Tax Filing Secrets for Beginners
Disclaimer: This is not tax advice and the information below is for educational purposes only. For tax advice you should meet with a tax professional as each person’s tax situation is different.
U.S. INDIVIDUAL INCOME TAX
The Internal Revenue Service or the IRS, is the government agency responsible for collecting taxes and enforcing tax laws.
The U.S. individual income tax system is what is called a pay-as-you-go system, meaning that you pay taxes throughout the year as you earn your income. Taxpayers who earn wages have their tax taken out by their employers and paid to the IRS when their wages are paid.
Non-wage earners, for example, self-employed persons or investors, are responsible for paying their taxes to the IRS when they earn their income. These taxpayers are required to pay estimated taxes throughout the year, and the IRS charges a penalty if this is not done.
FILING INCOME TAX RETURNS
Most people are required to file an individual income tax return. There are federal and state filing requirements. Income, filing status, age and other factors determine filing requirements. Generally, you must file a federal income tax return if your income is above certain thresholds. Filing status has to do with whether you are married, single or what the IRS calls head of household — someone who does not qualify to file as married and has a dependent.
Anyone who earns income above certain thresholds based on their filing status is required to file a tax return.
For 2023 tax year (for filing in 2024) these thresholds are:
1. Single under 65: $13,850
2. Single 65 or older: $15,700
3. Head of Household under 65: $20,800
4. Head of Household 65 or older: $22,650
5. Married Filing Jointly, both spouses under 65: $27,700
6. Married Filing Jointly, one spouse 65 or older: $29,200
7. Married Filing Jointly, both spouses 65 or older: $30,700
Common tax terms under the U.S. tax code.
1. Earned Income
This include wages, salaries, tips from a job and self-employment income from a business
2. Unearned Income
This includes interest, dividends, capital gains, rental income and royalties
3. Gross Income
This is the total of all income before any tax deductions allowed
4. Adjusted Gross Income or AGI
This is gross income minus certain adjustments
5. Taxable Income
This is the portion of income subject to tax after deductions
6. Tax Liability
This is the total amount of tax a taxpayer owes
FILING STATUS
A taxpayer’s filing status determines tax rates, deductions, and eligibility for certain credits. There are five filing statuses:
1. SINGLE
Unmarried or legally separated persons
2. MARRIED FILING JOINTLY
Married couples who file a single return
3. MARRIED FILING SEPARATELY
Married persons filing separate returns
4. HEAD OF HOUSEHOLD
Unmarried persons who pay more than half the cost of keeping up a home for a qualifying person
5. QUALIFYING WIDOW(ER)
Surviving spouses with a dependent child, for two years after the year of spouse’s death
U.S. Tax System Basics
The U.S. uses a progressive tax system, meaning that as your income increases, your tax rates on additional income increases.
There are two types of tax rates for which it is important to know the difference: marginal and effective tax rates.
MARGINAL TAX RATE
The marginal tax rate is the rate at which your next dollar of income would be taxed. So if your next dollar of income takes you into a higher tax bracket, that next dollar will be taxed at that higher rate.
EFFECTIVE TAX RATE
The effective tax rate is simply the average rate at which your total income is taxed.
U.S. INCOME TAX BRACKETS AND RATES (2023)
As I mentioned earlier, the U.S. has a progressive tax system, meaning the tax rate increases as income increases. Your income is separated into different portions, with each portion taxed at a different rate. Each higher portion is taxed at a higher rate.
There are seven tax brackets for the 2023 tax year. There are different brackets depending on filing status..
Single Filers
1. 10%: $0 to $11,000
2. 12%: $11,001 to $44,725
3. 22%: $44,726 to $95,375
4. 24%: $95,376 to $182,100
5. 32%: $182,101 to $231,250
6. 35%: $231,251 to $578,125
7. 37%: $578,126 and above
Married Filing Jointly
1. 10%: $0 to $22,000
2. 12%: $22,001 to $89,450
3. 22%: $89,451 to $190,750
4. 24%: $190,751 to $364,200
5. 32%: $364,201 to $462,500
6. 35%: $462,501 to $693,750
7. 37%: $693,751 and above
Married Filing Separately
1. 10%: $0 to $11,000
2. 12%: $11,001 to $44,725
3. 22%: $44,726 to $95,375
4. 24%: $95,376 to $182,100
5. 32%: $182,101 to $231,250
6. 35%: $231,251 to $346,875
7. 37%: $346,876 and above
Head of Household
1. 10%: $0 to $15,700
2. 12%: $15,701 to $59,850
3. 22%: $59,851 to $95,350
4. 24%: $95,351 to $182,100
5. 32%: $182,101 to $231,250
6. 35%: $231,251 to $578,100
7. 37%: $578,101 and above
Tax brackets are adjusted annually for inflation.
