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HOW TO DO YOUR TAXES

February 25, 2022 | Amy Boyington Modified on March 23, 2022




Editor's Note: This article contains general information and is not intended to
be a substitute for professional accounting advice. Please consult an accountant
before making any decisions about your finances.

--------------------------------------------------------------------------------


Tax filing can be a confusing process, but it's something most people need to do
each year. This informational guide on how to do taxes can help take the
guesswork out of filing annual tax returns, which are typically due April 15.

Individual tax obligations vary. While some people may receive a refund on
taxes, others owe money. Completing your taxes correctly from the beginning can
save you a lot of headaches down the road. Check with the Internal Revenue
Service (IRS) and your state and local governments to determine which forms you
need and verify filing deadlines.

Filing Status | Paperwork | Method | FAQs


CHOOSE YOUR FILING STATUS

Your tax filing status helps determine the amount of money you owe, as different
statuses fall within different tax brackets. More than one filing status may
apply to you, and one may reduce your tax obligations more than another. The IRS
categorizes individuals and married couples with the following five tax filing
statuses.


SINGLE

Unmarried taxpayers may qualify for single taxpayer status, including those who
are divorced or legally separated. Single filer status also applies to
individuals who do not meet requirements for head of household status. Married
filers typically receive larger deductions and enjoy lower tax liability.

To qualify for single status for the current tax filing period, you must have
been legally divorced or separated by the last day of the tax year. Persons with
an official annulled marriage may be able to change their tax status to single
on previous returns affected by the annulment.

--------------------------------------------------------------------------------



MARRIED FILING JOINTLY

The IRS considers couples who have married by the last day of the tax year as
married for the whole year for tax purposes. These couples can file as married
filing jointly, meaning that they file their taxes by accounting for both
incomes combined.

The IRS extends several tax breaks to married couples who opt for this filing
status. Married filing jointly taxpayers benefit from a doubled standard
deduction, lower tax rates, and credits not available to married couples filing
separately. However, the IRS may also use a refund from a joint return to pay a
spouse's specific individual debts, such as student loans or child support.

--------------------------------------------------------------------------------



MARRIED FILING SEPARATELY

Couples who qualify for married filing jointly status may choose the married
filing separately status instead. With this status, the couple files separate
tax returns based on each spouse's income. Some couples choose married filing
separately to avoid a refund offset to pay debts one spouse owes. This may
result in a larger tax break for these taxpayers' situation, or they may prefer
to keep their finances separate.

Couples do not qualify for as many tax credits, like the American Opportunity
Credit or the Child and Dependent Care Tax Credit, with this status. Because
they use the same tax brackets as single filers, each spouse's final tax
liability may also be higher than it would be if they filed jointly.

--------------------------------------------------------------------------------



HEAD OF HOUSEHOLD

Individual tax filers may meet the requirements for filing as head of household
if they are a single, unmarried filer with at least one qualifying dependent.
The dependent can be a qualifying child or a relative, like an elderly parent or
a sibling with a disability. The dependent must also have lived with the
taxpayer for more than half the tax year.

Head of household status grants eligible taxpayers tax breaks that they would
not qualify for as a single tax filer. The maximum income amounts for head of
household tax brackets are higher than they are for single filers, allowing head
of household filers to earn more without moving into a higher tax bracket.

--------------------------------------------------------------------------------



QUALIFIED WIDOW(ER)

The IRS reserves the qualifying widow(er) status for individuals whose spouse
passed away the year prior to the current tax year. The taxpayer must also have
a qualifying dependent child or stepchild. The qualifying widow(er) status
allows a taxpayer to use the same tax brackets as married taxpayers filing
jointly.

The taxpayer may use this status for two tax years after their spouse's death if
they remain unmarried for the tax filing year. For example, a spouse's 2020
passing may qualify the still unmarried widow(er) to use the tax filing status
for 2021 and 2022. If a spouse passes during the current tax year, the surviving
spouse may continue using the married filing jointly status if they previously
qualified.


