How to Do Your Taxes
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Editor's Note: This article contains general information and is not intended to be a substitute for professional accounting advice. Please consult an accountant before making any decisions about your finances.
Tax filing can be a confusing process, but it's something most people need to do each year. This informational guide on how to do taxes can help take the guesswork out of filing annual tax returns, which are typically due April 15.
Individual tax obligations vary. While some people may receive a refund on taxes, others owe money. Completing your taxes correctly from the beginning can save you a lot of headaches down the road. Check with the Internal Revenue Service (IRS) and your state and local governments to determine which forms you need and verify filing deadlines.
Choose Your Filing Status
Your tax filing status helps determine the amount of money you owe, as different statuses fall within different tax brackets. More than one filing status may apply to you, and one may reduce your tax obligations more than another. The IRS categorizes individuals and married couples with the following five tax filing statuses.
Unmarried taxpayers may qualify for single taxpayer status, including those who are divorced or legally separated. Single filer status also applies to individuals who do not meet requirements for head of household status. Married filers typically receive larger deductions and enjoy lower tax liability.
To qualify for single status for the current tax filing period, you must have been legally divorced or separated by the last day of the tax year. Persons with an official annulled marriage may be able to change their tax status to single on previous returns affected by the annulment.
Married Filing Jointly
The IRS considers couples who have married by the last day of the tax year as married for the whole year for tax purposes. These couples can file as married filing jointly, meaning that they file their taxes by accounting for both incomes combined.
The IRS extends several tax breaks to married couples who opt for this filing status. Married filing jointly taxpayers benefit from a doubled standard deduction, lower tax rates, and credits not available to married couples filing separately. However, the IRS may also use a refund from a joint return to pay a spouse's specific individual debts, such as student loans or child support.
Married Filing Separately
Couples who qualify for married filing jointly status may choose the married filing separately status instead. With this status, the couple files separate tax returns based on each spouse's income. Some couples choose married filing separately to avoid a refund offset to pay debts one spouse owes. This may result in a larger tax break for these taxpayers' situation, or they may prefer to keep their finances separate.
Couples do not qualify for as many tax credits, like the American Opportunity Credit or the Child and Dependent Care Tax Credit, with this status. Because they use the same tax brackets as single filers, each spouse's final tax liability may also be higher than it would be if they filed jointly.
Head of Household
Individual tax filers may meet the requirements for filing as head of household if they are a single, unmarried filer with at least one qualifying dependent. The dependent can be a qualifying child or a relative, like an elderly parent or a sibling with a disability. The dependent must also have lived with the taxpayer for more than half the tax year.
Head of household status grants eligible taxpayers tax breaks that they would not qualify for as a single tax filer. The maximum income amounts for head of household tax brackets are higher than they are for single filers, allowing head of household filers to earn more without moving into a higher tax bracket.
The IRS reserves the qualifying widow(er) status for individuals whose spouse passed away the year prior to the current tax year. The taxpayer must also have a qualifying dependent child or stepchild. The qualifying widow(er) status allows a taxpayer to use the same tax brackets as married taxpayers filing jointly.
The taxpayer may use this status for two tax years after their spouse's death if they remain unmarried for the tax filing year. For example, a spouse's 2020 passing may qualify the still unmarried widow(er) to use the tax filing status for 2021 and 2022. If a spouse passes during the current tax year, the surviving spouse may continue using the married filing jointly status if they previously qualified.
Gather Tax Return Paperwork
Accurately filing taxes typically requires a lot of documentation. You can reduce your burden come tax season by recording your financial activity throughout the year. File away your pay stubs and any receipts you intend to use for deductions. Keep detailed records of any business income and expenses or miscellaneous income you earn.
Expect to receive tax forms for the previous year from your employer, clients, lenders, and financial institutions starting in January of the current year. Although most payers mail forms by Feb. 1, you may still receive these forms in March or April. Check with your payers if you have not received a form you're expecting by March.
Your taxable income includes your wages and other income sources, including investments, capital gains, rental property, prize money, and interest payments. Business owners must also report their income along with relevant business expenses. Below are some of the most common income reporting forms you may need to file your taxes.
Use Form 1040 to complete your individual tax return. It reports earned income and other income types, in addition to tax credits and deductions, to find the total amount of tax owed.
The W-2 Wage and Tax Statement form includes all income made as an employee from an employer. The form also records taxes withheld, including federal, state, medical, and Social Security taxes.
These forms are for non-employee compensation and miscellaneous compensation, respectively. Independent contractors, freelancers, attorneys, and landlords are a few persons who may receive a 1099 form to report earnings of at least $600.
This form records interest income, investment expenses, tax-exempt interest, withdrawal penalties, and other amounts associated with interest earnings. Taxpayers may receive a 1099-INT if they made at least $10 in interest for the tax year.
Taxpayers receive this form as a record of dividends and distributions. Banks and financial institutions send the 1099-DIV when total dividends are at least $10 for the tax year.
A deduction lowers taxable income. To determine how much tax you owe, use the figure you get after subtracting deductions. There are two main options for tax deductions: the standard deduction and itemized deductions.
The standard deduction varies with filing status. In 2021, for example, the standard deduction ranged from $12,550 for single taxpayers to $25,100 for married taxpayers filing jointly. If you filed as single and your income in 2021 was $35,000, your taxable income would have been $22,450 after the standard deduction.
Itemized deductions work best for people whose deductions total more than the standard deduction. If you itemize, you should save receipts and documentation for all transactions you plan to deduct, including charitable donations, mortgage interest, and out-of-pocket medical expenses.
