In the United States, we have a “progressive tax system.” This means that the more money you make, the more taxes you pay. Of course, there are exceptions to this rule that come in the form of tax deductions. The federal government allows people who make money to exclude the amount they pay for certain expenses from their taxable income.
Everyone who earns more than a certain amount of money must file taxes each year. This process is handled by the Internal Revenue System (IRS). They provide the explanation of tax laws, appropriate forms, and instructions about how to use those forms to taxpayers.
Businesses located in the United States, as well as U.S. citizens, must pay taxes according to the rules set forth by the federal government and their state of residence. Government entities then take this money and use it to provide services like federal education programs, welfare programs, Medicare, Medicaid, Social Security, veteran benefits, federal crop insurance, and the National School Lunch Program. They pay interest on the federal debt and fund military programs, as well.
The amount of taxes you pay the federal government depends on your income level. Each year, the government sets tax brackets to help you determine your tax rate. Tax breaks, tax credits, and tax deductions can reduce the total amount of taxes you owe for the year.
Tax deductions reduce the amount your income that’s taxable by the federal government. For example, you won’t have to pay taxes on the amount of income you spent on out-of-pocket medical and dental expenses exceeding 7.5% of your adjusted gross income. You can also deduct charitable contributions, deposits to certain retirement accounts, and some student loan interest payments.
Every taxpayer receives a standard deduction. For single people, it’s $6,000 and for married filing jointly taxpayers, it’s $24,000. If your itemized deductions add up to more, you can choose to file different tax forms to take advantage of the savings.
Tax credits reduce your actual tax liability dollar-for-dollar. For the 2018 tax year, tax filers receive a $2,000 tax credit for each dependent who is also their child. The Lifetime Learning Credit offers up to $2,000 for tuition, books, and fees at any accredited institution. You could even get a $7,500 tax credit for purchasing a plug-in electric motor vehicle. The residential energy tax credit offers up to 30% of the cost of solar water heaters, solar panels, and solar energy systems for a home.
You can write off some of your utilities, rent, mortgage payment, repairs, maintenance, and real estate taxes if you use a portion of your residence regularly and exclusively for business purposes.
If you are a teacher or eligible educator, you can count on a $250 deduction to help pay for classroom supplies.
Get 10-50% of your contribution to certain retirement plans in the form of a tax credit. This credit depends on your filing status and income level.
For those with high-deductible health plans, an HSA is a great option. Your contributions to the account are tax-deductible, and your withdrawals are tax-free if they are for qualified medical expenses. For a family with a health insurance plan with a high deductible, the contribution limit is $6,900.
If you spent money gambling in 2018, you can deduct the amount you lost from your winnings and only pay taxes on the difference.
Families that adopted a child in 2018 can deduct up to $13,840 in related expenses per child if the total adjusted gross income of the household is less than $207,580. Families that adopt a special-needs child can claim the entire credit regardless of their expenses.
Most people pay their taxes throughout the year through payroll deduction or withholding tax. Self-employed people should pay taxes four times each year according to a schedule designed by the IRS.
If you earn only a small amount of money, you may not have to file your federal taxes with the IRS. For example, a single person under the age of 65 earning less than $12,000 is not required to file 2018 taxes. Two people filing taxes as Married Filing Jointly can have a combined gross income of $24,000 before they must file 2018 taxes.
If you may have a tax refund due, it’s a good idea to file even if you aren’t required to do so. Even if your income is very low, if you have one or more dependents, you may be eligible for the Earned Income Tax Credit (EITC). With this tax credit, families with three or more children could receive $6,444.
There are various forms required by the IRS when you file taxes. The set of forms you choose depends on your financial and household situation. Here are your choices:
If you don’t file taxes with the U.S. government each year, you could be leaving a valuable refund or tax credit behind. Every year, tens of thousands of Americans fail to file their taxes, forfeiting money that is rightfully theirs. The government doesn’t chase these people, file a tax return on their behalf, or offer them a refund of overpaid taxes. They simply keep the money. After three years, they can legally keep the money forever.
