuition you would say yes john smith is not in school so we're going to click no and press continue car and personal property expenses did you pay any car registration fees property tax on property such as motor homes boats etc or did you have a hybrid vehicle we're going to say no and we're going to press continue next we have job related expenses if you had any educator expenses moving expenses business use of home traveling expenses or other job related expenses we already added our business use of home earlier so i'm going to click no and we're going to click continue then there is various tax payments would you like to enter information about any of the following tax payments to explore possible credits and deductions this is a run-of-the-mill tax return so we're going to say no and then we're going to press continue and then there is retirement investments would you like to explore possible credits and deductions related to retirement investments this i'm actually going to say yes and we'll see what options we have available when we press continue next did you or your spouse contribute to a traditional ira during 2020 we're going to say no john just did his 401k with his uh employer and he didn't do anything else retirement wise next retirement savings contribution credit did you make contributions to any of the following retirement plans listed below traditional ira roth ira deferrals to a 401k etc etc we're going to say no and press continue next investment interest expense deduction do you want to file for this deduction and it says investment interest is interest paid on money you borrowed to buy property that is held for investment if you paid this type of interest you may be eligible for a deduction well john smith doesn't own any property so we're going to say no and we're going to press continue and then it asks if we have any of these following deductions here casualties and thefts elderly or disabled credits alimony paid other deductible expenses etc etc we're going to say no so now they're analyzing our deductions and they're going to give us their opinion on whether or not we should be using the standard deduction or an itemized deduction uh and that's going to show us here so there's a couple of other forms here that you might fill out if you actually have received these forms and if you have not we're not going to fill those out because they're not common so we're going to go ahead and click continue same thing with these we're going to click continue and skip through these other forms because these are less common next we have a health insurance questionnaire did you your spouse or dependent purchase health insurance via healthcare.gov or a state marketplace john smith works for walmart he has health insurance for them so we're going to click no and press continue and so there we go that is the whole process and so there you have it guys that is the entire process for the federal return that is the part that's going to be the same for everybody here and then when you get into the state return that's going to be different based on what state you reside in as i had mentioned with e-file that federal return is complete and that is free and with the other one here that is going to be one where you have to pay 28 dollars per state return however as we had mentioned here if you use this code uh 25 off it's going to cost just 21 so you're going to input that at checkout assuming that code is still valid but we're not going to do the state return because it's going to be different for everybody so that wraps up the demo of how to process your return and if you are doing your state filing and you're using efile.com you're going to follow the same exact wizard that we just used to help you with that entire process so here we are with our final summary after accounting for our business related expenses and deductions your total income was fifty thousand eighty five dollars agi address adjusted gross income is the same amount no tax credits total tax bill of four thousand three hundred twenty four so you would owe four thousand three hundred twenty four dollars in taxes assuming nothing was withheld on your federal return so then you would press continue and we are actually early for e-filing because we are doing this on january 6th and that would not be available until tomorrow however we don't actually want to file this because it's a fake return so this is going to be the conclusion for john smith and uh now we'll get back into more details about the tax filing alrighty guys so you now have a very good understanding of how to file a tax return using online tax software and that's pretty much all you need to know in order to file your return but if you're curious more about taxes and you want to know how tax brackets work and how taxes are calculated and different things like that well that's what we're going to cover now and the advantage to knowing this information is that the more that you're aware of the more that you can utilize in your best interest so there are you know certain things that a lot of people are not aware of with taxes that can be used to an advantage if you're looking to minimize your tax bill so that being said guys let's start off by covering how tax brackets work uh you probably heard a lot about this during times of election years and when different politicians are trying to change tax brackets and maybe you have no idea what that is so i want to explain that to you now and it's actually a relatively simple concept the best analogy to use here is that a tax bracket is like a pocket and i would say the majority of people actually are not clear how tax brackets work there's a common misconception out there that if you bump up into a higher tax bracket that it's going to wash out any additional income because now you're paying like 25 taxes on all of your money instead of 22.

