Einstein once claimed that nothing is more difficult to comprehend than income tax. Personal finances can sometimes be a crow’s nest of revenue, investments, debt, and liabilities, which seem impossible to organize and detangle in order to pay the charges due.
So, what are taxes and why do you have to pay them? This article gives the answers and provides guidelines on how to do your own taxes. We will cover the following:
- What are Taxes?
- Why Should You Do Your Own Taxes?
- Necessary Steps to Take Before Filing Taxes
- How to Do Your Taxes For the First Time
- Steps for Preparing and Filing Tax Returns
- Who Should Do Their Own Taxes?
- Tax Software to Consider
Everything you Need to Know About Taxes
Tax is essentially an obligatory financial levy paid by the taxpayer to the state in order to bankroll government spending.
The US tax system incorporates federal income tax via the Internal Revenue Service (IRS), state tax, as well as local government tax. Other specific taxes such as estate tax, property tax, sales tax, and excise tax have to be considered and integrated into the mix as well.
Federal Income Tax
The US Federal Income Tax system is comprised of seven tax levels applied to taxable personal income. Preparing to submit taxes may take some time depending on the multitude of tax deductions as well as income and investment details that need to be submitted.
However, taxes are payable in the US on an annual basis by the 15th of April. All documentation should be filed before the due date to avoid incurring penalties. It may be useful to note though, that the due date may be altered if global and national financial circumstances dictate it.
Employers are required by law to reserve a portion of the monthly income to cover estimated federal income tax. Employees have a measure of control over the amounts being deducted and are required to fill in the appropriate documentation (Form W-4) detailing their preferences when starting a new job.
When doing your own taxes, you’ll notice that tax rates are calculated on a progressive scale. The rate increases in conjunction with the revenue category or bracket. Rates range from 10% to 37% as applicable.
Married individuals may file a joint tax return and are hence taxed on a different level. Conversely, couples or individuals may opt to keep their taxes separate and be rated accordingly. Individuals over the age of 65 who earn $14,050 or less, are exempted from tax liability. If married, the same arrangement applies to an amount of $27,400 in this regard.
Example of rates (please note that statistics are liable to change):
|Rate||Range of income (single)||Range of income (married couples filing jointly)|
|10%||$0 to $12,400||$0 to $24,800|
|24%||$86,376 – $164,925||$172,750 – $329,850|
Self-employed tax becomes applicable to contractors who earn a net amount of $400, regardless of the mode of payment received. Although these taxes are payable at a rate of 15.3%, this expenditure is inclusive of Medicare and Social Security. Conversely, contractors are not required to pay employer tax, but should nonetheless submit the applicable Form 1099 and a Schedule C as stipulated.
When you do your own taxes, it is important to know that state taxes are charged in addition to and at the same time as federal income tax. Taxes garnered in this manner are a major source of state revenue and may be very different from state to state. While some regions charge a flat income rate, others employ a tiered system similar to that of federal tax.
Eight US states, including Alaska, Florida, and Texas, do not collect income tax at all.
Other relevant information includes:
- 42 US states tax individuals, while forty-one tax wages and salaries as well
- New Hampshire in particular, levies dividend and interest income only
- Some states employ more varied taxing brackets (e.g. Hawaii has twelve)
- Tax ranges are sometimes bound by specific exemptions or deductions as linked to inflation
Local Government Tax
Local tax is collected from citizens so as to fund public services. It may be levied by way of withholding tax on salaries or employer tax payable by business owners and proprietors in particular. The list of local levies includes stamp tax, vehicle license fees, land value, and agricultural land tax in addition to house tax, deed tax, and even amusement tax.
Local government tariffs may be charged at a level percentage rate or may use progressive models such as that of federal income tax.
What are property taxes and how do they work? Also known as millage rates, property taxes are charged by local governments but may be regulated to some extent by state protocols. Property taxes are calculated as follows:
Property Tax = Fair Market Value x Assessment Ratio x Tax Rate
Why Should You Learn How to Do Your Own Taxes?
As previously stated, receiving your W-2s and consequently having to pay taxes is just one of the things of life. But, there are in fact quite a few benefits to knowing how to do taxes on your own.
Here are some of them:
Knowing how to do your own taxes undeniably saves you money. Hiring an accountant or tax consultant is a costly service. You’ll be paying a large chunk of your tax refund to cover service costs.
Utilizing free or cheap online tax preparation software and tools is a great way how to easily do taxes on your own. The IRS website has free downloadable forms and provides you with the updated application of tax laws information at the click of a button. Resources are free and user-friendly, generating fewer errors and a more comprehensive tax return submission.
Become Financially Literate and Confident
Taking control of your finances by knowing how to do them yourself is strangely liberating. Financial literacy, however, requires a workable knowledge of tax rules and regulations. So, don’t get caught unawares. See our tips on how to do your own taxes and develop confidence.
Clear Up Debt
Once familiar with everything you need to know about taxes – tax time can be an opportunity to assess your financial standing and clean up accumulated debt. In addition to a tax refund providing welcome relief to strained coffers, interest accrued on debt can also be utilized as tax deductions.
Taxpayers can claim mortgage interest on first and second home equity. As well as mortgage interest on investment properties in this manner. Additional tax deductions such as interest on student loans, some business loans, and business credit cards may also apply.
Remember that interest on a savings account is taxable and should therefore be reported on tax returns.
Necessary Steps to Take Before Filing Taxes
Let’s go through the steps of preparing yourself to file tax returns.
Before deciding how to do your own taxes, a taxpayer should consider his or her filing status. Filing status takes the following into consideration:
- Is the candidate single or married?
