Module 9: Taxes for Beginners
Understanding the Basics Without the Headache
Introduction
Welcome to Module 9! Let's talk about taxes – probably the most confusing and anxiety-inducing part of personal finance for most people.
Here's the good news: you don't need to be a tax expert. You just need to understand the basics so you can make smart decisions and keep more of your hard-earned money (legally!).
Taxes aren't just about April 15th. Understanding taxes helps you:
- Make better decisions about retirement accounts
- Maximize your refund (or minimize what you owe)
- Avoid costly mistakes
- Plan for the year ahead
In this module, we'll cover:
- How income tax actually works
- The difference between deductions and credits (big deal!)
- Tax-advantaged accounts and why they matter
- Common tax breaks you might be missing
- Filing basics – DIY or hire someone?
- Dealing with taxes if you have side income
Think of taxes as a game where the rules are published. Once you understand the rules, you can play better. Let's learn them!
Part 1: How Income Tax Works
The Tax Myth: "I'm in the 22% tax bracket"
What people think: "I pay 22% tax on all my income"
Reality: You pay different rates on different portions of your income (progressive tax system)
This is HUGE to understand.
Progressive Tax Brackets (2024 Single Filer Example)
| Taxable Income | Tax Rate | You Pay |
|---|---|---|
| $0 - $11,600 | 10% | 10% on this portion |
| $11,601 - $47,150 | 12% | 12% on this portion |
| $47,151 - $100,525 | 22% | 22% on this portion |
| $100,526 - $191,950 | 24% | 24% on this portion |
| $191,951 - $243,725 | 32% | 32% on this portion |
| $243,726 - $609,350 | 35% | 35% on this portion |
| Over $609,350 | 37% | 37% on this portion |
Example: How It Really Works
Sarah makes $60,000:
- First $11,600 taxed at 10% = $1,160
- Next $35,550 ($11,601 to $47,150) taxed at 12% = $4,266
- Next $12,850 ($47,151 to $60,000) taxed at 22% = $2,827
Total tax: $8,253
Effective tax rate: $8,253 ÷ $60,000 = 13.8%
Even though she's "in the 22% bracket," she only pays 13.8% overall!
Key Terms to Know
Gross Income:
- All income before deductions
- Salary, wages, tips, interest, etc.
Adjusted Gross Income (AGI):
- Gross income minus "above-the-line" deductions
- Examples: IRA contributions, student loan interest, HSA contributions
Taxable Income:
- AGI minus standard or itemized deductions
- This is what you actually pay taxes on
The flow: Gross Income → (minus adjustments) → AGI → (minus deductions) → Taxable Income → (apply tax brackets) → Tax Owed → (minus credits) → Final Tax Bill
💡 Exercise 9.1: Understand Your Tax Situation
From your last tax return or most recent pay stub:
My gross income: $__________
My filing status: ☐ Single ☐ Married Filing Jointly ☐ Married Filing Separately ☐ Head of Household
My federal tax bracket: ________% (highest bracket you reached)
Actual federal taxes paid: $__________
My effective tax rate: Taxes Paid ÷ Gross Income = ________%
State taxes paid: $__________
Total tax burden: Federal + State = ________%
Did you: ☐ Owe money (paid more at filing) ☐ Get a refund (got money back) ☐ Break even
If you got a big refund: You gave the government an interest-free loan. Consider adjusting withholding.
If you owed a lot: You might need to adjust withholding or make estimated payments.
Part 2: Standard Deduction vs. Itemizing
This is one of the most important tax decisions you'll make.
The Standard Deduction (2024)
What it is: Fixed amount you can deduct from income, no questions asked
Amounts:
- Single: $14,600
- Married Filing Jointly: $29,200
- Head of Household: $21,900
How it works:
- Your income: $60,000
- Standard deduction: -$14,600
- Taxable income: $45,400
- You pay taxes only on $45,400
Who should take it: About 90% of taxpayers
Itemized Deductions
What it is: Adding up specific deductible expenses
Common itemized deductions:
1. State and local taxes (SALT)
- State income taxes OR sales taxes
- Property taxes
- Cap: $10,000 total
2. Mortgage interest
- Interest on mortgage up to $750,000
- Must be on primary or second home
3. Charitable donations
- Cash donations
- Items donated (fair market value)
- Must be to qualified organizations
4. Medical expenses
- Only amount over 7.5% of AGI
- Example: If AGI is $50,000, only medical over $3,750 is deductible
5. Casualty and theft losses
- Only for federally declared disasters
- Subject to limits
Should You Itemize?
