How to file income tax returns: Here’s a step-by-step guide

Highlights

• Remember the income tax filing dates and prepare the documents accordingly.
  
  
• You can pay tax either on your own or hire a professional.
  
  
• Learn about standard and itemized tax deductions to minimize tax payments.

People get overwhelmed over how to file tax returns as soon as the tax-filing season approaches. However, there is no need for panic. You simply need to follow some basic rules and avoid mistakes. The US has a multi-layered income tax system. The Federal, state, and local governments levy taxes on income. Taxes rules are different for federal and state governments. Furthermore, non-resident citizens pay taxes based on their US income.

The federal government has adopted a progressive tax system, in which the higher the income, the higher the tax liability. The Internal Revenue Service (IRS) is the federal agency that collects taxes. On the other hand, state governments levy either progressive or flat tax. However, a few states like Alaska, Florida, Texas, and Washington don’t charge tax. Individuals, corporates, social groups, etc., must pay taxes in the US. Here we discuss some basic steps that an individual can follow to make tax payments hassle-free.

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Ways to file taxes

There are various ways to file tax returns. You can save a significant amount of money by following some basic steps. One can also hire a professional. Nowadays, people also rely on software to calculate their tax liabilities.

Reading materials on how to file taxes can be helpful. However, if you are filing federal tax, you need to download the required forms from the IRS website. After that, you can courier the cheque along with the filled forms to the concerned office.

Federal and state websites will have links for filing taxes. The websites also offer guidelines on how to file taxes online. You can also fill the forms online and pay online through a credit card or other electronic means like mobile apps. The federal or the state governments do not charge any fee if you are filing yourself. Filing taxes on your own will help you to understand your earnings, transactions, and expenditures. Taxpayers who don’t have multiple income sources or only have salary income should pay their taxes themselves as it is easier.

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A professional can be helpful if you lack time or confidence. In addition, professionals can help find ways to minimize your tax liability. You can also use online software where you will have to fill in information like earnings, social security number, etc. Then, the software will calculate the taxes. They also offer online professional help. The list of such software can be found easily online.

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Filing taxes

You need to know when the tax season starts. The tax season is generally the initial months of a year. For instance, you can file taxes for 2020 from January 2021 to April 2021. However, the dates may vary, and you will need to keep a tab. The government had extended dates to file taxes in 2019 and 2020.

You will need to do some basic preparations for documentation before filing taxes. For example, you will need an identity and age proof document and your social security number and dependents. Also, make sure to take ‘Form W-2’ from your employer, showing your income and taxes paid by the employer for you.

Get ready with ‘Form 1099 NEC’ (Non-employee compensation) if you earn more than US$600 per year or if you are a freelancer or a gig worker. ‘Form 1099 MISC’ is for those who make over US$600 through ways like crop insurance or rent, or other incomes. Banks will provide ‘Form 1099 INT’ if you have received more than US$10 as interest. And you need to have a record of the contribution you made to the retirement fund.

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Special schemes

Taxpayers can claim tax deductions in two ways: standard deduction and itemized deduction. Standard deductions for 2021 are US$12,550 for a single taxpayer and those married filing separately, US$18,800 for the head of the house, and US$25,100 for married couples filing jointly.

Federal and various states have different rules for deductions. For example, the federal government imposes taxes on pension and social security schemes. But many states exempt them from taxation.

Itemized deduction is expenses that can be cut from adjusted gross income to decrease taxable income. Thus, you pay lesser taxes. These itemized deductions are charitable gifts, non-reimbursed medical bills, educational expenses, tax returns of the earlier year, and state and local taxes paid by you.

How does tax deduction work? For example, if you have an income of US$75,000 a year and itemized tax deduction is US$15,000, then income tax will be calculated on US$60,000. However, a tax credit is different from tax deductions. For example, if you have a tax credit of US$1000, and your income tax amount is US$5,000, you have to pay a tax of US$4,000.

Finally, filing taxes is not a difficult task. Read carefully to understand how to file taxes, fill up the forms and pay your taxes.