A Beginner’s Guide to Taxes: How to File Your Federal Income Tax Return
Filing taxes is not everybody’s favorite way to spend the weekend. Apart from the mountain of documentation, forms, and receipts you need to gather, you also need to do a lot of number crunching and you need to file your taxes correctly to get the most deductions and not be audited by the IRS.
Filing taxes is your federal responsibility. You can make it less of a chore by educating yourself with the basics of the tax codes and taxation regulations. Fortunately for you, there’s a number of options that you can choose from when you file your taxes: do it by hand, use accounting software, or hire a full-blown accountant to do them for you.
Whichever method you choose, you’ll still have to gather all the important tax-related data in one place, organize them, and then input them into your forms. You’ll also have to check that all calculations are correct before you turn your tax return in to the IRS.
Therefore, filing taxes can feel quite intimidating if you don’t know how to do it or where to begin. But once you get the hang of it, you’ll actually see where you can optimize your tax deductions and credits the most. Importantly, you know you’re doing an important task required for all responsible citizens.
How do I Know if I Have to File Taxes?
The first most important thing you have to know about filing taxes is: do you have to file in the first place? A lot of people you know are probably filing taxes so you think that it’s mandatory for all citizens of legal age. However, there are people who don’t have to file taxes at all.
Requirements to File Federal Taxes
- You are less than 65 years old with more than $10,150 in income.
- You are more than 65 years old with an income of more than $11,850.
- You are legally married, both under 65 years old and will file jointly with an income of more than $20,600.
- You are legally married, both over 65 years old and will file jointly with an income of more than $23,100.
- You are married and you or your spouse is over 65 years old, will file jointly with an income of $21,850 or more.
- You are married, but filing separately and your income is $4,000 or more.
- You are less than 65 years old, the head of the household with an income of $13,250 or more.
- You are over 65 years old, the head of the household, with an income of $14,800 or more.
- You are less than 65 years old and a widow(er) with an income of $16,600 or more.
- You are more than 65 years old and a widower with an income of $17,850.
Do my Dependents Have to File Taxes?
The IRS has separate rules when it comes to dependents. You can bring your tax bill down by claiming exemptions for your dependents. However, other factors come into play, such as income, age, status, and visual impairment. A dependent has to file a tax return if he/she falls into one of these circumstances:
- If the dependent is not blind, age below 65 years and receives unearned income through interests and dividends amounting to $1,050 or more.
- If the dependent in not blind, age 65 years and above and receives unearned income through interests and dividends of more than $2,600.
- If the dependent is blind and over 65 years old and receives unearned income through interests and dividends of more than $4,150.
- If the dependent is not blind, age below 65 years and earns income of more than $6,300.
- If the dependent is not blind, age 65 years and above and earns income of more than $7,850.
- If the dependent is blind and age 65 years and above and earns income of more than $9,400.
What’s my Tax Bracket?
Whatever tax bracket you fall under tells you how much of your income is taxable. The US adopts a progressive tax bracket system which is a more complicated computation because you simply don’t deduct your taxable income just by a certain percentage and get the amount. You will have to deduct your taxable income in different percentages, ranging from 10 % to 39.6%.
Your tax bracket is affected by how much you earn and your filing status. For instance, single filers belong to the 15% tax bracket if they earn between $9,226 to $37,450. However, married couples who file jointly belonging to the same tax bracket have an income of between $18,451 to $74,900.
Your tax bracket is not determined by how much your income is. You’ll also have to consider other deductions like charitable donations, contributions to your retirement among others. However, earning a higher income may defeat your education credits and make them no longer count as tax benefits.
According to TaxAct, the US tax bracket system following:
Look for the tax bracket you belong, consider your deductions and exemptions and begin computing your taxable income.
What all do I need to file my taxes?
At the start of tax season, you should begin collecting the forms, documents, and receipts you need to file your taxes. You should organize your papers according to personal information, income information, manner of deduction, your expenses, filing status, and your previous tax returns.
The most important personal information you’re going to provide in your tax forms is your social security number (SSN). This is a unique set of 8 numbers attached to your identity all throughout your life. Secure your SSN and write it down in all pages of your tax form. Also ensure that you have the correct SSNs of your children, spouse, and other dependents.