That's actually not the case because being in a higher tax bracket only affects your new income uh it's a little bit confusing guys but i'm going to do a drawing quick that should help you to understand so real quick guys i want to go ahead and explain how this pocket system works with your tax return i'm not going to use exact numbers here just because it's going to be easier to explain with just some basic numbers but let's say for example you had 100 of income for a given year and these were the following tax brackets so let's assume for example on that one hundred dollars of income that the first twenty dollars is zero percent tax bracket so that would mean that down here in this box that is where twenty dollars would go and then you have eighty dollars left that you still have to pay taxes on well let's say when you earn anywhere from twenty to sixty dollars that would be the ten percent tax bracket so that would mean you actually have forty dollars of income in this ten percent tax bracket and then that would of course leave you with forty dollars left which would be in the twenty percent tax bracket the misconception is that a lot of people think if you bump up to that twenty percent tax bracket that all of your money would be taxed at twenty percent and that's not true in this case here with this example twenty dollars of your income would be taxed at zero percent so you would pay zero dollars in taxes on that income at the ten percent level forty dollars is being taxed so you would pay four dollars on that income in that level or that pocket and then at the very top uh let's say the top bracket for this example was twenty percent you're paying 20 taxes on that 40 worth of income which is of course going to be eight dollars so if you add all of that up together you're actually paying just 12 in taxes on that 100 of income because it's a pocket type system if you were paying just 20 tax on the full hundred it would be 20 paid in taxes so there you go guys you now know probably more than 90 percent of people about how the tax brackets work so basically guys with our current tax system here uh you have these different pockets of income that are all going to be taxed at different rates so when you fill up one pocket you simply move to the next one and whatever amount exceeding that previous level is what you pay taxes on in that new bracket so that's actually a better system because as you saw in our example it led to a lesser amount of money being paid in taxes and it's a more fair and equal system next guys i want to go over and cover how your taxes are actually calculated um if you're curious how the irs figures out what each person owes in taxes well first of all guys it's important to understand that there's two main types of taxes out there we have income taxes and then we have payroll taxes and when it comes to your income taxes depending on what state you live in some states have no taxes on income such as florida and then other states like california and new york have sky-high state taxes i happen to live in one of those states and every single year that goes by i question why i live here because i'm literally handing new york state tens of thousands of dollars for pretty much no reason uh based on the fact that i operate an online business so understand that as well guys that not every state has an equal tax situation and certain states have a more favorable situation so living in california you pay a lot in state taxes state income tax whereas in florida there's no income tax so if you're somebody who's flexible with where you live this becomes a big part of the equation when figuring out how to minimize that tax bill so that's one of the things you should be aware of now is that by simply moving or relocating to a different state for the majority of the year you can significantly lower your tax bill especially if you're a very high income earner a lot of people are familiar with the graham stefan youtube channel graham stefan just made the decision to move out of california and move to las vegas based on the tax savings associated with moving from california to nevada so something to keep in the back of your mind if you're becoming a high income earner so between income taxes and payroll taxes we'll start with the income taxes explain what they are and how they're calculated so first of all income taxes provide general government revenue as mentioned earlier it pays for things like roads and police and this is automatically deducted from your paycheck if you work a job like i said when you get a new job you file form w-4 which is going to estimate the withholding amount and you don't know exactly what bracket you're going to be in because of bonus income and raises and overtime so it's a general estimate it could be high or it could be low if you are way off like for example if you file your tax return this year and you owe thousands of dollars and you don't want to have to deal with that again i would recommend contacting your hr department and asking them about claiming xero with your w-4 and basically uploading a new w-4 because the more that you claim on that w-4 the less is withheld with for taxes if you want the maximum withholding simply claim zero and collect a fat check at the end of the year uh i would much rather do that a lot of people say oh you're giving the irs a free loan but i would rather do that than you know have thousands of dollars that i have to scrape together at the end of the year i would rather have um you know money that's being put aside that i don't have to be putting aside and getting a check back rather than finding out i owe thousands of dollars now as mentioned earlier guys if you do have income from freelance or uh investment income there's no money being withheld for taxes and so you need to be setting aside money throughout the year to pay your tax bill unless you have a lot of cash sitting around or money that you have set aside for taxes so for your gig work and freelance workers there's no withholdings and so this formula now becomes more important so here's how your income taxes are calculated you start off with your total gross income which is how much money you made from all sources and then you go ahead and subtract what we call above the line deductions a few examples of this are 401 k contributions as an employee because those are tax deductible as well as business expenses associated with operating your business if you're filing a business tax return after that when you take your gross income minus the above the line deductions like your 401k contributions so this is going to give you your agi or adjusted gross income and at this point you subtract your below the line deductions or your itemized deductions now this is where you have to make a decision if you're going to go with the standard deduction or itemized deductions and we're going to talk about that more later as far as whether or not you want to go with standardized or itemized deductions after that you're