Your Top Tax Questions Answered
Tax season is just around the corner (and it’s never too early to start prepping!), so here are the answers to some of the most frequently asked tax questions.
What income do I have to pay taxes on?
Taxable income includes money, property, or services—unless a law specifically exempts it. You must report all taxable income on your federal tax return and your state tax return if you live in a state with state income tax.
You must also report some nontaxable income, even though you won’t pay taxes on it. IRS Publication 525 has details on what counts as taxable income and what doesn’t. It’s a very helpful list and can be found on irs.gov.
What filing status should I choose?
Many tax rules are different depending on your household status. Choosing a filing status tells the IRS which rules should apply to you, like tax rate and eligibility for certain deductions and credits. Your filing status options are single, married filing jointly, married filing separately, head of household and qualifying widow(er) with dependent child.
The IRS website has an interactive tool if you need help choosing a filing status.
There are pros and cons to both options of how to file if you are married (jointly or separately). If you file jointly, you can get a bigger standard deduction, can take two exemptions, and can take multiple credits like the Earned Income Tax Credit, the American Opportunity and Lifetime Learning Credits, the exclusion or credit for adoption expenses, and the Child and Dependent Care Credit. But filing separately might work in your favor if you need to separate your tax liability from your spouse's or if one spouse has a significant itemized deduction.
How do I know my tax bracket and tax rate?
We have what’s called a “progressive tax system,” which means not all of your income is necessarily taxed at the same rate. A tax bracket is a range of income that is taxed a certain rate. For example, the first $10,000 you earn might be taxed at 10%, and the next $25,000 you earn could be taxed at 11%. Your marginal tax rate is the highest tax bracket applicable to your income. (In our example, if you earned $35,000, your marginal tax rate would be 11%.)
The number of tax brackets and their corresponding tax rates can change. The IRS Tax Rate Schedule for the current taxable year will help you determine your bracket, your marginal tax rate, and how much tax you might owe.
What tax form should I use?
A single, simplified Form 1040 has replaced the previous versions (Forms 1040, 1040EZ, and 1040A). All individual taxpayers start with this form and then fill out and submit additional forms (called “schedules”) as needed. Any tax assistance service or software will tell you when you need one of these schedules.
What’s the difference between a tax credit and a tax deduction?
Tax credits and tax deductions reduce the amount of tax you pay. Tax deductions and exemptions lower your taxable income. Tax credits are a dollar-for-dollar reduction of the amount of tax you owe.
For example, if you’re in the 22 percent tax bracket, a $1,000 tax deduction saves you $220 you don’t have to pay in income tax (0.22 x $1,000 = $220). Think of it as reducing the amount you are taxed on. Standard deductions are set before the start of each year, and while the amount of each deduction usually changes, the categories do not (single filing, married filing together/surviving spouse, married but filing separately, and head of household). Itemized deductions are used when their total exceeds the standard deduction of your filing status. Qualified expenses include medical expenses, property taxes, charitable donations, mortgage interest, and others.
A $1,200 tax credit saves you $1,200 in taxes owed. Tax credits depend on several factors, including taxpayer income, age, filing status, and other qualifications. There are fewer tax credits than tax deductions. They are available for things like adopting a child, childcare expenses, buying a first home, home office expenses, and caring for elderly parents.
Are unemployment benefits taxable?
Unemployment income is usually taxable and should be counted in your income for the year. You will receive a Form 1099-G near tax time to show how much unemployment income you received.
When are taxes due?
Tax Day is April 15, or the next business day if it falls on a weekend or federal holiday. You must file your income tax return for the previous year by this date, or you can file for an automatic extension. However, filing for an extension doesn’t mean you get to hold off on paying the IRS; you still need to pay what you estimate your tax bill to be, but you have an extended time to file all the proper forms and schedules. If you file late without an extension, you'll owe the I.R.S. fines and interest.
How and when are my taxes due if I’m self-employed?
If you're a sole proprietor (i.e. you're not legally incorporated business) you should withhold 25–30% of your income in an account to be used to pay federal income tax (more if you need to pay state income tax, too). You should then pay your taxes quarterly to the IRS via their website.
How do I file a tax return?
You have many options to file your return:
- Mail it to an IRS-approved address (which can be found on their website)
- Submit online via the IRS e-file system (it’s free under certain income thresholds, depending on how you file)
- Use an online tax filing service, like TurboTax
- Pay a tax professional
What if I can’t afford to pay the tax I owe?
You still need to file a tax return and make arrangements to pay whatever you owe. The IRS has multiple payment options, including installment agreements. You’ll still owe interest, and possibly penalties, if you enter into a payment arrangement.
You could also:
- Put it on a credit card (for smaller amounts)
- Take out a personal loan
- Seek relief from the IRS
What if I made a mistake on my tax filing?
As soon as you realize you’ve made a mistake, fill out a new Form 1040 (and any changed schedules), with corrected information, and a Form 1040-X, Amended U.S. Individual Income Tax Return. If you wait, there’s a greater chance you’ll be charged interest and penalties when the IRS discovers the mistake. Allow the IRS up to 16 weeks to process the amended return.
If it was only a simple mathematical error, the IRS will catch it during processing and correct it for you.
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