Here cometh the tax season, with all its merry greetings. Even the most experienced filers hardly look forward to paying taxes since we all hold our hard-earned money very dear to us. And undoubtedly, taxes can be pretty intimidating to people who’ve never dealt with them before.
But fret not; there are many tax filing software, also known as e-filing, that you can employ. These free tools can guide you throughout the entire process of calculating and filing returns. However, it’s best to keep abreast of some essential tax concepts so you can get the maximum refunds and do your taxes correctly. The following article mentions six things you must know before getting socked by the world of tax.
Your tax deadline
If you want to avoid incurring heavy penalties, you must file your returns by the provided tax deadline. Or you can request an extension to the said deadline. However, not doing either can result in a failure-to-file penalty that costs 5% to 25% of your tax payment, adding up with each additional month of delay.
The most significant disadvantage of missing the filing deadline is that you can’t reclaim your expected returns for the period. Just think about losing thousands of dollars you could have retained in your savings.
And even if your projected tax bill falls outside your current budget, you should still file your taxes. Why? The failure-to-pay penalty will cause minor damage, e.g., 0.5% of your tax bill, compared to the significant failure-to-file penalty. Although setting up a payment plan with the IRS can take all your penalty worries away. Such a payment plan allows for feasible monthly installments for your total tax bill.
You can file an extension only for paperwork
The IRS is more flexible than it gets credit for. For instance, if you can’t file your federal sales tax timely, it won’t crucify you at stake. The condition being, you ask for an extension for your paperwork.
However, this extension does not imply you can slack off on “paying” your due taxes. You will still have to pay your expected tax bill on time. But what if you don’t have the necessary cash to pay what you owe? In that scenario, you have several alternatives, including credit payments or entering into a monthly installment plan.
You can file your returns for free
Often, filing returns is best left to professionals such as accountants or tax preparation firms. Yet, these services can be pretty expensive. And it’s illogical to employ these services if your tax situation isn’t relatively complicated. For example, suppose you’ve only got a bunch of donation receipts with your standard W-2 form. In that case, it’s a good idea to skip hiring any professionals.
Instead, you can use one of the many online tools such as GenuTax, TurboTax, or H&R Block. They’re free! Besides, you can easily find someone at a tax clinic to file your taxes for free if you’re self-employed or have a more straightforward tax situation.
You could save more by itemizing your tax deductions
Another critical aspect of doing taxes is itemizing deductions. You can go for the standard deductions or itemize them. Governments have pretty direct processes for giving out the entitled refunds to the filers in more straightforward tax situations. Claiming the standard deductions can significantly reduce your taxable income figure.
On the other hand, to itemize your deductions, you’ll have to identify each item you want to receive a deduction on. Individuals are likely to this route if the sum of their total deductions exceeds their standard amount. A few examples of frequently itemized items comprise charitable donations, lease payments, and medical expenses.
Your time and money play a big role in your decision to opt for itemized or standard deductions. In some cases, the time to itemize every item is negligible to the tax savings it’ll reap. If itemizing isn’t completely necessary, you’ll reap no financial benefit from allotting all that time into the process.
Your filing status and tax brackets
You need to keep your total gross income in focus if you want to calculate your tax payment. When you’ve accounted for all sources of this income, you can start claiming your rightful tax refunds. After that, you can quickly obtain your taxable income by subtracting said deductions from the gross income.
In a progressive tax system like the US, your effective tax rate will increase as your taxable income increases. And your specific tax bracket will determine the said rate.
For instance, you were in the 22% tax bracket for the last tax year. If you’re married and filing for joint returns with a taxable income between $80,251 to $171,050. Then, you’ll only be charged with the 22% rate for the part of your income above $80,251 24%.
Watch out for the due dates
Failure to comply with specific tax due dates can incur hefty penalties and interest. Your bank and employer must abide by their due dates in transferring the necessary financial information. The IRS has deals in its own due dates known as the statute of limitations. After a set time limit, the IRS can deny collecting and assessing citizen’s federal income taxes.
What’s more, the statute of limitations only applies when one files their tax returns. Meaning, the IRS is free to collect and assess your taxes anytime it desires. Therefore, it’s always wise to file your returns as soon as possible, regardless if it’s past the deadline.
This article discussed some things you must know before sitting down to do your annual taxes. These include the tax deadline, filing options, tax brackets, and tax deductions. Gaining a rudimentary understanding of some basic tax concepts can lead to higher tax refunds and a more effective filing process. Take note of the tips mentioned above, and ensure seamless tax filing.