Itemize only if your itemized deductions > standard deduction
Example 1: Don't itemize
- Mortgage interest: $6,000
- Property taxes: $3,000
- Charitable donations: $2,000
- Total: $11,000
- Standard deduction: $14,600
- Take standard deduction (save $3,600 more)
Example 2: Itemize
- Mortgage interest: $18,000
- State taxes: $10,000
- Charitable donations: $5,000
- Total: $33,000
- Standard deduction: $29,200 (married)
- Itemize (save $3,800 more)
Most people take the standard deduction because it's simpler and higher than their itemized total.
💡 Exercise 9.2: Standard vs. Itemized
Estimate my itemized deductions:
| Deduction | Annual Amount |
|---|---|
| State/local taxes | $________ |
| Property taxes | $________ |
| Mortgage interest | $________ |
| Charitable donations | $________ |
| Medical (over 7.5% of AGI) | $________ |
| Other | $________ |
| TOTAL ITEMIZED | $________ |
My standard deduction: $__________ (see amounts above)
Which is larger? ☐ Standard deduction (take this one) ☐ Itemized deductions (itemize)
My savings by choosing correctly: $__________
Part 3: Tax Credits vs. Tax Deductions
CRITICAL DIFFERENCE: Credits are better than deductions!
Tax Deductions
What they do: Reduce your taxable income
Value: Depends on your tax bracket
Example:
- You're in 22% bracket
- $1,000 deduction
- Saves you: $1,000 × 22% = $220
Tax Credits
What they do: Direct reduction of taxes owed
Value: Dollar-for-dollar reduction
Example:
- $1,000 tax credit
- Saves you: $1,000 (regardless of bracket)
Credits are worth more than deductions!
Common Tax Credits
1. Earned Income Tax Credit (EITC)
- For low-to-moderate income workers
- Worth up to $7,430 (2024, with 3+ children)
- Refundable (can get money back even if you owe $0)
- Many eligible people don't claim it!
2. Child Tax Credit
- $2,000 per child under 17
- Partially refundable ($1,600)
- Income limits apply
3. Child and Dependent Care Credit
- For childcare expenses while you work
- Up to $3,000 expenses (1 child) or $6,000 (2+ children)
- 20-35% of expenses depending on income
4. American Opportunity Credit
- For college expenses (first 4 years)
- Up to $2,500 per student
- Partially refundable
- Income limits apply
5. Lifetime Learning Credit
- For college or job skill courses
- Up to $2,000 per return
- No limit on years
- Income limits apply
6. Saver's Credit
- For retirement contributions
- Up to $1,000 ($2,000 married)
- For low-to-moderate income
- Income limits: ~$38,250 single, ~$76,500 married (2024)
7. Residential Energy Credit
- For energy-efficient home improvements
- Solar, geothermal, wind
- 30% of costs
💡 Exercise 9.3: Credits You Might Qualify For
Check which credits might apply to you:
☐ Earned Income Tax Credit
- Income under ~$63,000 (married with kids)
- Have earned income from working
☐ Child Tax Credit
- Have children under 17
☐ Child and Dependent Care Credit
- Pay for childcare to work
☐ Education Credits
- Pay college tuition for yourself or dependent
☐ Saver's Credit
- Made retirement contributions
- Income under limits
☐ Energy Credits
- Installed solar or energy-efficient systems
Action: Research these credits at IRS.gov or use tax software to check eligibility
Potential tax savings: $__________
Part 4: Tax-Advantaged Accounts
We covered these in Module 7, but let's look at them through a tax lens.
Pre-Tax Retirement Accounts
Traditional 401(k) and Traditional IRA:
Tax benefit NOW:
- Contributions reduce current taxable income
- Example: Earn $60,000, contribute $6,000 → taxable income $54,000
- In 22% bracket: Save $1,320 in taxes this year
Tax cost LATER:
- Pay taxes on withdrawals in retirement
- Taxed as ordinary income
Best for: High earners now, expect lower taxes in retirement
After-Tax Retirement Accounts
Roth 401(k) and Roth IRA:
Tax cost NOW:
- No deduction; pay taxes on income now
Tax benefit LATER:
- Withdrawals in retirement are TAX-FREE
- All growth is TAX-FREE
Best for: Lower earners now, expect higher taxes in retirement, want tax diversification
Health Savings Account (HSA) – The Triple Tax Advantage
The ultimate tax-advantaged account!