- Is the individual married but filing tax returns separately?
- Is the applicant the sole breadwinner with dependents?
- Does the person qualify for exemptions or credits due to being a widow or widower?
These and other criteria are used to determine tax liability and eligibility for tax deductions.
Gather Documents and Receipts
Whether you are doing your own taxes or seeking a free tax consultation, having all your ducks in a row is very important. Follow these tips when it comes to gathering documents and receipts:
- If visiting a consultant, choose a reputable agent and schedule an appointment
- Be sure to gather all documentation and relevant receipts for easy access to facts and figures. These documents may comprise proof of retirement account contributions, medical bills, educational expenses, and evidence of charitable deductions and debt interest statements
- Find last year’s tax return to use as a reference
How to Do Your Taxes for The First Time
Follow these tips when you do your taxes for the first time:
If you want to learn how to do your own taxes, you need to keep a close eye on your income throughout the financial year. Note your year-to-date information on your salary slip and remember to include all sources of income.
These may include rent collections, interest or dividends on investments, as well as interest on accounts. Mark the due date for submitting tax returns down on your calendar so you don’t miss the deadline.
Save paperwork relating to tax time throughout the year. Make note of work-related expenses, grants, fellowships, and charitable donations that have been made. Keep these records for at least five years, in case of an IRS audit.
No tax return is complete without the relevant IRS documentation. If employees are employed full time, they will need to collect Form W-2 from their employers. This will give them access to details about withheld tax and related deductions on hand. Save similar forms related to self-employed individuals or contractors (Form 1099-NEC) together with the relevant forms for claiming interest on student loan interest, dividends, and other comparable sources.
Once the relevant documents and receipts have been gathered, you are ready to easily do taxes on your own.
Steps For Preparing and Filing Tax Returns
If you have chosen to forgo professional help and wish to learn how to do your own taxes for free, there are a variety of self-help options to choose from. However, the best option for you will depend solely on the complexity of your return and your financial literacy.
This option requires the taxpayer to complete Form 1040 by hand. The completed document may be mailed to the IRS together with the calculated amount of tax due.
Access Free File IRS
The IRS gives taxpayers who earn a specified minimum income amount access to free tax preparation software. The software assists users in making use of any credits or tax deductions they are likely to be eligible for.
Tax Preparation Software
Employing tax preparation software is by far the best way to learn how to do your own taxes. When filing, taxpayers can pay a minimal fee to have access to online tax guidance software in order to benefit from available deductibles and credits.
Utilizing this option provides the filer with electronic versions of paper forms together with basic guidelines to complete tax returns. However, no assistance is given on tax minimization strategy or other ways in which taxable income may be reduced.
Who Should Do Their Own Taxes?
US tax laws specify that anyone below the age of 65, who has a gross annual income of $12,400 as a single taxpayer, must file a tax return. The same applies to married individuals who opt to file jointly. The amount, in this case, is $24,800.
It is a common misconception that it’s necessary to hire a professional tax consultant, in order to be protected from tax liability and possible IRS tax audit. In fact, if your tax profile is simple, and you know how to draw data from relevant sources and apply it to Form 1040, then it can be a relatively painless process. Therefore, you can teach yourself how to do taxes on your own.
If you are adequately versed in tax laws applicable to your particular situation, you can either print out paperwork to fill in and email it or complete the process online, using tax preparation software. Be sure to keep your personal details and changed tax situation up to date on the tax database.
Tax Software to Consider
Making use of tax preparation software to file a tax return is an efficient solution to a complicated problem. Not only is it convenient and more effective, but it can also show you how to do your taxes on your own.
Tax software bundles take the fuss out of tax filing by automating the groundwork and the actual filing of the return. Building a credible tax history is an added benefit. Some programs even feature online advice in order to correctly record and file the myriad of forms in the appropriate manner.
Software is updated regularly and implements current laws and applications to available credits and tax deductions users may qualify for. This allows for easy filing of tax returns.
Some of the best personal and business tax software for 2021 includes TurboTax, H&R Block as well as Intuit, QuickBooks, and TaxSlayer. Likewise, investors dealing in Bitcoin and other cryptocurrencies vouch for Koinly and Cryptotrader, when searching for the best crypto tax software.
Have you ever wondered, how hard is it to do your own taxes? Wonder no more. It does not matter whether you are just sorting out personal finances, own a business, or dabble in crypto. Anyone with a basic understanding of federal, state, and local government tax laws can have a go at it.
Do your tax return via a trusted service provider or use online tax preparation software for the best outcome. Maximize tax returns, save money, and in the process, learn to understand how to do taxes on your own.
Gather the required documents, decide on your mode of filing, and research which benefits or credits you may be entitled to, based on your filing status. Select the appropriate online forms and get to them. You will be glad that you did.
According to the IRS, anyone earning an income should pay tax, regardless of age. However, different rules apply if the child is listed as the parent’s dependent, is over the age of 19, or is a full-time student reliant on a parent for at least half of their maintenance.
If you are unmarried and under the age of 65, you will only pay tax if your gross income exceeds $12,400. For senior citizens over the age of 65, the amount is $14,050. Please note that these numbers are not fixed and may change as inflation dictates.
For married couples who plan to file tax returns together, the amount basically doubles, depending on the spouses’ age and the number of dependents.
If your taxes only require straightforward calculation, then you can find out how to do your own taxes and have a go at it. However, in certain situations, for example, if your income status has changed, you recently got married, or inherited money, these modifications need to be documented correctly and are best done by a pro.