While deductions lower your taxable income, credits directly reduce your tax bill. In doing so, a tax credit can lower your tax liability even more than a deduction. A nonrefundable credit lets you reduce your tax bill by the amount you owe, while a refundable credit may give you a refund if the credit is more than the tax you owe.
Popular Tax Credits
- Child and Dependent Care Tax Credit: This credit serves taxpayers who paid for the care of a qualifying dependent for the purposes of working or looking for work. This credit does not apply to those with the status of married filing separately. The credit amount depends on the amount of work-related expenses paid to the care provider in question. As of 2021, the credit was capped at $3,000 for one qualifying dependent or $6,000 for two.
- Earned Income Tax Credit: The EITC reduces a portion of the owed tax for low- to moderate-income taxpayers. The maximum amount of the credit for filers with three or more qualifying children was $6,728 for the 2021 tax year. Taxpayers must file as any status except for married filing separately, have a valid Social Security number, and meet income guidelines to qualify.
- Premium Tax Credit: The PTC helps qualifying taxpayers offset the cost of health insurance through the Health Insurance Marketplace by lowering their monthly premiums. Taxpayers must submit Form 8962 when they file their taxes to reconcile the credit. Taxpayers may owe money or receive a refund, depending on how much of the credit they used and their income.
- American Opportunity Tax Credit: The AOTC is a maximum $2,500 credit that reduces the tax bill of taxpayers with education expenses. To qualify, taxpayers must be pursuing a degree at least half time for at least one academic period during the tax year. Taxpayers must also have a 1098-T that outlines their tuition costs for the year.
Pick Your Tax Filing Method
There are three primary ways to file your taxes: by mailing or electronically filing forms to the IRS, by filing with tax preparation software, or by seeking the help of a tax professional. The method you choose depends on your tax situation and how comfortable you are with filing your taxes.
Taxpayers can file their taxes with the IRS using a paper form 1040. The IRS also allows taxpayers to file their taxes electronically through partnered websites. If your adjusted gross income (AGI) is less than $72,000 for the tax filing year, you can e-file with the free program, known as IRS Free File. With an AGI above $72,000, you can still use fillable forms provided by the IRS to fill out and file your taxes for free.
The IRS Free File program for taxpayers with AGI lower than $72,000 guides you through filing with similar step-by-step navigation as tax software. The fillable forms may require you to have more knowledge of filing taxes and understanding the forms you need.
A taxpayer doesn't need to navigate tax preparation solo. Approximately 46% of Americans use tax preparation software to complete and file their taxes. Tax preparation software guides taxpayers through a series of questions to get them the correct deductions and credits based on their tax situations. The following software programs are among the most popular options.
- TurboTax: TurboTax allows automatic importation of some tax forms and tax information from other tax preparation services, saving you some time when preparing taxes. The software also has plans for multiple tax situations, from the simplest returns to more complicated returns like those for the self-employed or investors.
- H&R Block: H&R Block's tax software navigates return filing with simple questions to ensure accuracy. Feel confident in your tax preparation with H&R Block's accuracy guarantee. The company promises to reimburse taxpayers for up to $10,000 in penalties or interest they owe if these amounts result from software mistakes.
- TaxAct: Known for its affordable pricing, TaxAct offers filing capabilities for individuals, small businesses, and various other taxpayers. The software's mobile apps for Android and iOS devices allow you to file your taxes from anywhere. Account holders also have multiple security settings available to lock down their accounts and keep their personal information safe.
Understanding how to do a tax return is a valuable skill. Still, hiring a tax professional to help can ensure that you complete your return correctly. If you don't have a year-round accountant, you can hire a tax preparer for tax season.
According to the IRS, more than half of taxpayers pay a tax preparer for assistance. If your tax situation has changed due to a milestone like a job switch or a new marriage, your tax preparer can guide you through any potential tax implications for the current tax year. Consider the following types of tax professionals if you are seeking help.
Consider hiring a tax professional:
Common Questions About Taxes
How much do you have to make to file taxes?
Your filing status and age determines the minimum income for tax filing. The most current IRS information requires single filers under 65 to file a return if they earn at least $12,400, while married couples under 65 must file if they earn $24,800.
How much do places charge to do taxes?
Expect to pay, on average, $100-$300 to have a professional tax service prepare your taxes. Prices vary depending on your tax situation and whether you want to add state tax filing.
How long do you have to file taxes?
The annual deadline to file taxes for the previous year is April 15th. If you need extra time you can file an extension, pushing the deadline to October 15.
How long does it take for a tax refund to come back?
The IRS can typically issue a refund for a complete and accurate tax return within 21 days, although some may take more than six weeks. You can check your refund status using the Where's My Refund? tool.
- Choosing the correct filing status. (2016). IRS.gov
- Definition of adjusted gross income (n.d.). IRS.gov
- How to file (n.d.). IRS.gov
- IRS urges taxpayers to choose a tax preparer wisely for the filing season ahead (2014). IRS.gov
- Tax forms for individuals (n.d.) IRS.gov
Lizzette Matos, CPA
Lizzette Matos is a certified public accountant in New York state. She earned a bachelor of science in finance and accounting from New York University.
Lizzette began her career at Ernst & Young, where she audited a diverse set of companies, primarily in consumer products and media and entertainment. She has worked in the private industry as an accountant for law firms and ITOCHU Corporation, an international conglomerate that manages over 20 subsidiaries and affiliates. Lizzette stays up to date on changes in the accounting industry through educational courses.
She is a paid member of Red Ventures Education's freelance review network.
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