Benefits:
- Contributions are tax-deductible (pre-tax)
- Growth is tax-free (invest it!)
- Withdrawals for medical expenses are tax-free
Example:
- Contribute $3,850 (individual limit 2024)
- In 22% bracket: Save $847 in taxes immediately
- Invest and grow tax-free
- Use tax-free for medical expenses
- After 65, can use for anything (taxed like traditional IRA)
Requirements:
- Must have high-deductible health plan (HDHP)
Strategy: Treat as a retirement account
- Pay medical expenses out of pocket now
- Let HSA grow for decades
- Use in retirement for medical expenses (tax-free!)
💡 Exercise 9.4: Maximize Tax-Advantaged Accounts
My current contributions:
401(k):
- Current contribution: $________/year
- Maximum (2024): $23,000
- Room to contribute more: $________
IRA (Traditional or Roth):
- Current contribution: $________/year
- Maximum (2024): $7,000
- Room to contribute more: $________
HSA (if eligible):
- Current contribution: $________/year
- Maximum (2024): $4,150 individual / $8,300 family
- Room to contribute more: $________
Tax savings opportunity:
If I increased retirement contributions by $________,
I would save $________ in taxes (contribution × tax bracket)
And I'd have more money for retirement!
Action plan:
☐ Increase 401(k) contribution by _____% starting _______
☐ Set up automatic monthly IRA contribution of $_______
☐ Max out HSA if eligible
☐ Review annually and increase contributions
Part 5: Side Income and Taxes
Have a side hustle? Freelance? Sell things online? Here's what you need to know.
When Side Income Is Taxable
Always taxable:
- Freelance income
- Side business revenue
- Gig economy (Uber, DoorDash, etc.)
- Rental income
Sometimes taxable:
- Selling personal items at a loss: Not taxable
- Selling personal items at a profit: Taxable
- Hobby income over $400: Taxable
Self-Employment Tax
What it is: Social Security + Medicare tax for self-employed
Rate: 15.3%
- 12.4% Social Security (on first ~$160,200)
- 2.9% Medicare (all income)
Why so high? Employees pay 7.65%, employers pay 7.65%
- Self-employed pay both halves
Example:
- Side income: $10,000
- Self-employment tax: $1,530
- Plus regular income tax on it
Good news: Can deduct half of self-employment tax from income
Estimated Tax Payments
When required: If you'll owe $1,000+ in taxes
How it works:
- Pay quarterly (April 15, June 15, Sept 15, Jan 15)
- Estimate your tax liability
- Pay throughout the year
Why it matters: Avoid underpayment penalty (~6% interest)
How to estimate:
- Previous year's tax ÷ 4
- Or estimate current year's income and tax
Business Deductions
If you have self-employment income, you can deduct business expenses:
Common deductions:
- Home office (if dedicated space)
- Mileage (65.5 cents per mile in 2024)
- Equipment and supplies
- Software and subscriptions
- Professional development
- Marketing and advertising
- Business insurance
- Health insurance premiums (if self-employed)
The rule: Ordinary and necessary for your business
Keep records: Receipts, mileage logs, invoices
💡 Exercise 9.5: Side Income Planning
Do I have side income?
☐ Yes ☐ No ☐ Planning to start
If yes:
My side income sources:
- _______: $ (annual estimate)
- _______: $ (annual estimate)
- _______: $ (annual estimate)
Total annual side income: $__________
Tax planning:
Self-employment tax (15.3%): $__________ × 0.153 = $__________
Income tax (your bracket ___%): $__________ × % = $_______
Total tax on side income: $__________
Divided by 4 quarters: $__________ per quarter
Business deductions I can claim:
☐ Home office: $_______
☐ Mileage: _______ miles × $0.655 = $_______
☐ Equipment: $_______
☐ Supplies: $_______
☐ Software: $_______
☐ Other: _________: $
Total deductions: $__________
Net taxable side income: $__________
Action plan:
☐ Set aside ___% of each payment for taxes
☐ Open separate checking account for business
☐ Track all business expenses
☐ Set up quarterly estimated payment reminders
☐ Consider forming LLC (if significant income)
Part 6: Tax Filing Basics
Should You DIY or Hire Someone?