Additionally, you have to get your correct mailing address or PO BOX. Also provide contact information and credit card or bank account details (for payment purposes). The personal information required in your tax forms are very basic, but you should still double check to make sure you don’t make any mistake (typographical or otherwise) to prevent rejection or improper filing.
This is where your documents pile up. Before the end of January, your bank, employer, and other places where you have financial accounts with should send you their tax forms for filing. To prevent confusion, make a checklist of your expected forms and cross them out of your list as you receive each. Also check your email because a lot institutions send their forms virtually as well.
Now, here are the most important income information forms that you need to collect and fill up for tax purposes.
This form will come from each of your employer. It details your income, tax, and medical contributions among other things. You must receive one form from each from your employers.
This is the form you need for any income made outside of your regular job. You must have this form if you’ve done consulting work, freelanced, or worked on side gigs during the previous year.
You need this form if you received an interest certificate from your bank indicating that your bank account has earned at least $10 in interest.
Investment companies generally provide this form to members or stockholders who earned at least $10 in dividends in the previous year.
This form contains your profits and losses from your brokerage accounts. It reflects all transactions, including profits and gains from trading stocks.
This form contains the details of your (and your family’s) medical coverage in the previous year. You need to use the appropriate version of this form 1095 (1095-A, 1095-B and 1095-C) depending on the circumstances of your medical coverage. Expect to receive this form from your employer or medical insurance company.
You need to use this form to show how much interest in mortgage you’ve paid in the previous year. Lenders typically send this form to homeowners who have paid at least $600 in mortgage interest to be able to qualify for deductions.
You will receive this form if you’ve paid back interest in student loans amounting to $600. Depending on your income, you might be able to enjoy some deductions using this information.
This form details how much debt you have been forgiven by creditors. The IRS considers forgiven debt as a form of income.
This form indicates how much in unemployment insurance you’ve received throughout the year.
These are just some of the most common income information forms that you need to fill out and you might need some but not all, depending on your unique personal income situation. Other things that you also need to consider when considering income information are charitable donations, gambling and lottery winnings, and other forms of taxable income.
Difference Between Standard vs. Itemized Deductions and Exemptions
One of the most important decisions come filing time is whether you’d like to get standard deductions or itemize them. Both has its own pros and cons and it’s important to pick the route that will give you the most deduction possible.
This is the easiest route because the deductions are made automatically based on your income and filing status. You do not have to bother with collecting and re-checking receipts. In 2016, applicable standard deductions are as follows:
- $6,300 for single and married individual who are filing separately
- $12,600 for married couples jointly filing as well as widow(ers)
- $9,300 for those who are head of household
This can require a little more work, but can potentially provide you with more deductions than standard deductions. If you want to itemize your deduction, you need to use form 1040 and go over your receipts to check where deductions might apply.
To help you make a decision whether you should go with a standard or itemized deduction, check to see if you’ve spent a a lot on medical and dental needs, donated to charities, paid taxes and interest on your property, spent un-reimbursed expenses while performing your job at work, or suffered from uninsured casualty or theft during the previous year.
You don’t have to take one method and use it for all your tax filing years. You could use standard deduction this filing season, but if your financial circumstances change next year, you might feel better off with itemized deduction. You just want to pick the deduction method that will help bring your tax bill down the most.
If you decide to itemize your deductions, it pays to record your expenses so you can easily calculate how much of the deductions can be taken off your tax bill. Some of the expenses that you can deduct off your tax bill are:
Medical and Dental Bills
If you had medical / dental bills during the previous year, including diagnosis, treatment, and recovery, you can possibly write these expenses off as deductions. The scope of medical and dental deductions can be quite extensive. Visit the IRS’s page http://www.irs.gov/pub/irs-pdf/p502.pdf to learn more.
These can be deducted from your taxes, though the amount differs depending on the reason for traveling. Your transportation expenses to and from and medical treatment can be deducted at 23 cents per mile. You may receive as much as 14 cents per mile for driving expenses incurred while volunteering for a charity. You may also deduct expenses for parking and toll for such reasons. You must be able to have a legitimate record of such expenses to differentiate it from personal expenses.