left with a figure called your taxable income and this is where you apply the tax brackets or pockets it's this number right here your taxable income that gets put into those different brackets and whatever amount of money falls into each pocket is how much you pay taxes on that's going to give you your tax liability from that point you subtract any tax credits more on this later and then you have your withholdings from your w-4 so if the money in your withholdings pays for your entire tax liability then you get a refund if it pays for it period you don't owe any money you don't get anything back that's very rare and if you owe a little bit of money that's because your tax withholdings were not enough to cover your tax liability and that in a nutshell tells you what you owe or what you're getting as a return for a refund now payroll taxes on the other hand are a little bit different so let's cover those now talk about what they are and how those are calculated well payroll taxes fund things like social security and medicare and they're automatically deducted from your paycheck if you do have a job with w-2 income now the interesting thing about that is if you do have a job your employer is actually paying for half of the payroll tax and you're paying for the other half and this is a flat 15.3 tax if you make under 137 700 per year if you make more than that well then you are now somebody who's in a uncommon or more unique tax situation and that is somebody who should probably hire a tax advisor because you're in a more complicated situation but for the most part it's a flat 15.3 if you earn under 137 700 per year now as i said earlier you're going to pay for half of that and your employer is going to pay for the other half so if you make under that amount of money your half is 7.65 of your taxable income is what you pay in payroll taxes and the good news is guys this is automatically deducted from your paycheck every single week so you don't have to worry about paying this at the end of the year however if you don't work a job and you don't have w-2 income there are no withholdings and you actually have to pay both halves because the benefit with your job is that your employer is paying for half you're paying for the other half but if you're a gig worker or you have freelance income you have to pay for both halves of that payroll tax now this of course can be a big surprise for freelancers and gig workers this is why it's recommended to create a tax savings account and like i said put away 25 to 33 of the profit that you're making from your business or from your um side hustle put it aside in a separate account and consider that your tax savings account we're gonna cover deductions for uh gig workers and freelancers later on but again you're always better off to have too much and then have a little bit extra rather than needing extra money and not having it so in a nutshell guys when it comes to payroll taxes if you're an employee there's nothing to worry about here that money is being automatically deducted and paid and your employer is paying for half of those payroll taxes if you're self-employed you do have to pay these taxes and if you are making more than ten thousand dollars per year self-employed you should potentially be paying quarterly estimated taxes um that is where every single quarter you actually send in money for your state and federal um taxes and you prepay your taxes throughout the year so i do this every single quarter with my own business next up guys my favorite section here which is reducing taxable income through deductions this is where knowledge is power because the more you understand about deductions and the more you understand about taxes the less you have to pay so let's get into that now deductions reduce your taxable income and this leads to a lower tax bill so for example if you had fifty thousand dollars of taxable income that's roughly a six thousand eight hundred dollar tax bill to the federal government not including any state taxes because it varies based on what state you are in if you add a five thousand dollar deduction a lot of people will be wondering if that would wipe out five thousand dollars of taxes that's not the case it would instead lower your tax bill from sixty eight hundred down to fifty seven hundred and that's because deductions are another thing that ninety percent of people do not understand but i'm gonna teach it to you now so it's not a five thousand dollar reduction in your taxes it's a one thousand one hundred dollar reduction in your taxes from that five thousand dollar deduction the reason is because you have to take your tax bracket multiply that by the deduction and that is the savings amount so in this example here if you had a five thousand dollar deduction and you're in that twenty two percent tax bracket you would be saving twenty two percent of five thousand on your taxes or one thousand one hundred dollars so no deductions are not free money that literally mean that it was costing you nothing but it is a way to not pay taxes on that amount of money that the deduction actually is now these deductions are more valuable for people in higher tax brackets because typically at that point you have more deductions available to you and lower income individuals will prefer and have more success focusing on tax credits and we're going to explain why that is in a little bit so first of all i want to cover some common deductions for employees there's not a lot of them and that's why most people just utilize that standard deduction which we're going to talk about later but typical deductions for employees are ira contributions 401k contributions and student loan interest deductions that's common for employees or just w-2 earners self-employed individuals this is the holy grail is the deductions here and this is why i say if you don't own a business in this country you are paying way more in taxes than you need to be because when you're self-employed there's a whole different world of deductions and different things you can take advantage of so for example a couple of options of common deductions for self-employed individuals supplies office supplies any business expenses things that you had to pay for to run your business home office a portion of your mortgage or rent can be written off because of a home office a portion of your utility bill a portion of your internet bill any softwares or services you pay for for doing business mileage when you're traveling for work half of your self-employment taxes as mentioned earlier that can be written off as well as retirement plan contributions for a sep ira or a solo 401k so if you are self-employed you are in the best possible situation to maximize your deductions and find as many loopholes as pers as possible i use the word loopholes lightly because it's not like you're doing anything illegal or fraudulent you're actually just taking advantage of a system that exists whereas the more you know the more you're able to save and