DEDUCTIONS
Deductions are amounts allowed under the tax code that reduce your taxable income and lower the amount of tax you owe. There are two main types of deductions:
a) Standard Deduction
The standard deduction is an amount set by the IRS that reduces your taxable income based on your filing status.
The standard deduction varies by filing status, and for 2023 is as follows:
1. Single or Married Filing Separately: $13,850
2. Married Filing Jointly or Qualifying Widow(er): $27,700
3. Head of Household: $20,800
Additional Standard Deduction for 65 or Older and Blind
Taxpayers who are 65 or older or blind get additional standard deductions.
To qualify for these additional deductions the taxpayer must have turned 65 by the end of the tax year or must be totally blind or received a letter from an eye doctor stating that the person sees less than 20/200 in their better-functioning eye or their field of vision is 20 degrees or fewer.
A person may also qualify if contact lenses are able to correct the conditions, but they are unable to wear them because of pain or infection.
The additional amounts vary based on filing status.
For 2023 these additional amounts are as follows:
Single or head of household
65 or older or blind $1,850
65 or older and blind $3,700
Married filing jointly or separately and surviving spouse
65 or older or blind $1,500 (per qualifying person)
65 or older and blind $3,000 (per qualifying person)
Dependent Qualifying Deduction
For a person filing a tax return but is being claimed as a dependent by someone else, the standard deduction depends on their earned income.
For the 2023 tax year, the deduction is either a flat $1,250, or the amount of earned income plus $400, but cannot exceed the maximum standard deduction for that tax filing status.
Who Does Not Qualify for the Standard Deduction
There are certain situations in which a taxpayer cannot take the standard deduction. These are as follows:
1. If you are married filing separately, and your spouse chooses to itemize, you must also itemize
2. If you are filing a trust, estate or partnership return
3. If your return covers a period of less than a year because of accounting period changes
4. If you are considered a “nonresident alien” or “dual-status alien” of the U.S. There are some exceptions to this rule.
Itemized Deductions
The second type of deduction is called itemized deductions.
Instead of taking the standard deduction, a taxpayer can itemize deductions. If itemized deductions are higher than the standard deduction, it is more beneficial to take the itemized deductions. Common itemized deductions include:
1. Medical expenses (amount exceeding 7.5% of adjusted gross income)
2. State and local taxes (up to $10,000)
3. Mortgage interest
4. Charitable contributions
5. Casualty and theft losses (in federally declared disaster areas)
Above-the-line Deductions
These deductions reduce adjusted gross income and can be taken even if the taxpayer does not itemize.
Examples include:
1. Student loan interest (up to $2,500)
2. Individual Retirement Account (IRA) contributions
3. Self-employed health insurance premiums
4. Alimony payments for divorces finalized before 2019
TAX CREDITS
Whereas deductions reduce your income, credits directly reduce your tax liability and are more valuable than deductions. There are two types of tax credits:
Refundable Credits
These can give you a refund even if your tax liability is reduced to zero.
Examples include:
1. Earned Income Tax Credit (EITC)
2. Additional Child Tax Credit
3. American Opportunity Tax Credit (partially refundable)
Non-refundable Credits
These can only reduce your tax liability to zero.
Examples include:
1. Child Tax Credit
2. Adoption Credit
3. Retirement Savings Contributions Credit (Saver’s Credit)
4. Lifetime Learning Credit
FILING YOUR TAX RETURN
Form 1040 is the main individual income tax return form.
Various schedules are used depending on your specific situation (e.g., Schedule A for itemized deductions, Schedule C for self-employment income).