Expenses While on the Job Hunt
If you lost your job the previous year and made efforts to land a new one, expenses while searching for new job may also be deducted from your tax bill. Traveling to interviews is deductible by 57.5 cents per mile. You may also deduct expenses spent on agencies and online job search services.
If your employer requires you to wear a uniform that’s unsuitable to be worn outside your working hours, the amount you spent could also be deducted. Additionally, you may deduct the cost incurred for protective and safety gear required in carrying out your job.
What’s my Tax Filing Status?
Knowing the right filing status applicable for you can go a long way in reducing or increasing your total tax bill. Currently, your filing status should fall into one of the following categories:
- Married filing jointly
- Married filing separately
- Qualified widow(er)
- Head of household
Some married couples are especially torn between filing jointly or separately. If you’re legally married, you may file jointly with or separately from your spouse, but you cannot mark yourself as single in your tax forms.
If you’re married and trying to decide which is best between filing jointly and separately, it is worth considering which will bring your tax bill the most. Across the board, those who file jointly enjoy the smallest tax bill. In most cases, single filers and married couples who file separately have equal tax rates.
To know which filing status is appropriate for you as a married couple, consider running the the numbers to see which status will generate the lowest tax bill.
Previous Tax Returns
A good way to get started with this year’s filing season is to get your previous returns and review them. You’ll see the patterns almost immediately because most basic information never changes. If there are some pertinent changes in your life during the year (got married or entered new business ventures and investments) you’ll have to fill those out as well. The information from your previous tax returns will initiate you to doing this year’s taxes.
What Tax Form Should I Use to File my Taxes?
When filing taxes, you’ll come across three versions of tax forms: 1040EZ, 1040A, 1040. You may use one of them but that would also depend on the complexity of your finances and whether you want to do standard or itemized deductions. Basically, the more complex your finances become, so do your taxes. As you acquire properties and other forms of income, you will have to choose the form that would detail these the most.
Your accountant or computer software can figure which form is best to use depending on your situation, but if you’re doing it on your own, it helps to familiarize yourself with each one.
Of the three, this form is the simplest, shortest and easiest to use. This form is appropriate to use if your finances are basic and simple, such as when you’ve just started your first job and has not acquired personal assets yet. Additionally, form 1040EZ is appropriate for single and married filing jointly with income of less than $100,000. Use this form if your income comes from salary and wages and if your tax interest is less than $1,500. Using this form also implies that you’re claiming standard deductions.
Form 1040A is applicable if you receive other forms of taxable income aside from wages and salary. It can be used by filers of any status as long as income is less than $100,000. Sources of income can include dividends, IRA, unemployment and social security benefits. Certain income adjustments like early withdrawal charges and student loan interest apply. Also, tax credits are detailed in this form, including earned income credit, child care credit and education credits. Finally, remember that this form should only be used if you intend to get standard deductions.
This form is applicable if your finances are more complicated than those detailed above and you’re paying mortgage and other taxable interest. Use form 1040 if your income exceed $100,000 and you generate income from businesses, partnership, rental properties, farming and corporation. Additionally, 1040 is used if you have foreign wages and pay foreign taxes. If you intend to claim itemized deductions, this is the form to use.
Ways to Pay Your Taxes
There are three basic ways to file and pay your taxes: do it manually, get an online accounting software or hire an accountant. Each has its own merits and drawbacks. Consider where your finances currently stand to gauge the best method for you.
Mail The Payment
You can get tax forms from the local library or post office or you can download them from the IRS website. Simply fill the forms by hand and supply the required information. Once done, you can send the forms to the location specified in your state. The IRS has a Where to File page where you can see the exact details of where to send your tax forms (http://www.irs.gov/uac/Where-To-File-Addresses-for-Tax-Professionals). You have to make sure to send the documents early so they’ll be received by the IRS before the deadline.
A quicker and easier alternative to filing tax returns manually is to get an online accounting software. You have several choices, such as TurboTax, TaxAct, and H&R Block. The beauty of using such software is that it figures out much of the information based on the data you give to it, such as using the correct tax form and computing within the correct tax bracket. Additionally, you can electronically file your tax returns with the program of your choice.
Hire an Accountant
Getting a CPA to file your taxes can be a smart move, but it can be very expensive. This method is best for filers with more complicated finances. Your accountant can spot deductions that you or your computer software may not see. Apart from maximizing deductions and credits, your accountant is also trained and knowledgeable with the tax code and its changing regulations.
