In 2016, 140.9 million taxpayers paid a total of $1.44 trillion in income taxes. Today, the largest source of revenue federal government of the United States is income and payroll taxes from private individuals. Over the years, governments around the world have sensitized citizens on the need to pay taxes.
However, the process of filing tax returns has been described as frustrating and time-consuming. This has resulted in a good number of people not filing their taxes. The good news is that consumers in today’s world have access to information and resources that can make this process easier.
Manage Your Taxes
Efficient tax management plays an important role in ensuring you meet your tax obligations. Whether you intend to do your own taxes or seek the help of an expert, it is necessary to familiarize yourself with various tax basics as well as the process of filing returns.
This will not only help you to make more informed decisions but also ensure you avoid common tax-filing mistakes. Knowledge of tax issues will also put you in a better position to identify effective ways to lower your tax bill and invest your money wisely. Here are a few tax tips to help you as you prepare to file your taxes.
What Are Taxes, and Why Should They Be Paid?
Taxes are compulsory levies that are charged on individuals or corporations and enforced by government entities. In almost every country in the world taxes are levied, for the most part, to raise revenue for government expenditures. There are different types of taxes, making it important to familiarize yourself with them if you are to know your tax liability.
Generally, failure to pay taxes, along with resistance or evasion of taxation is punishable by law. This means that if you do not file your taxes or unknowingly submit wrong information to tax authorities, you may get into trouble with the law. In some cases, tax offenses will see you being prosecuted in court and serve a jail term upon conviction. With the serious penalties associated with tax fraud, it is crucial to ensure that you are tax compliant.
There are a number of reasons why taxes should be paid. First, taxes provide revenue for the government, helping to facilitate government operations and making it possible for the government to provide services to its citizens. These include healthcare, welfare programs, education, and infrastructure. Secondly, every taxpayer has a moral responsibility to pay taxes. Lastly, since taxes are compulsory, paying taxes as required will ensure you are in good standing with the law.
To make sure that you pay your taxes on time every year, you should adopt effective tax management practices. In addition to helping you avoid unnecessary stress, it will also save you from paying penalties.
Important Terms You Should Master
Filing taxes can appear to be intimidating, especially if you have never done it before. However, it is not as bad as you may think. There is a good chance you will enjoy a seamless process if you arm yourself with some basic information. Apart from tax tips, below are a few important terms you may want to master before you file your taxes.
This refers to monies that you received from wages, salaries, tips, and professional fees. It also includes taxable scholarships and fellowship grants.
This generally covers investment-type income such as dividends, capital gains, interest on your savings account, and unemployment compensation.
The total amount of income that is not exempt from taxes. This may have been received in the form of money, property, goods, and services.
A predetermined amount of money that you deduct from your taxable income just for having dependents. Personal and dependent exemptions for yourself and family members who qualify will reduce the amount of income on which tax is levied.
A set amount of money that the federal government gives a taxpayer who meets certain stipulations. The deduction differs depending on marital status.
There are six main types of expenses that you incur throughout the year and can be deducted. These are medical and dental, taxes, charitable contributions, interest as well as casualty and theft losses. Just like exemptions, itemized deductions will reduce the amount of tax you owe.
These are wage income forms that employees receive from their employers in order to prepare their taxes.
When it comes to filing status, you will be required to indicate if you are single, married, or head of a household. Each of these categories has several sub-categories within it.
This list is by no means exhaustive. There are many more terms you will need to know if you are to file your taxes without any difficulties. In case you are in a position to do your taxes, you can rely on a tax store, a network of firms and tax professionals, to find the right expert to handle your taxes for you.
7 Things to Know about Taxes
It is necessary for every taxpayer to understand tax-filing fundamentals. When it comes to managing your money and taxes, knowledge is power. Below are seven principles and best practices you should learn as you prepare to file your taxes.
Failing to file will cost you more than failing to pay taxes: A good number of consumers will be hesitant to file if they cannot pay their bill. However, you can request a payment plan since the penalty for failing to file is more than the penalty for failing to pay.
Tax Changes Are Not Permanent
There are numerous tax changes that happen over time. This is why it is important to stay updated on the latest tax laws and regulations if you are to maintain tax compliance.
Refunds Are Forfeited After Three Years
In the US, you will not be entitled to claim a refund if you wait too long. If the government owes you money, you should claim it within a period of three years.
Not All Income Is Taxable
Some of the monies that are not subject to federal income tax include life insurance proceeds, financial gifts below $15,000 and inherited money. This is a crucial piece of information that can help consumers save a significant amount of money.
There Are Plenty of Ways to Reduce Your Taxable Income
In these tough economic times, most people are looking for ways to save money. Great ways to reduce taxable income include contributing more to retirement accounts, getting your health insurance, keeping track of medical costs, and saving for college for the kids in your life.
Tax professionals can help handle complex situations
There is no need to get frustrated if tax issues become confusing. Tax professionals will not only help you file your taxes but also claim all possible deductions.
You can file your own returns
While there are times when you will need to consult tax professionals, there are a number of things you can do on your own. Today, with the various tax tools available, you should have no problem filling your return on your own.
