Maybe tax time is approaching, and this year is the first time you have to file your taxes. You may need to do a different type of tax return than you have before. Whatever the case may be, doing your taxes can be time-consuming and difficult, and people are often worried that they may do it wrong because of the consequences involved in this. This article covers the main types of taxation in the US for individuals and businesses and the ways in which you can do your taxes. It also goes over some considerations you should make and how you can make the process easier on yourself.
The process of filing one’s taxes can broadly be separated into three different methods. If you have an employer in the US, they likely handle your income tax for you by deducting it from what they pay you before you receive it. Therefore, if you are in that type of employment, you do not need to worry about filing your own income tax. However, there are many other situations where you need to file taxes. Broadly, the ways in which you can file your taxes can be separated like this:
- With an accountant or financial manager: This is a great way to go about filing your taxes if you have money to spare and would rather take the headache out of the process. Someone goes through the process of filing the taxes for you, and all that is needed on your part is to provide them with the information and documents they ask for. However, this option is of course more expensive than going through the process yourself.
- Filling out the tax return form yourself: This is obviously not as convenient as having somebody else fill out the form for you, and it may not be advised if you have an especially complicated situation with regards to your taxation. However, if you know exactly what you need to do, then it isn’t too much of a problem to file your taxes yourself, as long as you ensure that you fill out all of the required information and submit it by the deadline.
- Using tax return software: This is something of a happy medium between finding professional help in filing your taxes and doing it yourself. You generally need to pay for the service, but it costs less than hiring the services of a professional to file your returns for you. It is also worth mentioning that some of this software is now free, as long as your case or paperwork isn’t overly complicated. The software generally runs you through different questions to understand what you need from them and then fills out the 1040 form for you. If you choose, they can also submit the paperwork in some cases.
How Much Tax Do I Need to Pay?
The amount of tax you need to pay and the types of tax you need to pay vary greatly depending on your personal and financial circumstances. It also varies depending on what state you live in, as different states have different laws or policies with regard to different kinds of taxes. However, it is generally speaking not too difficult to figure out how much of your income is going to be deducted by the federal government.
In the US, the system of taxation is progressive. This means that the more money you earn, the greater the percentage of your income is eligible to be taxed. Other factors also affect how you are taxed. For example, if you are married and/or have children, this can mean that you are required to pay less tax or can potentially receive exemptions, depending on your circumstances. The nature of the US taxation system at the federal level means that your rate of income tax is based on which tax bracket you fall into. For example, as of 2019, the tax bracket between $84,201 to $160,725 is where people are taxed at 24%.
While your employer deducts the income that they pay you from your wages, this does not mean you do not have to file anything yourself. They provide you with a form around tax time called a W-2. This form displays information including what you have been paid and what they have taken out of your wages in the form of tax and other important details. You need to use this information in conjunction with anything else you know in order to figure out exactly how much you owe in tax and how you can file your return. If you are self-employed, you need to go through a different process, and there are different kinds of paperwork involved. If you have also accrued income through investment or bank accounts, for example, they may also choose to send you documentation of this, which needs to be filed too.
If you are self-employed or work as a type of contractor, you likely need to use a 1099 form to file your taxes. It is more common today than ever to work as a contractor or as a self-employed person, and entrepreneurship is also on the rise. Such work is generally not taxed at the time that it is done, of course, so this means that it is often necessary for the self-employed person or contractor to file their own taxes and report their income at tax time. Self-employed workers generally receive a 1099 form from their clients, which is a form that discloses various kinds of relevant information so that the self-employed worker can more accurately report their income at tax time.
There is a great variety of types of work that 1099 forms have to be issued for, so do not worry too much if you have received one and were not expecting to. For example, 1099 forms are often also relevant to agricultural transactions. Generally speaking, they are issued if the value of the transaction in any way comes to $600 or more, and the party whose services have been rendered or used are not an employee of or employed by the person who paid for the services.
The types of 1099 forms vary depending on the type of work that has been done and also the types of assets that need to be reported. For example, there is a separate type of 1099 form for dealing strictly with dividends. This can make the process of filing and properly going through the 1099 form quite complicated and tiring. If you are not sure entirely of what kind of income and assets you should be reporting, then it is best to consult with an expert on this matter. Filing your taxes incorrectly can be a crime, so it is best not to take any chances if you do not feel comfortable.
Deductions and What They Mean
There are many different factors that affect how much tax you need to pay. One such factor is deductions and whether or not you are eligible for any. Deductions reduce the amount of your income that is taxable, and they may therefore mean you fall into a different tax bracket, despite the fact that your income is the same. Payments to charity are one example of a deductible transaction. For example, if you pay $5,000 to charities across the US, then that same amount may be considered a deduction and taken out of your taxable income.
One deduction that almost everybody is eligible for is the standard deduction. Your standard deduction varies depending on your living situation and other factors, as well as the tax bracket that you fall into. It also takes into account other things, like whether or not you are disabled and how old you are. If you are over a certain age or are blind, then you are automatically eligible for another deduction on top of the standard deduction. The idea behind the deductions is that they make it easier for people to live and relieve some financial pressure on individuals and families.
Final Calculations You May Need to Make
Once you’ve finished doing all the relevant paperwork, it should be fairly easy to determine your position and situation in terms of your taxes. You may end up owing money in some form, and if this is the case, it is generally fairly straightforward to simply pay the balance to the relevant government department. On the other hand, you might find that you are actually owed money, and if this is the case, then you generally receive several different options as to how you can receive this.
You may find that once you have finished calculating your income and money owed that you actually owe more to the government than you are able to pay all at once. This is not unusual, and it is not necessarily any cause for concern. There are generally payment plans and options available to people in such situations, and you should therefore be able to pay the balance in installments, which relieves much of the financial pressure of suddenly realizing that you owe an unexpected sum of money!
Paying taxes is not enjoyable, but it is a necessary part of life in almost all countries around the world, and the US is no exception. Remember that doing so incorrectly can be considered a crime in many circumstances, and as such, it is imperative that you do so correctly. If you are in any doubt as to your responsibilities or rights, you should get in touch with the relevant government department or an accountant. They should be able to help you get on track in terms of what and how much you need to pay, and they should also be able to help you to understand other elements of the taxation system, like deductions. It is always better to be safe than sorry when it comes to your finances.