What’s the Best Way to Pay Your Taxes
Depending on your financial circumstances and experience in filing tax returns properly, one way may be better than the other two. Consider trying to file your own tax returns manually to get the hang of it.
You can also consult with online resources to make sure you’re doing things properly.
Getting an online software to prepare and file your taxes can cost you but not as much as an accounting professional that charges by hour. If you’d like to cut cost on your future tax returns, consider getting a pro one time and see how it’s done. Next time you’ll know and you can file taxes on your own.
The software can cut back on time because it’s been programmed to figure out the data you give it. You’ll also see previous tax returns you’ve filed using the same program. However, the software can have its own limitations and might not see all the potential deductions a certified human accountant can.
If you’re just beginning to establish your own finances and income comes from your salary and wages, it might be cheaper to do your own taxes or work with a software. However, your finances can get complicated as you acquire assets, get into more businesses and other forms of income-generating endeavors. Getting a human being certainly helps maximize your deductions and file your tax properly.
There are multiple ways to pay for your taxes and you just have to figure out which one is more convenient for you.
Credit or debit card – you can pay online using your credit card or debit card. The IRS has approved partners that can process your tax payments, including WorldPay, Official Payment and Link2Gov.
Direct Pay – this is also an online option wherein your tax payment is made by transferring the payment from your bank to IRS.
Electronic Funds Withdrawal – the opposite of Direct Pay, EFW works by allowing IRS to deduct the set amount for tax payment from your account at a pre-set schedule.
Cash Payments – you may also hand your tax payment personally at IRS payment partners, including some 7-eleven stores.
Important Tax Terms and Phrases
For the uninitiated, there are a number of terms and phrases that one needs to understand when filing taxes. Here are the top terms you need to learn in order to understand your taxes better.
Adjusted Gross Income (AGI) – this refers to the amount you get when you subtract your tax deductions from your total gross income.
Exemption – this refers to the amount you can subtract for each person who depends on your tax. You may claim an exemption for yourself, children and your spouse. The sum of your exemption is subtracted from your AGI to come up with your taxable income.
Itemized deductions – these are expenses which you can itemize one by one so you can further bring your bill down. You will have to use form 1040 if you want to itemize your deductions as well reach a certain threshold before such deductions can be honored.
Standard deduction – this is the fixed amount you can deduct from your taxable income after considering your filing status and income. You can subtract this amount right away without having to itemize each and every deduction.
Taxable income – this is the final amount when you subtract your gross income with all the allowable deductions and credits.
Tax credits – these are tax breaks which you can subtract directly from tax bill. Tax credits come in various forms, including but not limited to earned income tax and child tax credits.
Tax deductions – these are expenses you’ve had during the year which you can deduct from your taxable income.
Tax refund – this is the amount you get when you pay the IRS in excess of what’s just supposed to be your tax bill.
Withholding taxes – these are taxes taken out from each of your paycheck even before you get your salary or wage. This amount is deposited to the IRS each time a paycheck is coming your way. Each filing season, the withholding amount will be credited to you.
How Do You Get Previous Tax Returns?
If you need your previous tax returns for one reason or another, you can get these documents from the IRS or through the accounting software you used. You can get a copy of your tax returns from the IRS dating back to seven years.
Basically, what you have to do is get a copy of form 4506 from the IRS or download it online. Fill it up with the required information and indicate which year you need to get a copy of your tax return. Send the form to the IRS along with the payment. Currently, you need to pay $50 to request a copy of your previous tax returns which you can pay through money order or check. The IRS can get back to you with your requested tax return within 75 days.
Filing your taxes can seem like an initiation to adulthood. The process can seem intimidating and intricate at first. Fortunately, you have numerous options so you can do the process as conveniently and easily as possible. You have to keep track of all the required documents and organize them so you can go along with the process seamlessly, whichever way you to choose to file your taxes.
Cary Silverman is a consummate entrepreneur having sold multiple companies during his 20 years of business experience in the financial industry, but for him, it isn’t about the money. His success is rooted in his passion to focus on doing something better today than it was done yesterday. These days, he’s the CEO of Waldo General, Inc. that oversees the operation of King of Kash.