GATHER TAX RETURN PAPERWORK

Accurately filing taxes typically requires a lot of documentation. You can
reduce your burden come tax season by recording your financial activity
throughout the year. File away your pay stubs and any receipts you intend to use
for deductions. Keep detailed records of any business income and expenses or
miscellaneous income you earn.

Expect to receive tax forms for the previous year from your employer, clients,
lenders, and financial institutions starting in January of the current year.
Although most payers mail forms by Feb. 1, you may still receive these forms in
March or April. Check with your payers if you have not received a form you're
expecting by March.


INCOME

Your taxable income includes your wages and other income sources, including
investments, capital gains, rental property, prize money, and interest payments.
Business owners must also report their income along with relevant business
expenses. Below are some of the most common income reporting forms you may need
to file your taxes.

Use Form 1040 to complete your individual tax return. It reports earned income
and other income types, in addition to tax credits and deductions, to find the
total amount of tax owed.

The W-2 Wage and Tax Statement form includes all income made as an employee from
an employer. The form also records taxes withheld, including federal, state,
medical, and Social Security taxes.

These forms are for non-employee compensation and miscellaneous compensation,
respectively. Independent contractors, freelancers, attorneys, and landlords are
a few persons who may receive a 1099 form to report earnings of at least $600.

This form records interest income, investment expenses, tax-exempt interest,
withdrawal penalties, and other amounts associated with interest earnings.
Taxpayers may receive a 1099-INT if they made at least $10 in interest for the
tax year.

Taxpayers receive this form as a record of dividends and distributions. Banks
and financial institutions send the 1099-DIV when total dividends are at least
$10 for the tax year.


DEDUCTIONS

A deduction lowers taxable income. To determine how much tax you owe, use the
figure you get after subtracting deductions. There are two main options for tax
deductions: the standard deduction and itemized deductions.

The standard deduction varies with filing status. In 2021, for example, the
standard deduction ranged from $12,550 for single taxpayers to $25,100 for
married taxpayers filing jointly. If you filed as single and your income in 2021
was $35,000, your taxable income would have been $22,450 after the standard
deduction.

Itemized deductions work best for people whose deductions total more than the
standard deduction. If you itemize, you should save receipts and documentation
for all transactions you plan to deduct, including charitable donations,
mortgage interest, and out-of-pocket medical expenses.


CREDITS

While deductions lower your taxable income, credits directly reduce your tax
bill. In doing so, a tax credit can lower your tax liability even more than a
deduction. A nonrefundable credit lets you reduce your tax bill by the amount
you owe, while a refundable credit may give you a refund if the credit is more
than the tax you owe.

POPULAR TAX CREDITS

 * Child and Dependent Care Tax Credit: This credit serves taxpayers who paid
   for the care of a qualifying dependent for the purposes of working or looking
   for work. This credit does not apply to those with the status of married
   filing separately. The credit amount depends on the amount of work-related
   expenses paid to the care provider in question. As of 2021, the credit was
   capped at $3,000 for one qualifying dependent or $6,000 for two.
 * Earned Income Tax Credit: The EITC reduces a portion of the owed tax for low-
   to moderate-income taxpayers. The maximum amount of the credit for filers
   with three or more qualifying children was $6,728 for the 2021 tax year.
   Taxpayers must file as any status except for married filing separately, have
   a valid Social Security number, and meet income guidelines to qualify.
 * Premium Tax Credit: The PTC helps qualifying taxpayers offset the cost of
   health insurance through the Health Insurance Marketplace by lowering their
   monthly premiums. Taxpayers must submit Form 8962 when they file their taxes
   to reconcile the credit. Taxpayers may owe money or receive a refund,
   depending on how much of the credit they used and their income.
 * American Opportunity Tax Credit: The AOTC is a maximum $2,500 credit that
   reduces the tax bill of taxpayers with education expenses. To qualify,
   taxpayers must be pursuing a degree at least half time for at least one
   academic period during the tax year. Taxpayers must also have a 1098-T that
   outlines their tuition costs for the year.


