Here in the US, as in many countries, we owe the government taxes. These may come in the form of a sales tax, a tax on our investment profits (or losses) or as is top of mind this time of year – income tax. April 18^th is the day that every tax-paying individual in the US will have to have filed (or filed for an extension) with the federal and state government. This process always brings a lot of stress for me – and I would imagine a lot of you young professionals out there too. The government doesn’t make it easy; in fact I find it quite confusing and most of us will end up using software like TurboTax or H&R Block to help us. I’ll get on a brief soapbox about how most other industrialized countries do your taxes for you, since in theory they have all the data anyways (through your employer and brokerage firms) and how in the US we spend on average 13 hours and pay $240 to do our own taxes. But taxes are a bit of mess here in the US, with plenty of politicians wanting to make them easier/simpler, but all they ever seem to do is make taxes more complicated.

I’ll get off my soapbox now and similar to what I did in 2022, I’ll share a couple of thoughts as I go through filing my taxes this year.

How taxes work

Gross income is this is the total income you’ve earned throughout the year and comes in 3 flavors. The most typical is the ‘W-2’. This is income from an employer. The next income type is the ‘1099’. This is income that comes from being self-employed. The final type of income is ‘previously unreported’ i.e. tips or other income that you don’t get an official form for. Technically you should report amounts over a couple hundred of dollars. Technically. Interest and any ‘capital gains’ or dividends from gains on stock or various other investments are included separately and are taxed a bit differently. The old rate was 15%, but now it’s more closely aligned to your ‘common income’ rate.

Subtracted from your gross income are various deductions. The ‘standard deduction’ for a single filer is about $12,950. This means that before any taxes hit, they let you subtract $12,950. Various other deductions exist for having kids and a couple of other things. Any payments for health insurance are allowed to be deducted, as are contributions to a 401(k) retirement plan. This is nice because you are getting those tax-free. Charitable contributions are also allowed to be deducted, but unless you are giving away more than the $12,950 standard deduction, they won’t really count (it’s an either or situation).

From there you calculate your AGI – Adjusted Gross Income and then depending on your income you are taxed at a sliding scale – the more you earn, the more that bucket gets taxed. This article clearly lays out at what rate your income is taxed in 2022.

I still find them confusing

It seems that as our financial maturity has grown, so has our tax complexity. Back when I started this blog Mrs. Money and I basically only each had one employer and one W-2. We had marginal investment income and few deductions. Fast-forward 10 years things have gotten a bit more complicated for us, but also in the federal tax code. I feel like the more I understand about finances the more complicated taxes become. So, even 10 years into being a young professional, I still generally am confused by how they all come together. I do the best I can with the online tax software, hit submit and hope for the best! (Slight exaggeration but the general sentiment applies).

Tax advantage accounts are still nice

I am so thankful for tax advantaged accounts and did a much better job at maximizing them this year. 2022 was the first year I actually maxed out my 401k – so I contributed $20,500. I also participated in a HSA – health savings accounts and into a state 529 – for the kiddos college funds. It’s nice being able to put aside and invest money for our future – and also get a tax break while doing so!

Big shocker – why I got a CPA

In years past, I’ve always chosen to do my own taxes. I felt financially savvy enough to use online software but in years past I’ve always been a little iffy on the growing complexity of our taxes. Finally this year I got about halfway through doing my own taxes and decided to hire a pro. I asked around for a few references and got one that I felt I could trust and that could also do my taxes in time! It’ll end up being $400-$500 but in years past I’ve paid $250ish to do my own taxes, so $200 more didn’t feel too crazy for an expert to help and for the peace of mind that comes with it. In 2022 Mrs. Money and I had: multiple W2s and 1099s (self-employed contractors), Mrs. Money had her LLC, we bought a rental property and had income, I had crypto again (so dumb lol judging by how far it’s fallen) and we had donations to a handful of charities. Things just felt like they got to be a lot, and I found myself for the first time quite unsure about my own taxes. It was then that I decided to hire a professional! I’ll keep you posted on how it all turns out but for now I’m nervously excited!

Summary

‘Death and taxes are the only 2 things guaranteed in life’ as the old saying goes. In theory taxes help keep our government running and for us to enjoy participating in a stable democracy for us to pursue life, liberty and the pursuit of our own happiness in. In actuality it might get a bit messier but I think directionally that’s still accurate. I don’t like paying taxes but I do like living here in America. Taxes can be a lot higher in other countries. We finally reached the point in 2022 where we felt like hiring a pro would be worthwhile – and did so! It feels like one of the things well worth the money for me!