Necessary Documents
Other documents that might be needed to file an individual income tax return include:
1. W-2 wage forms from employers
These are used to report wage income and taxes withheld by employers
2. 1099 forms for business or other income
1099s are used to report various types of non-wage income. These include:
1099-INT: Interest income
1099-DIV: Dividend income
1099-MISC: Miscellaneous income
1099-NEC: Non-employee compensation
1099-R for retirement income
3. Receipts for deductible expenses
4. 1098: Reports mortgage interest paid
5. 1095-A, B, or C reports health insurance coverage information
6. Identification: Social Security numbers or taxpayer identification numbers
Filing Methods
There are several options for filing an income tax return. These include:
- E-filing: the quickest and most accurate method
- Paper filing: You can mail your tax return to the IRS
- Tax software: Popular options include TurboTax, H&R Block, and TaxAct
- Professional help: You can use Certified Public Accountants (CPAs) or Enrolled Agents (EAs), to file your tax return
Filing Deadline
The filing deadline for individual tax returns is April 15th, unless it falls on a weekend or holiday, then it is the next working day.
PAYING YOUR TAXES
Withholding
Employers withhold taxes from each paycheck based on employees’ form W-4. Employers pay withheld taxes to the IRS either monthly or semi-weekly.
Estimated Tax Payments
Self-employed individuals or those with large non-wage income are required to make quarterly estimated tax payments. The IRS charges penalty and interest for taxpayers who fail to make estimated tax payments on time.
Payment Options for Those Who Owe Taxes
Taxpayers can make their tax payments to the IRS in one of several ways.
- Direct pay from a bank account
- Credit or debit card
- Payment by check
- Taxpayers who can’t pay in full can establish payment plans with the IRS
REFUNDS
For those who overpaid their taxes through withholding or estimated taxes, the IRS is required to refund the overpayment. Many people look forward to getting a refund, but a refund is in essence an interest free loan to the government, as you’re only getting back what you overpaid.
A refund can be issued via direct deposit to the taxpayer’s account, via a paper check mailed to the taxpayer, or the taxpayer can opt to have it applied to the next year’s taxes.
TAX PLANNING
Tax planning is using the tax code to legally minimize taxes owed. Tax can be complicated because of the many tax provisions. Using a tax professional for planning is advisable to give you the best shot at minimizing your taxes. This is a basic introduction to taxes so I will not discuss tax planning in detail but will mention a couple ways taxpayers can reduce their taxes.
a) Maximize retirement contributions in a 401(k) or individual retirement account (IRA)
b) Use tax-advantaged accounts like health savings account (HSA) for health expenses, or 529 plans for education
c) Harvest tax losses in investment accounts
d) Bunch itemized deductions in alternate years
e) Make charitable contributions directly from IRAs if over 70½ (Qualified Charitable Distributions)
COMMON MISTAKES TO AVOID
Taxpayers sometimes make silly mistakes which end up costing them money. Here are some common mistakes to avoid.
a) Missing the filing deadline (penalties and interest may apply)
b) Failing to report all income
c) Math errors — e-filing may help to prevent these
d) Incorrect Social Security numbers
e) Forgetting to sign and date the return
DEALING WITH THE IRS
a) Audits
The IRS audits a certain number of tax returns each year. Tax returns may be selected for audit either randomly or if there are certain red flags in the return. Taxpayers who get Earned Income Credit, for example, are audited at a higher rate than other taxpayers because of widespread abuse of this credit in the past.
b) Notices
The IRS may issue notices to taxpayers when there is an issue with their tax return. Notices include:
- CP2000: Proposed changes to your tax return
- CP14: Balance due notice
c) Payment Plans
Taxpayers may establish a payment plan if they can’t pay all their taxes due at once. Payment plans may be short-term (120 days or less) or long-term.
STATE INCOME TAXES
a) Most states have their own income tax (rates and rules vary)
b) Seven states have no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming
c) Two states tax only dividend and interest income: New Hampshire and Tennessee
Understanding U.S. individual income tax is important to meet your tax obligations and for financial and retirement planning. This was a basic introduction to taxes. Tax laws are complex and change frequently, so always ensure you’re getting the right professional advice to optimize your tax situation. When in doubt, consult a tax professional or the IRS website (www.irs.gov) for the most up-to-date guidance.
REMINDER
This guide is for educational purposes only and should not be considered legal or tax advice. Tax laws are subject to change, and your individual situation may vary significantly from others.