Paying taxes and filing tax returns are both civic obligations. Sadly, not many people see it that way.
According to the Tax Policy Center, around 57% of United States households did not pay federal income taxes for the 2021 financial year. It’s estimated that nearly the same fraction of the tax-paying population does not file their returns. Many people cite difficulty in navigating the tax filing process as the primary reason behind not filing their returns.
However, the procedure is a lot easier than popularly imagined. It only requires a little amount of time investment.
This article provides a comprehensive guide to the tax filing process. Read on as we address all the frequently asked questions regarding filing income tax.
What Are The Benefits Of Filing Income Tax?
As already hinted, the process of filing income tax is rather straightforward. You only need to arm yourself with the requisite items, such as high-quality tax form envelopes, in case you’re doing manual filing.
But is it necessary to file your income tax in the first place?
The answer is a resounding yes. Filing your tax returns offers numerous benefits.
First, failure to file returns may attract numerous penalties. That’s especially true if the delay is willful and you’re unable to adduce sufficient grounds to justify it, such as physical disability.
Note that the federal government considers failing to file taxes as a clever form of tax evasion. That means you could have criminal charges preferred against you, depending on the duration you’ve gone without filing your tax returns and the figures in question.
But even if the federal government doesn’t charge you with potential financial crimes for failing to file your tax returns, the Internal Revenue Service (IRS) may still slap you with a number of penalties.
One such penalty is a failure-to-file penalty, which is 5% – 25% of the tax owed for each month you did not file your returns.
Should you fail to file your taxes for up to 60 days, the tax agency will impose a minimum penalty of $450 or the tax amount owed, whichever value is smaller.
The following are other benefits of being up to date on your tax returns;
- It increases your eligibility for financial aid
- It builds your Social Security benefits
- You avoid forfeiting any future tax refunds you’re eligible for
The tax landscape is replete with jargon. It’s important to understand these terms before you begin filing your tax returns. A simple mistake might cause you to file the wrong taxes and cause the IRS to categorize you under the wrong tax brackets.
Below are the most common tax terms to know before filing your returns.
- Tax Return – A tax and income-reporting document you file with the IRS annually.
- Taxable Income – The portion of your income (less deductions) subject to tax.
- Nontaxable Income – Income that’s tax-exempt, such as cash rebates, alimony, and child support.
- Tax Deductions – The amount the IRS writes off from your taxable income.
- Self-employment Income – Income generated by independent contractors, sole proprietors, or freelancers.
- Tax Bracket – A category assigned to you by the IRS, depending on your income and filing status.
- Filing Status – The entity you assume while filing your tax returns, such as single or married.
- Tax Credit – A dollar-for-dollar reduction of your outstanding taxes.
- Above-the-Line Deduction – The tax relief amount you’re eligible for, such as student loan interest.
- Adjusted Gross Income (AGI) – Taxable income less all deductions.
- Capital Gains – Profits earned from selling capital assets, such as real estate properties, stocks, and bonds.
- Capital Losses – The opposite of capital gains.
- Capital Gains Tax – Taxes levied on capital gains.
- Withholding Tax – Tax deductions made to the government by the payer and not the payee of the earnings, such as savings account interest.
Procedure for Filing Tax Returns
1. Determine if you should file tax returns.
Not everyone is obligated to file tax returns. You should file your returns only if your annual income exceeds the $12,950 threshold.
2. Understand your filing status.
The IRS maintains five different tax filing statuses. These include single filing, married filing separately, married filing jointly, head of household, and qualifying widow (er) with dependent child (ren).
Be sure to understand your status before starting the filing process. That’s because it determines your eligibility for certain benefits, such as tax credits.
3. Know the deadline
According to the IRS, the deadline for filing tax returns is on the fifteenth day of the fourth month after the end of your fiscal year. The tax agency offers an extension if the 15th day falls on a weekend or legal holiday.
4. Choose between paper and electronic tax return
You can file your taxes manually or electronically. Each option has its pros and drawbacks.
E-filing provides the convenience of filing your returns from whichever location. It also gives you access to the IRS tax preparation software.
However, filing your income tax electronically has limitations when it comes to prior year and amended returns. That’s where filing by mail makes a difference.
To file your tax returns by mail, follow the instructions in the Form 1040, U.S. Individual Income Tax Return form. When done, enclose the form in an envelope and mail it to the right address, depending on your state.
There’s our definitive guide to filing tax returns. Remember that filing returns isn’t just a civic duty. It’s also an efficient finance management tool.