DIY with software if:
- ✅ W-2 income only
- ✅ Standard deduction
- ✅ No complicated investments
- ✅ No business income
- ✅ Comfortable with technology
Recommended software:
- FreeTaxUSA (cheap, good)
- TaxAct
- H&R Block
- TurboTax (most expensive)
Cost: Free to $100
Hire a professional if:
- ✅ Self-employed / side business
- ✅ Rental properties
- ✅ Complex investments
- ✅ Multi-state income
- ✅ Itemizing with many deductions
- ✅ Major life changes (marriage, divorce, inheritance)
- ✅ You're anxious and want expert help
Cost: $200-$500 for simple returns, $500+ for complex
Free Filing Options
IRS Free File:
- Free if income under ~$79,000
- Through IRS.gov
- Guided tax preparation
VITA (Volunteer Income Tax Assistance):
- Free in-person help
- If income under $64,000
- Find locations: IRS.gov/VITA
AARP Tax-Aide:
- Free in-person help
- All ages welcome (not just seniors)
- Find locations: AARP.org
Important Deadlines
April 15: Tax filing deadline (or next business day)
October 15: Extended deadline (if you filed for extension)
January 31: Deadline for employers to send W-2s
Important: Extension to file ≠ extension to pay
- If you'll owe, estimate and pay by April 15
- File paperwork by October 15
What to Keep, What to Toss
Keep for 3-7 years:
- Tax returns
- W-2s, 1099s
- Receipts for deductions
- Records of estimated payments
- Investment statements
Keep forever:
- Records of home purchase/improvements
- Records of non-deductible IRA contributions (form 8606)
Toss after filing (if not needed for deductions):
- Pay stubs (once you have W-2)
- Monthly bank statements (keep year-end)
💡 Exercise 9.6: Tax Filing Plan
My tax filing strategy:
☐ DIY with software: _______________
☐ Hire professional: _______________
☐ Use free service (VITA/AARP)
Expected cost: $__________
Tax prep checklist:
Documents I need:
☐ W-2 from employer(s)
☐ 1099s (interest, dividends, freelance income)
☐ 1098 (mortgage interest)
☐ 1098-T (tuition)
☐ Childcare provider info (EIN, address)
☐ Charitable donation records
☐ Medical expense receipts (if itemizing)
☐ Property tax statements
☐ Prior year's tax return
☐ HSA/IRA contribution records
My filing timeline:
☐ Gather documents by: _______
☐ File taxes by: _______
☐ If owed refund, expect it: _______ (2-3 weeks)
☐ If owe money, pay by: April 15 (NO EXCEPTIONS)
Part 7: Tax Mistakes to Avoid
Mistake #1: Not Filing
The trap: "I don't owe anything" or "I can't pay, so I won't file"
Reality: Not filing costs way more than owing
- Failure-to-file penalty: 5% per month (up to 25%)
- Failure-to-pay penalty: 0.5% per month
- Plus interest
Fix: Always file, even if you can't pay
- Set up payment plan with IRS
- File on time to avoid failure-to-file penalty
Mistake #2: Not Reporting All Income
The trap: "They won't notice that $500 cash payment"
Reality: IRS gets copies of all 1099s
- Mismatch triggers audit
- Penalties for unreported income
Fix: Report all income, even cash
Mistake #3: Bad Record Keeping
The trap: No receipts, wing it on deductions
Reality: Can't prove it = can't deduct it if audited
Fix:
- Save receipts (take photos)
- Track mileage
- Keep bank statements
Mistake #4: Math Errors
The trap: Manual calculations, rushed filing
Reality: IRS catches mistakes, sends bill with penalties
Fix: Use tax software (it does the math)
Mistake #5: Wrong Bank Info for Refund
The trap: Typo in account number
Reality: Refund delayed weeks or months
Fix: Double-check, triple-check routing and account numbers
Mistake #6: Not Saving Tax Records
The trap: Toss everything after filing
Reality: Audits can go back 3-7 years
Fix: Keep tax returns and supporting docs for 7 years
Mistake #7: Panic Over an IRS Letter
The trap: Ignore it or freak out
Reality: Usually just needs clarification or you owe a small amount
Fix:
- Read it carefully
- Respond by deadline
- Keep copy of response
- Call if confused (be patient, hold times are long)
💡 Exercise 9.7: Avoid Tax Mistakes
My tax mistake prevention plan:
☐ Set reminder to file by March 31 (before deadline)
☐ Create folder (physical or digital) for tax documents
☐ Set up system to track deductible expenses:
- Method: _______________
☐ Use tax software to avoid math errors
☐ Have someone review before filing
☐ Save tax return and all docs for 7 years
☐ If I get IRS letter, will: ☐ Read carefully ☐ Respond by deadline ☐ Call if confused
Common Questions Answered
Q: Should I aim for a refund or break even?