How to File a Tax Return
For those with a regular paycheck, there is a good chance that they are already paying their taxes. This is because employers withhold taxes owed by employees on their earnings and pay them to federal and state governments. However, the situation is a bit different for small business owners and freelancers. There are different ways to file your taxes. As a taxpayer, you should not only be aware of the options available to you but also understand their advantages and disadvantages. Your decision will depend on, among other things, whether you have the money for the fees charged and time to file your return.
File Your Taxes Manually
This process entails filling out a form known as a 1040. Taxpayers are required to fill out the form according to the instructions provided by the IRS before mailing it to the tax authorities. You should also include any payments you owe.
Get Professional Help
An accountant or tax preparer can work with you to make the process easier and faster. In addition to filling out your tax return for you, the professional will also help you maximize your refund. Taxpayers can use resources such as tax store to find suitable tax experts.
Use a Tax Software Program
Today, thanks to technology, consumers can use tax tools such as software programs and websites of various services to file their returns. Through the service, you will be taken through several questions about your income and potential deductions. You will then fill out your 1040 and file taxes electronically.
Regardless of the option you use to file your taxes, you must be aware of how much you need to pay in taxes. Although your income will mainly determine this, you have to understand how exemptions and deductions help to reduce your taxable income.
What You Need to File Your Taxes
The sooner you file your taxes, the sooner you will get it done with and receive your refund. To make the process quicker, you should ensure that you have all the necessary forms and documents in place before you begin. Here is what you need to file your return.
You will need to provide personal information when filing your returns. These include your own Social Security number and tax ID number. You should not forget to have your spouse’s numbers as well as those of your dependents. Personal information also covers the date of birth for everyone on your return.
Income and Investment Information
In order to calculate the amount of tax you owe, you will need your income and investment information. These will include form W-2 and tax statements, bank statements, the previous year’s state refund amount and miscellaneous income records such as gambling winnings, award money, and lottery pay-outs.
Self-Employment and Business Records
In case you are self-employed on own a business, your tax liability will be calculated based on information contained in your records. When preparing to file your return, make sure you have your business expense records, quarterly estimated tax payment receipts, mileage records, and home office expenses.
You should consider taking a tax deduction for the donations you made to charity during the year. This will require that you back them up with receipts that indicate the date, amount, and charitable organization to which the donation was made. This information will go a long way in helping to reduce your taxable income.
Medical Expense Records
Medical expenses make for one of the main categories of expenses that are considered itemized deductibles. When preparing to file your return, it would be important to have with you receipts of unreimbursed medical expenses such as exams, surgeries, and preventative care. You should also have health insurance coverage forms as well as social security benefits if applicable.
If you are a homeowner and you itemize your deductions, you can write off part of the property taxes you have paid. Whether you use tax tools or file your return manually, you will be sure of a 100 percent accurate return as well as your maximum possible refund.
Advantages of Doing Your Own Taxes
One of the options that taxpayers have when it comes to filing returns is to do their own taxes. Although most people consider this to be more difficult than leaving everything to a tax preparer, the right approach, and a few simple tax tips will make the process manageable. Whether you are planning to file your taxes or it has been a few years, and you want to try again, here are some advantages you should consider.
You Save Money
As much as preparing your own taxes will take time and organization, it will be good for your wallet. With some basic knowledge and tips, you can save the money you would have spent hiring an accountant.
Gain Financial insight
When you prepare your own taxes, you will have a great chance to have a closer look at your finances. You will also get a deeper understanding of the effect that certain saving options will have on your return. In the end, you will be able to handle your finances better.
Peace of Mind
Some people have a tough time trusting their tax return to an accountant. There is also the risk of making errors while communicating important information. However, you should have a thorough understanding of the entire process before filing your taxes.
You Can File Whenever You Want
Handling your taxes on your own allows you to file whenever you want. Taxpayers can have the paperwork ready to submit their taxes immediately their W-2 arrives. This allows you to get your refund check faster.
Many Tax Tools Are Cheap or Free
Today, it is possible to move your filing process online. Online filing reduces the possibility of errors, the software gets updated with new tax laws, and the various tools are quite affordable.
As much as you may want to file your taxes on your own, you should know when to consult an expert. In case you have a complicated return, and you have to fill out multiple forms, you may be better off with the assistance of a tax professional.
Tips for Filing Your First Tax Return
Before you make the decision to file your taxes, you should find out whether you have to. Your decision will depend on your income, age, filing status, and if someone else can claim you as a dependent. Here are tips for filing your first tax return.
Gather the Information You Need
You will need to gather all the information you need to file your return. This includes proof of income, evidence of taxes already paid, and expenses that are tax-deductible. It is important to stay organized throughout the year and keep all records if you are to achieve efficient tax management.
Make Key Decisions
Some of the decisions you make when preparing your taxes will affect your tax bill. Take time when choosing your filing status as well as when choosing between standard and itemized deductions.