the less you pay in taxes so now we're gonna cover the standard deduction which is what most people are going to choose when filing their tax return and this is something that your tax prep software is probably going to indicate for you by asking you a set questionnaire to help you understand whether or not you should be using an itemized or a standard deduction so the standard deduction is a flat twelve thousand four hundred dollar deduction that anybody has available to them this is for people who feel that their individual itemized deductions will not add up to a number that exceeds twelve thousand four hundred so rather than having everybody scrambling and itemizing their deductions the majority of people just use that flat twelve thousand four hundred dollar standard deduction for simplicity and not having to do all this calculation of deductions that being said if you feel your itemized deductions would exceed twelve thousand four hundred dollars you can do the itemized deductions instead which includes things like mortgage interest on your primary home charitable contributions state and local taxes with a cap of 10 000 and medical expenses over seven point five percent so basically the standard deduction is twelve thousand four hundred dollars or you can use the itemized deduction which includes things like mortgage interest on your primary home charitable contributions state and local taxes as well as some medical expenses for most people the standard deduction will be higher which is going to be your best possible scenario to minimize your taxes unless you have lots of donations high state tax and high mortgage interest so if you have a gigantic house and you have a high amount of mortgage interest and you do a lot of charitable donations that you have records of and you're in a state where you pay a lot of state income tax that may be a case where the itemized deduction makes sense but for the majority of people who don't live in a high tax state who don't have a lot of charitable contributions the standard deduction is going to be the best way to go now that you understand the basics of deductions let's cover reducing taxes owed with credits well tax credits directly reduce your tax liability dollar for dollar which makes them a little bit more interesting because as we said earlier a five thousand dollar deduction does not mean that your tax bill is reduced by five thousand dollars it means that you simply take your tax bracket multiplied by that deduction amount and that's the actual amount that you're saving on taxes well with tax credits it's a dollar for dollar reduction so for example if you had fifty thousand dollars of taxable income as we said earlier that's going to be about sixty eight hundred dollars in federal taxes if you had a five thousand dollar tax credit that would lower your tax bill from 6800 down to eighteen hundred dollars because it's a dollar for dollar reduction which is different than the deductions now there's two different types of tax credits out there the first is refundable and the second is a non-refundable tax credit refundable credits can reduce your taxes below zero dollars and score you a refund common credits include child tax credits of two thousand dollars per child another one is the american opportunity tax credit which is up to two thousand five hundred dollars for college expenses and then we have the savers credit which is a two thousand dollar credit for low-income individuals that are actively saving for retirement your income taxes that are withheld from your paycheck are also treated as a credit because they come off of your tax bill dollar for dollar and as we mentioned earlier most of the time these tax credits are available to lower income individuals so if you are a low income earner this is where you may want to spend more of your time studying tax credits as you get into the higher and higher brackets a lot of people are ineligible for tax credits that's when you want to primarily focus on those deductions next the last thing we got to cover here guys is actually getting your refund or paying your tax bill how do you go about that process well after you enter all of your relevant information on efile.com and again guys that's e-file or there's a link down below because e-file without the dash is actually a totally separate company um that i have never used i don't know if it's good or bad but i have used e-file and so that is the one that i recommend well when you enter all of your relevant information you're going to see exactly what you owe or what your refund will be and it also shows you this as you go as we saw earlier if you owe money you can make a payment directly through e-file to pay your tax bill and if you're getting a refund you can choose how you want to receive it there's two different options direct deposit is going to be the fastest and easiest way or if you want to receive a check they will mail you a check to the address on your tax return so of course make sure that information is current if you're familiar with online banking and and you live in 2021 and you're up to date with things direct deposit that's going to be the fastest and easiest way no checks get lost in the mail and you're not waiting on the irs to process your refund also don't forget to save a copy of your return for your records the irs recommends holding on to at least three to five years of past tax returns just to be safe the advantage of using a tax prep software is that they store all of your returns for you automatically some of them might charge for this service so just you know when you're comparing different tax softwares just be aware of that i personally keep a copy of my personal return and my business returns all in different folders and i have one for every single year to hold on to just in case of an audit from the irs so anyways guys there you have it that is exactly how the u.s tax system works you now understand more than i would say 95 percent of people about taxes especially understanding how the tax brackets work with the pocket system how deductions work and how they're not just free money and also how tax credits work and you understand how to file your tax return for free if you have a very simple and basically run-of-the-mill tax return um if you guys enjoyed this video please drop a like and leave me a comment down below uh let me know what you thought about this and if you have any questions as well i always do my best to answer those if you want to file your taxes with e-file.com i do have that affiliate link down below so i can earn like a dollar for the free returns so i would really appreciate it guys if you wouldn't mind but as i said earlier that's not expected it's just if you want to give back to me for spending many hours on this video if this is your first time seeing me make sure you subscribe and hit that bell for future notifications that being said guys i will see you in the next video

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