A: Break even is ideal. Big refunds mean you gave IRS an interest-free loan. Adjust W-4.
Q: Can I deduct crypto losses?
A: Yes, but with rules. Capital losses up to $3,000/year against ordinary income.
Q: Do I pay taxes on Venmo/PayPal for personal payments?
A: No, only business transactions. Personal gifts and reimbursements aren't taxable.
Q: How long until I get my refund?
A: E-file + direct deposit: 21 days typically
Q: What if I made a mistake on filed return?
A: File amended return (Form 1040-X) within 3 years
Q: Should I take extra withholding or do quarterly payments?
A: Extra withholding is easier (W-4 adjustment). Quarterly if self-employed.
Key Takeaways
-
✅ Tax brackets are progressive – you don't pay your top rate on all income
-
✅ Most people should take the standard deduction (it's easier and often better)
-
✅ Tax credits are better than tax deductions (dollar-for-dollar savings)
-
✅ Maximize tax-advantaged accounts (401k, IRA, HSA) for huge savings
-
✅ Side income requires estimated quarterly payments to avoid penalties
-
✅ Always file on time, even if you can't pay
-
✅ Keep tax records for 7 years
-
✅ Use tax software or hire a pro – don't wing it
Quick Wins You Can Do Right Now
-
Check if you're getting full 401(k) match – it's pre-tax free money!
-
Increase 401(k) contribution by 1% – you'll barely notice, big tax savings
-
Create tax folder (physical or digital) and start collecting documents
-
Review last year's return – look for missed credits or deductions
-
Set up estimated payments if you have side income
Before You Move to Module 10
Make sure you've completed:
- ✓ Exercise 9.1: Understood your tax situation
- ✓ Exercise 9.2: Standard vs. itemized analysis
- ✓ Exercise 9.3: Identified credits you might qualify for
- ✓ Exercise 9.4: Maximized tax-advantaged accounts
- ✓ Exercise 9.6: Created tax filing plan
- ✓ Exercise 9.7: Set up mistake prevention
Reflection Questions
What tax concept surprised you most?
What tax savings opportunity did you discover?
What's one tax-smart move you'll make this year?
Looking Ahead
In Module 10, we'll put everything together – creating your personalized financial action plan that integrates all the concepts from Modules 1-9. This is where your financial journey becomes concrete and actionable!
See you in the final module!
Additional Resources
IRS Resources:
- IRS.gov (official site, not as scary as you think!)
- IRS Free File: IRS.gov/freefile
- VITA locations: IRS.gov/VITA
- Tax forms and publications: IRS.gov/forms
Tax Software:
- FreeTaxUSA.com (cheap, solid)
- TaxAct.com
- TurboTax.com (most expensive)
- H&R Block
- Cash App Taxes (free federal and state)
Tax Calculators:
- SmartAsset.com/taxes/income-taxes
- TurboTax.com/tax-tools/calculators
Finding a Tax Professional:
- CPA: AICPA.org
- Enrolled Agent: NAEA.org
- Ask for recommendations from friends/family
Further Learning:
- IRS Publication 17 (comprehensive tax guide)
- r/tax (Reddit community)
- Tax blogs: Bogleheads wiki tax section
"The hardest thing in the world to understand is the income tax." – Albert Einstein
"In this world nothing can be said to be certain, except death and taxes." – Benjamin Franklin
"The best way to teach your kids about taxes is by eating 30% of their ice cream." – Bill Murray