Get the Right Tax Forms
Even as you learn how to file your return, you should be aware of the forms you need to fill out and file. The most important one is Form 1040 that is used to report income, claim tax deductions, and calculate both the tax refund and tax bill.
Start Preparing Early
The need to start preparing early cannot be emphasized enough. Early preparations will help you avoid the last-minute rush, reduce the likelihood of making mistakes, avoid late-filing penalties, and receive your refund fast.
Take Advantage of Free Tax Help
Tax issues can become complex, leaving you feeling lost and confused. The good news is that there is a lot of help available for anyone filing their return for the first time.
Learn How to Manage Your Tax Situation
In case you have been writing giant checks to the IRS or receiving a huge refund, you should consider changing your W-4. This means adjusting the amount of tax that is withheld from each paycheck to ensure better tax management.
There are many more tax tips that can help make this process easier for first-timers. This is why you should always seek more knowledge and stay updated on various tax changes.
Ways to Lower Your Tax Bill
One of the essential things you need to learn when preparing to file your taxes is how to lower your tax bill. This will help you reduce the amount of money you owe the IRS and make it easy to save more money. Here are some tips for lowering your tax bill:
Claim Your Credits
This is one of the best ways to lower your tax bill since it provides a dollar-to-dollar reduction of your income tax liability. However, to qualify for these credits, you should claim the correct filing status.
Another great way to reduce your tax bill is to have a record of your deductible expenses. These include medical and dental expenses, standard mileage rates, and miscellaneous deductions such as tax preparation fees.
Charitable contributions make for a sure way to reduce your tax bill. Books, toys, clothes, and other household items can be donated to charitable organizations. Expenses incurred during volunteer work can also offer tax benefits.
Save for Retirement
The government provides tax benefits to those who make a contribution to an Individual Retirement Account. This is a smart way to ensure tax management while at the same time, making your retirement years comfortable.
Buy Stuff Only if You Need It
Most people tend to buy stuff towards the end of the year for their home-based businesses. There is a misconception that this move is a quick and easy deduction. However, it is important to ensure that you need these items before buying them.
Using the different tax tools will make it easy to determine what is deductible and decisions that will give you the best results. Consider using these tools when you file your taxes to lower your tax bill.
Common Tax-Filing Mistakes to Avoid
When preparing to file your taxes, there are certain mistakes that you should try to avoid. These mistakes can cost you in terms of penalties, lead to a delay in getting your refund and present the risk of an audit. One of the best ways to minimize the chances of mistakes it avoids rushing through the process.
One of the most common mistakes that last-minute filers make is failing to disclose all income. During the rush, you can forget to include income received from a side job. The problem is that leaving out such information can lead to penalties and interest when the IRS discovers you owe more.
Messing up the Math
It is important to ensure that your final tallies are correct before filing your return. Whenever you are pressed for time, you should avoid filing on paper and instead opt for e-filing. The process is not only easier and faster but is also more secure and will eliminate mistakes to ensure that your math is correct.
Missing out on Deductions and Credits
Overlooking credits and deductions is one of the most costly mistakes that people make when filing their taxes. Both credits and deductions can help to lower your tax bill, effectively saving you hundreds or even thousands of dollars. Make sure you take time to prepare your taxes so that you save money and avoid running afoul of the IRS.
Not Double-Checking Numbers and Signatures
An incorrect Social Security number and bank account information that is not accurate will make it difficult for you to receive a direct deposit refund. Forgetting to sign and date the return will make it invalid. If you are filing jointly with your spouse, make sure they also sign and date the document.
Not Asking for More Time
Rather than filing a tax return full of mistakes, you should consider asking for more time. Most people fail to do this, missing out on the amazing opportunity to really look at their options and make sure they are not leaving out deductions that can save them money. This also leads to errors that end up costing the taxpayer in the long run.
Misunderstanding Extension Rules
Filing an extension does not mean that you do not have to send your check to the IRS by the set deadline. It is important to note that the extension applies to the return and not the payment. This means that you still have to be prepared to estimate your income and pay the amount you owe in taxes. Using reliable tax tools will help you avoid penalties and fees for late payment.
Sources of Free Tax Help
Even with the many tax tips, there are times when you will need help when it comes to preparing, handling, and filing your taxes. The good news is that when you find yourself in such a situation, there are several places you can turn to for help. Here are six sources that can help you file your taxes.
IRS tax offices where IRS employees will help you file current or amend previous returns
Free or inexpensive legal clinics staffed with law students and advised by licensed attorneys
You can call IRS helplines with your tax questions and get answers from specialists
Community-based free tax preparation programs run by IRS-trained volunteers
Taxpayer advocate service office can help with long-term problems with tax issues
Free tax software will help calculate taxes, deductions and let you file your return electronically
To Sum Up
Filing your return does not have to be scary and daunting. Equipping yourself with basic knowledge and having access to the right resources will enable you to file your taxes without much difficulty. In the event that you cannot do this on your own, you can always hire a professional to handle your taxes on your behalf. Tax store, a network of accounting and tax professionals, specializes in offering tailored financial service solutions for individuals and small businesses.