If you owe taxes but don’t file, the IRS can still estimate how much money you should pay. They’ll send you a notice that explains their calculations and a bill for the tax. If you don’t pay it immediately, they’ll charge a late payment penalty of .5% every month that could add up to 25% of the total bill over time. They may also create a tax lien, which becomes a matter of public record and could affect your ability to get a loan, keep a security clearance, or get a job. You could get collections calls from the IRS and even lose your right to receive money due from the sale of property or assets.
Property like a 401(k) account, the home where you live, your vehicle, and your paycheck can become the property of the federal government if they decide to collect on past-due taxes. The State Department has the power to revoke your passport, as well.
If you owe taxes, work out a payment plan with the IRS immediately to avoid the drama and expense associated with owing back taxes. Payment plans are fairly flexible and may prevent the IRS from taking over your bank accounts or claiming your vehicle as payment.
If you haven’t filed a tax return in a few years and want to resolve the problem before the IRS catches up with you, there are a few things to know. The tax laws change every year, so you’ll need to obtain the correct set of forms and instructions if you want to go the do-it-yourself route. You’ll need all W-2s, 1099s, and any other forms from that tax year. If you don’t have them, you’ll need to request duplicates. Don’t worry about contacting your employer or past employers. The IRS can provide you with missing tax documents as far back as 10 years. You’ll need to create an account with the IRS online to access this information.
When you have all of your tax documents and the correct set of instructions, prepare your taxes as usual. Print the forms, sign them and mail them to the IRS. You can’t e-file past-due tax returns. The IRS will look through your tax forms and approve or ask for additional documentation within a few months. If you owe back taxes, the IRS will notify you of the exact amount, including interest and penalties.
If you don’t want to tackle the problem on your own, you can use tax software widely available online or consult a tax preparation expert for help.
Each individual state has their own tax rules and tax rates. These taxes vary widely depending on where you live and how much money you make. Residents of Florida, Alaska, South Dakota, Texas, Nevada, Wyoming, and Washington do not pay income tax. Residents of Illinois pay a flat tax rate of 3% of their income, no matter how much money they make. Indiana, Michigan, Pennsylvania, Colorado, and Utah also impose a flat income tax. New Hampshire and Tennessee only charge taxes on income earned from dividends and interest. All other states have a graduated tax that depends on your income level, much like the tax structure of the federal government.
Those who work for an employer have their state taxes automatically deducted from their paychecks. Self-employed people must pay their state taxes (if applicable) four times per year.
If you overpay your state taxes, you can receive a refund if you file the appropriate paperwork with the state entity that runs the tax system. If you owe state taxes, it’s best to send the payment when you file for the previous year. If you can’t pay the full amount, contact the appropriate authorities to make payment arrangements. If you ignore the debt, the state will eventually garnish your wages, garnish your unemployment benefits, take your federal tax refund, or put a lien on your property.
If you think you’ll owe taxes but you miss the April 15th deadline, you’ll automatically be charged a 5% penalty on the total amount due. The IRS will also add interest and fees to that amount if you don’t pay the total amount due when you send in your paperwork on time.
To avoid penalties and interest, you can send Form 4868 (Application for Automatic Extension of Time to File U.S Individual Income Tax Return) to the IRS. The form doesn’t ask you to provide a reason. You simply need to make sure the IRS has it before the April 15th deadline. The fastest and easiest way to accomplish this is to e-file the form using tax software online. The form requires you to estimate your total tax liability and provide your social security number for identification purposes. After the IRS approves your application for an extension, you’ll have until October 15 to file taxes for the previous year. This will relieve you of the late filing penalty of 5%, but it won’t get you out of paying interest and late payment penalties if you don’t pay the amount due by the April 15th deadline.
Tax laws and codes are always changing. The most extensive and sweeping changes to tax code happened late in 2017 for the 2018 tax year. For this reason, people who previously handled their own tax preparation are turning to professionals for support and assistance for the first time. If there is any confusion about the tax rules, it’s best to seek the help of someone who has a great deal of experience dealing with tax issues.
Owing back taxes, not filing every year, and making mistakes with your tax payments are mistakes that will eventually catch up with you and could have a long-term effect on your future financial health. It’s smart to learn how taxes work, and smarter to ask for help when you need it with this complicated subject.