Most people dread the arrival of the tax season, as filing your taxes is an extensive and tiresome job. If you’re a student or a first-time taxpayer, then filing your taxes can feel like a humongous and scary task. Without knowledge of various taxation terms, you are likely to make errors in your tax calculation and filing. To ensure that you file your taxes correctly and avoid getting any penalties, we have compiled information on all you need to know about filing your taxes in the US.
The first step before filing your taxes is to gather all the documents that you are likely to need, during the filing process. Make sure that you have all your investment and credit documents available at hand before the #1st of January of the fiscal year.
The IRS forms that you need to file the taxes.
- The W-2 form that discloses your taxes withheld by the employer.
- 1099-MISC form to report any expenses above $600 made during the year to nonemployees. For example, contactor, painter, etc.
- Statements of the payments made under tax deductions. For example, Interest receipts for the mortgage and student loans.
- If there has been a change in your name, address, marital status, or income, then you need to separate an additional form. For example, Form 8822 is for a change in address and Form SS-5 is for a change in name.
- Decide the method of tax deduction
Tax deductions are expenses incurred during the year, that can be reduced from your taxable income. These tax deductions considerably reduce the tax bill that you are charged with and must be carefully calculated.
There are two types of tax deductions that a taxpayer can claim:
- Standard Tax: Every taxpayer can claim standard tax deductions from their gross income. The amount set for 2019 as the standard deduction is $12200. If your itemized deductions are lower than $12200, then by claiming the standard deductions you can complete filing your taxes quickly and without hassle.
- Itemized Deductions: Many tax deductions can be claimed by taxpayers for their expenses. The motto behind providing these deductions is to ease the taxpayers of excessive tax liability. So,e common tax deductions are:
- Deduction on mortgage interest and student loan interest.
- Deductions on contribution to healthcare accounts and retirement accounts.
- Deductions offered to self-employed people like freelancers, small businesses, etc.
- Deduction of money spent on charity and donations.
- Choose Your Appropriate Filing Status
The standard deductions offered to people with different filing status is varying. Senior citizens and unmarried people receive a larger standard deduction when compared to single married filers. Your credit eligibility and approval for itemized tax deductions also depends heavily upon your filing status. You could be eligible to file under two different types of statuses, which is why it is essential to understand different status types and select wisely. For example, married people can with file jointly or separately.
- Single: Unmarried, widowed, and divorced people can qualify as single filers.
- Married, filing separately: Some people receive more tax benefits when filing separately, then you can file as a married person, filing separately. A couple could also be filing separately for some other personal or financial reasons.
- Married, filing jointly: By filing jointly, you and your spouse can save a lot of money on your taxes. Filing jointly is also simpler, as you only have to file your taxes one time for both taxpayers.
- Qualifying Widow(er): When your spouse dies during the tax year, you can file jointly with your dead spouse. You can use the same status, for the next two years after their death, albeit you have not gotten remarried.
- Head Of Household: When an unmarried person is also managing the expenses of a child or some other dependent person, then the can qualify as head of household. The condition is, that they must be bearing more than half the expenditure of the household.
If you are eligible for two different statuses, evaluate your taxes to determine which status will lead to a lower tax bill.
- Filing Your Taxes
Once you have gathered your documents, decided upon the deduction method and the taxpayer status, you can begin filling your taxes.
There are three different ways in which you can file your taxes in the US:
1. Fill out the IRS Form 1040 and mail it.
2. File your taxes electronically by using tax software.
3. Hiring a tax advisor or accountant to prepare your taxes.
Hiring a tax preparer is considered to be the most efficient and hassle-free way of filing taxes. Tax preparers have the knowledge of taxation rules, IRS forms, and regulations, and tax deductions available to taxpayers.
They can help you in proactively preparing your taxes by informing you about the various documents that you will need when the tax season begins. They can also help you invest in retirement and healthcare plans that can be used for tax deductions. They have the skills and experience required to minimize your taxes and save money.
While doing your taxes by yourself is cheaper, the chances of errors is higher. Whereas using tax software to electronically file your taxes is only recommended if you have some knowledge of the tax jargon and the IRS rules. However, for a personalized experience and to file complex taxes, a tax preparer or accountant is your best bet. If you’re running a business, are retired, or own financial assets, the help of a tax preparer can do wonders in minimizing your tax bill.
To file your taxes, you’re supposed to fill the IRS form 1040. Your tax bill will be determined when you deduct the tax deductions and credit claimed for your annual income. You will then have to calculate your tax return by deducting paid tax from the taxable income. If your tax taxes are more than your tax bill, you can apply for a tax refund. Proof of employment, income, deductions, and credit, etc. must be attached with the required IRS form.
To pay to the IRS without paying a fee, you can make a direct bank transfer or pay by check. You can also pay by your credit card, but you will be charged a fee for doing so.
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In the US the deadline for filing your taxes is 15th April. Delays in filing your taxes can lead to heavy penalties from the state. To take permission for an extension of your filing date, you need to fill out Form 4868 of the IRS. The annual interest rate charged over the outstanding tax payable amount is 5% to 6%. It is best to start preparing to file your taxes, sometime before the last date. This can help reduce a lot of the tax filing stress.
To proactively prepare to file your taxes, you must:
- File taxes even if you did not make taxable income.
- Keep your income and expenses related documents safely gathered at the same place so that you do not have to run around to find them at the end of the financial year.
- Register for a CRA account. This will help you review your previous taxes and make smart investments and expenses. You can also make automatic deposits wth the account and quickly assess your taxes.
- Take advice from a tax professional to effectively take measures that would help you reduce your tax bill. When you calculate your taxes prior to the tax season, you can make specific investments that would help you reduce your taxable income. For example, contribution to Health savings accounts, contribute to a 401K retirement plan, etc.