The tax laws in the United States are intricate. This is true whether you’re submitting your taxes for the first time or have decades of expertise as a tax attorney. Even the IRS Taxpayer Advocate Service admits that the tax system’s complexity is the most severe issue that people confront.
People’s minds are full of tax issues when the year is coming to an end. Most people occupy their minds with tax-related things such as;
- Trusted tax advice.
- Knowing how to squeeze out more value deductions.
- How to avoid fines or an audit.
- Know how much can they get back on their tax returns.
- And much more….
We’ve put together answers to the most asked tax questions to assist you with your tax filing.
What makes a tax credit different from a tax deduction?
Tax credits and deductions can both help you save money on your taxes. Deductions reduce the amount of income subject to taxation, lowering your tax burden. Credits are a decrease in the amount of tax you owe on a dollar-for-dollar basis.
If you have a $30,000 income and a $1,000 deduction, you will not have to pay tax on that $1,000. If you assume a 20% tax rate on the $1,000, the deduction might save you $200. A $1,000 credit, on the other hand, would lower the amount of tax you owe by $1,000. If you owe $3,000 in taxes, you’d owe $2,000 instead and save $1,000.
What is the best filing status for me?
Depending on the household status, taxpayers are handled differently. You must select a filing status to tell the IRS which regulations apply to you. The five options are single, married filing jointly, married filing separately, head of the home, and qualified widow(er) with the dependent child.
Your tax rate, standard deduction, and eligibility for certain deductions and credits are all affected by your filing status. The IRS offers an interactive tool to assist taxpayers in determining their filing status.
What happens if I don’t file my taxes promptly?
The answer is contingent on whether you owe the IRS money or anticipate receiving a refund. If you owe money, the penalty for not paying your taxes on time is 5% of the amount owed for each month the return is late, up to a maximum of 25%.
If you file but don’t pay, the IRS will tax you 0.5 percent every month, up to a maximum of 25% if you don’t pay. There is no penalty for not submitting your federal return if you anticipate receiving a tax refund. Still, you are depriving yourself of funds put aside by the IRS for you.
What if I spent the previous year residing in many states?
Every state has its tax regulations. Things might get tricky if those policies contradict those of another state where you worked remotely.
Knowing the requirements of each state where you worked is crucial because, depending on where you went and where you came from, you may be forced to pay taxes to two states on the same income.
The most straightforward approach to accomplish this is to go to the website of your city’s or state’s tax agency. This is known as the “Department of Revenue” in most states. However, it is also known as the “Department of Taxation” in certain areas.
When will I be able to receive my money back?
According to the IRS, most refunds are received within 21 days for individuals who e-filed and had their return instantly deposited. If you submit paper returns, refunds might take up to six weeks to arrive.
Your refund may be delayed if you claim certain credits or deductions. On the IRS “Where’s My Return” page, you may check the status of your refund.
What is the best way to figure out my tax bracket and rate?
Because the United States has a progressive tax system, not all of your earnings are taxed at the same rate. The range of earnings taxed at specific rates is a tax bracket, whereas your marginal tax rate is the highest tax bracket relevant to your income.
Under current tax law, there are seven tax brackets. You’ll need to know your income to figure out which one you’re in — and what your tax rate is.
The IRS Tax Rate Schedules for the taxable year can then be used to establish your bracket, marginal tax rate, and potential tax liability.
What exactly is a W-2?
Suppose you observe that your company deducted income, social security, or Medicare tax from your take-home pay on your paycheck or pay stub. In that case, you’re probably a W-2 employee.
You will receive a W-2 form from your employer. A W-2 is a pay and income statement that shows the total revenue received from an employer.
Should I itemize or take the basic deduction?
Taxable income is reduced through deductions. You can choose to itemize your deductions or take a standard deduction.
The value of certain expenses deductible under US tax law is deducted from your taxable income when you itemize. For example, if you pay mortgage interest, you can remove it if you itemize your deductions.
Compare the amount of the standard deduction to the total value of your itemized deductions to determine which deductions to take. Your itemized deductions might not exceed the average amount in your filing status because the standard deductions have been enhanced due to tax reforms.
What is the amount of income that I am required to pay taxes on?
The IRS defines income as “money, property, or services.” Unless the law explicitly exempts it, all income is taxable, and all taxable income must be recorded on your tax return.
Even if you don’t pay taxes on it, certain nontaxable income must be disclosed. The IRS Publication 525 explains what income is taxable and what isn’t, and it’s a long list.
All taxable income is not treated equally. Earned income is taxed differently than unearned income since it is subject to Social Security, Medicare, and state and federal income taxes.
Unearned income, such as child support or Social Security payments, is exempt from payroll taxes, subject to federal and state income taxes. In addition, several forms of unearned income are taxed at a lower capital gains rate than your regular tax rate.
What if I’m unable to pay the tax that I owe?
Even if you can’t afford to pay your taxes, you must file a return and make plans to pay what you owe. Interest and penalties will accrue if you don’t file and pay your taxes on time.
Suppose you can’t pay the whole amount due by the deadline. In that case, the IRS offers a variety of payment options, including installment arrangements.
Even if you engage in a payment arrangement, you will still owe interest and maybe penalties. Payment plan costs and fees differ based on the length of your plan and whether you apply by mail or online.
Who am I allowed to claim as a dependent?
Who am I allowed to claim as a dependent? You may be eligible for additional tax credits and deductions if you have a dependant. However, determining who is and is not a qualified dependant may be difficult.
The IRS will often allow you to claim a dependant to fulfill the qualifying kid or qualifying relative requirement.
Your kid must be under 19 years old to take the qualifying child test (24 years old if still a student).
There is no age limit for the relative qualifying exam. In either case, the dependant must be a US citizen, US national, US resident, or a resident of Canada or Mexico. They cannot be claimed as a dependant by anyone else, and they cannot file a combined tax return (like a married filing jointly form) for the year in question.
The above answers to the frequently asked tax questions might assist you in meeting your tax responsibilities. But you might still have questions as you proceed through the filing process.
Consider contacting a reliable tax professional who could guide you through the process or do it entirely for you. Most tax professionals or organizations know every possible loophole in the tax system to save you $1000s.
Suppose you feel comfortable filing your taxes by yourself. In that case, there is no need to consult a tax professional or organization who will charge you for their services.