Published March 31, 20216 min read
Filing taxes for the first time can feel like driving somewhere without a GPS — frustrating and confusing. So when Derek Silva’s mom told him he had to do his own taxes as a college student, he was baffled. He asked his mom, “Why? I barely have any money. Why do I need to file taxes?”
Surprisingly, Silva discovered he didn't hate the tax filing process. So much so, he looked for personal finance journalism roles after graduating college in 2014, so he could help other people “figure out what the hell taxes are all about.”
Silva has been a personal finance editor at Policygenius for two years. He's written around 60 tax articles to date. He likes to refer to Albert Einstein's quote (also seen on the IRS website): “The hardest thing in the world to understand is the income tax.” This week we chatted about why a $0 tax return is a good thing, the juiciest tax benefits and the two things he would change about taxes if he had a magic wand.
This interview was lightly edited for style and clarity.
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I was very lucky in the sense that at the time I lived in Massachusetts, where they allow you to file your state tax return for free with an online program. Other states have similar programs, so I would definitely recommend that new tax file filers look into that and see if you can file your state return for free.
I'd say definitely shop around. Just because you only know one or two filing services doesn't mean those are the only options. Something that really helped was being willing to go onto the IRS website and read a little bit. It's definitely not the most user-friendly or easy to understand what they're talking about, but it can definitely shed some light on how the whole process works.
Most people get a refund on their taxes, which right off the bat means that you already paid more taxes than you needed to. That's income you could have had in your bank account all year, but didn’t. I think at the very least, people should care about their taxes because getting a proper refund means getting back the money that is rightfully yours. Similarly, there are millions of people in the U.S. who have low incomes and otherwise wouldn't need to file a return, but if they did file, they would qualify for the earned income tax credit, or something else, which would mean they still get a refund — but they only get that refund if they file their tax return. It's your money and caring about taxes is important because you want to get back the money that you've rightfully earned.
It's a big misconception among people that if you get a big refund, you're doing the right thing. Unfortunately that's not really the case. It just means that you've already paid too much so the government has to return that money to you. That's true at the federal level and at the state level, if your state has income taxes.
So, if you pay the correct amount through the year, in theory, you could have a $0 refund. You don't owe any money and that's it — and there's nothing wrong with that. This year, my refund from the IRS was $89 and that's the closest I've gotten [to a $0 tax return] so far — and it feels good.
In the year of COVID-19, I feel like everything is different. There are definitely some new things for this tax season. In particular, as it relates to COVID-19, there are tax credits. If you didn't get any of the stimulus check payments, and you should have, you can get those by claiming a tax credit on your tax return. Similarly, if you are self-employed and you missed time at work because you had COVID-19 or you needed to care for somebody who had COVID-19, you can get a tax credit for some of the income you lost.
Taxes are tough. There are always small changes that you don't really notice because they don't seem like changes. For example, the medical expense deduction. The threshold was supposed to be that if you have medical expenses worth more than 10% of your income, you can deduct whatever the excess is. But then Congress decided to keep that level at 7.5% of your income. Whenever you're filing your taxes, it's always good to make sure you go through everything. Just to be sure that you don't miss anything, especially if you're using a tax filing service, that perhaps you've never heard of or never tried for before.
There are some fun ones in there. For example, this won't apply to everyone, but if you know of someone or a company who is committing tax fraud or under-reporting their income, you could report them to the IRS — of course there's a form for it. Then the IRS, if they find that this person or company is actually avoiding taxes, will pay you a whistleblower fee, or [percentage] of what they collected that they otherwise wouldn't have. Another one is if you go on jury duty and you miss out on pay because of it, it's possible to get a tax credit for it.
I don’t know anyone that’s done it, but it seems like it'd be very cool to get a whistleblower refund from the IRS.
It's kind of uncharted territory. Things are constantly changing and popping up and at the moment. The way it generally works with cryptocurrency is if you sell them, you have to pay capital gains tax, which is something that already existed in the system. It's possible that going forward Congress will find a way to more accurately tax other types of income or property, like digital currencies or NFTs — which could be a good thing.
As all of these new things come out, it just adds an extra layer on an already confusing tax system. If you're someone who's trading Bitcoin, there's not a lot of IRS literature about how it works. They don't have a ton of guidelines about what you should do with an NFT on your taxes. I would think that in the future Congress will tweak, or if we're lucky, overhaul the tax code to make these things easier to actually include in your taxes without just adding 10 extra forms.
There are two changes I think would make taxes a lot nicer. No. 1 is if normal people wrote tax content for the IRS, so you could actually go on their website and understand, in plain English, what any of their content means. Second, I would love for a bill to go through Congress and become law that sends people pre-populated tax returns, so you don't have to worry about crunching the numbers and gathering all your forms. Meaning, the government would set up a system where people can file for free and [they] generate a pre-filed tax return for you. The IRS already has most of your tax information, right? When you get a W2 from your employer, the IRS also gets that information. So in theory, there's no reason why they couldn't be pre-populating your tax return.
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Image: Nastia Kobzarenko