PICK YOUR TAX FILING METHOD

There are three primary ways to file your taxes: by mailing or electronically
filing forms to the IRS, by filing with tax preparation software, or by seeking
the help of a tax professional. The method you choose depends on your tax
situation and how comfortable you are with filing your taxes.


IRS

Taxpayers can file their taxes with the IRS using a paper form 1040. The IRS
also allows taxpayers to file their taxes electronically through partnered
websites. If your adjusted gross income (AGI) is less than $72,000 for the tax
filing year, you can e-file with the free program, known as IRS Free File. With
an AGI above $72,000, you can still use fillable forms provided by the IRS to
fill out and file your taxes for free.

The IRS Free File program for taxpayers with AGI lower than $72,000 guides you
through filing with similar step-by-step navigation as tax software. The
fillable forms may require you to have more knowledge of filing taxes and
understanding the forms you need.


SOFTWARE

A taxpayer doesn't need to navigate tax preparation solo. Approximately 46% of
Americans use tax preparation software to complete and file their taxes. Tax
preparation software guides taxpayers through a series of questions to get them
the correct deductions and credits based on their tax situations. The following
software programs are among the most popular options.

 * TurboTax: TurboTax allows automatic importation of some tax forms and tax
   information from other tax preparation services, saving you some time when
   preparing taxes. The software also has plans for multiple tax situations,
   from the simplest returns to more complicated returns like those for the
   self-employed or investors.
 * H&R Block: H&R Block's tax software navigates return filing with simple
   questions to ensure accuracy. Feel confident in your tax preparation with H&R
   Block's accuracy guarantee. The company promises to reimburse taxpayers for
   up to $10,000 in penalties or interest they owe if these amounts result from
   software mistakes.
 * TaxAct: Known for its affordable pricing, TaxAct offers filing capabilities
   for individuals, small businesses, and various other taxpayers. The
   software's mobile apps for Android and iOS devices allow you to file your
   taxes from anywhere. Account holders also have multiple security settings
   available to lock down their accounts and keep their personal information
   safe.


TAX PROFESSIONAL

Understanding how to do a tax return is a valuable skill. Still, hiring a tax
professional to help can ensure that you complete your return correctly. If you
don't have a year-round accountant, you can hire a tax preparer for tax season.

According to the IRS, more than half of taxpayers pay a tax preparer for
assistance. If your tax situation has changed due to a milestone like a job
switch or a new marriage, your tax preparer can guide you through any potential
tax implications for the current tax year. Consider the following types of tax
professionals if you are seeking help.

CONSIDER HIRING A TAX PROFESSIONAL:



COMMON QUESTIONS ABOUT TAXES


HOW MUCH DO YOU HAVE TO MAKE TO FILE TAXES?

Your filing status and age determines the minimum income for tax filing. The
most current IRS information requires single filers under 65 to file a return if
they earn at least $12,400, while married couples under 65 must file if they
earn $24,800.


HOW MUCH DO PLACES CHARGE TO DO TAXES?

Expect to pay, on average, $100-$300 to have a professional tax service prepare
your taxes. Prices vary depending on your tax situation and whether you want to
add state tax filing.


HOW LONG DO YOU HAVE TO FILE TAXES?

The annual deadline to file taxes for the previous year is April 15th. If you
need extra time you can file an extension, pushing the deadline to October 15.


HOW LONG DOES IT TAKE FOR A TAX REFUND TO COME BACK?

The IRS can typically issue a refund for a complete and accurate tax return
within 21 days, although some may take more than six weeks. You can check your
refund status using the Where's My Refund? tool.


REVIEWED BY:

Lizzette Matos is a certified public accountant in New York state. She earned a
bachelor of science in finance and accounting from New York University.

Lizzette began her career at Ernst & Young, where she audited a diverse set of
companies, primarily in consumer products and media and entertainment. She has
worked in the private industry as an accountant for law firms and ITOCHU
Corporation, an international conglomerate that manages over 20 subsidiaries and
affiliates. Lizzette stays up to date on changes in the accounting industry
through educational courses.

She is a paid member of Red Ventures Education's freelance review network.


Featured Image: mapodile / E+ / Getty Images


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