All You Need To Know About Filing Your Taxes In The US

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.

  1. Tax Documentss

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.
  1. 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:

  1. 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.
  2. 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:
  3. Deduction on mortgage interest and student loan interest.
  4. Deductions on contribution to healthcare accounts and retirement accounts.
  5. Deductions offered to self-employed people like freelancers, small businesses, etc.
  6. Deduction of money spent on charity and donations.
  1. 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.

  1. 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.

Guide To Filing Taxes For Non-US Citizens Living In The US And US Citizens Living Abroad

Different countries have their own tax authorities and rules. While some nations only charge taxes on income earned by people in the country, the worldwide income of citizens may be subject to taxes in others.

The tax forms to be filled and the status of filing may differ for citizens and resident aliens of a country, this is why it is essential to get information about taxes on resident aliens. Moreover, when living abroad, one needs to understand cross-border taxes and how to minimize their tax bill. The tax regulations in the country they live in will also impact their taxes.

Non-US-citizens Living In The US

Whether you’re a software developer from Asia working in the states or married to a US citizen and have moved from your country to live with your spouse, to avoid getting into trouble with the authorities you must correctly follow IRS rules for non-citizens and file your taxes on time.

You must first understand the category of non-citizen that you lie in:

1. Resident Alien

2. Nonresident Alien

The IRS conducts two tests to verify whether someone is a resident or a nonresident alien.

1. Green Card: Having a green card means that you have been allowed by the US Citizenship And Immigration services to legally live in the US.

2. Substantial Presence Test: This test is dependent upon whether you have spent enough time in the US, to be considered a resident alien. If you have been in the US for 183 days in the last three financial years and 31 days in the current financial year, then you can be called a resident alien. Your presence is only counted if you were present in the states for the entire day.

If you either pass the green card or substantial presence test, you will qualify as a resident alien.

Taxes For A US Resident Alien

A resident alien in the US is expected to follow the same tax guidelines as the citizens. Your worldwide income is taxable and must be filed. If you have a business in your native country or some part of the world, then you need to disclose the income on your US tax return. They are subject to the same tax rates and schedules as the citizens.

To pay their taxes, Resident aliens have to fill the IRS Form 1040, 1040A, 1040EZ. They can claim an exemption if a citizen, resident alien, or a nonresident alien who has lived in the US, Mexico, or Canada, is dependent on their income. They can claim the same deductions and credit that a citizen can claim from their taxable income. In case they do not have high itemized deductions, they can go for a standard deduction.

Taxes For A US Nonresident Alien

A nonresident alien is not subject to paying taxes on their worldwide income. They are expected to pay taxes only on the income that they have earned in the US if it hasn’t already been deducted at the source. IRS has no authority or will to tax nonresident aliens on the income that they earn in their country or other countries.

To file their taxes, nonresident aliens have to fille the IRS Form 1040NR, 1040NR-EZ, or 8843. They are subject to the same deductions and credit as resident aliens and US citizens.

US Citizens Living Abroad

If you have been stationed in a foreign country by your company or are willing to live and working abroad, as a US citizen you are bound by the IRS to file a return in the US for your worldwide income.

When you provide your services in a foreign country, it is counted as your income earned in that country. It does not matter whether the income was provided by an employer in a foreign country or an employer in the US.

Even if you are a resident alien and work in another country, you will be subject to disclosing your worldwide income. This rule also applies to government employees that have been transferred to a foreign country for work.

  • It is a misunderstanding that by filing a US tax return on your worldwide income along with paying taxes in a foreign country, you will be paying double taxes. However, this double filing is only done to ensure that the government is aware of the gross income of its citizens. Many taxpayers are unaware that if they are paying taxes in some foreign country, they can receive a foreign tax credit. This tax credit can be deducted from the tax bill of the taxpayer in their US tax return filing.
  • When filing taxes in two countries, you must ensure that you are disclosing the same income and expenses in both returns. If the information does not match when they are checked, you could face trouble with tax authorities.
  • The amount filed must be converted into US dollars, as per the ongoing exchange rate of the two currencies. You can use the yearly average of the exchange rate to ensure accuracy.
  • If your balance in foreign bank accounts exceeds $10000, then you need to report it while filing taxes. You must file an FBAR or Foreign Bank And Financial Accounts for the same.
  • Taxpayers filing taxes for the income that they earn abroad receive tax relief in the form of deductions like foreign housing exclusion, foreign earned income exclusion, individual retirement accounts, etc.
  • Foreign housing exclusion offers relief to taxpayers on the amount they pay for the rent of the house that the taxpayer lives in, in a foreign country. However, one must qualify to be present in the country for 330 days in the financial tax year.
  • Individual Retirement Account or IRA deductions are changed every year and amount to around $5000 to $6000. The IRA limit decided without deducting the foreign housing exclusion.

Citizens or resident aliens living abroad receive a 2-month extension on their filing date. Considering the last day to pay taxes in the US is 15th April, citizens living abroad can file their taxes by 15th June. However, you may be charged a penalty over delayed filing. You can also request an added extension in case the compliance rules in the country you work in are extremely different. For this extra extension, you must file IRS Form 4868 or send an Application For Extension.

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Citizens or resident aliens living abroad receive a 2-month extension on their filing date. Considering the last day to pay taxes in the US is 15th April, citizens living abroad can file their taxes by 15th June. However, you may be charged a penalty over delayed filing. You can also request an added extension in case the compliance rules in the country you work in are extremely different. For this extra extension, you must file IRS Form 4868 or send an Application For Extension.

If a US citizen does not pay taxes to the IRS and has substantial back taxes in their record, then the IRS has the authority to ask the State Department to refuse to issue a passport to the individual. Moreover, they can also revoke your current passport in such a scenario. Shrugging off the IRS merely because you are not working in the country has many repercussions. It is advised that citizens living abroad, ensure that they file their taxes on time to avoid any trouble with US tax authorities.

If you are a resident or nonresident alien in the US or are a US citizen living in a foreign country, it is best to acquaint yourself with compliance rules set by the IRS. If you do not have the required knowledge of taxes to file your US tax return and need help with filing, then you can either use tax software, hire a tax prepare, or take help from the IRS website assistant.

Using tax software or hiring a professional will ease the process of managing taxes on foreign assets, financial incentives earned in a foreign country, and the income received and expenses incurred there.

When using tax software, the appropriate tax form for your filing status will automatically be selected by the software. A tax preparer or an accountant that specializes in cross-border taxes could also help you in the task. The compliance rules IRS are different from the rules imposed by tax authorities in other countries. It can be challenging to comply with both and avoid delayed filing and errors.