10 Common Questions About Taxes People Ask

0
72

The tax code is quite complicated, even experts agree so. Changing tax laws do not make the situation any better. The amount of information one is required to grasp to keep the IRS from knocking is colossal. 

That gives rise to hordes of tax-related questions that people keep asking. If you find yourself asking such, there is no need to feel inadequate. Even experts ask and that is why they keep getting better at it.

Here are some common questions and answers. 

  1. How Does One Know They Have To File Tax Returns?

This is where it all starts. As simple as it might seem to some, many people do not know how to determine if they are required to file. To further clarify, filing does not mean you will pay.

Factors to consider include whether you are someone’s dependent, age and filing status. It gets a bit complicated when gross income comes in as a consideration.

People below the age of 65 and earning $12400 or more are required to file tax returns. If they are dependents, they might have to file returns, whether their gross income meets the threshold. For instance, self-employment earnings of $400 or more need filing.

There are also provisions on those earning untaxed tips. Other considerations are donations from tax-exempt churches. For clarity in these and more, consult the IRS Publication 501.

  1. Which Incomes Are Taxable?

The IRS lists income as either money, services or property. All incomes are taxable unless explicitly exempted by law. Thus, all incomes should be indicated on tax returns.

Various taxable incomes get treated differently. For example, earned incomes get taxed at varying rates. Unearned incomes go untaxed, while some get taxed at low capital gains rates.

In some cases, even the exempted taxes should get listed as you file your returns. For a deeper understanding of that and more consult the IRS Publication 525.

  1. What is My Tax Bracket and Tax Rates?

The tax system in the U.S is progressive in nature. That means that not all of your income gets taxed at the same rate. To determine what is taxed at what rate, there are tax brackets.

The Tax Law currently in effect has seven tax brackets. To know where you fall and determine your rates, you need to know what you earn. Then, use the IRS Tax Rate Schedules for your current taxable year.

  1. Which Tax Filing Status Best Suits Me?

When filing taxes, your status dictates how you get treated. You need to inform the IRS on the status of choice beforehand. There are five statuses:

  • Single
  • Married filing jointly
  • Married filing separately
  • Head of household
  • Qualifying widow(er) with dependent child

The IRS pegs tax rate, standard deductions, deductions and credits eligibility on these statuses. While the status choice might seem straightforward, the IRS offers a tool to help determine where you fall.

  1. Which Tax Form Suits Me?

Prior to the taxable year 2018, there were three forms, 1040, 1040A, and 1040EZ. Now there is only one form for all, 1040, making filing returns quite easy. 

The new 1040 form is precise, taking much less of your time. Only taxpayers with complexities require additional forms. The additions are called schedules and seldom will you require them.

  1. What is The Difference Between a Tax Credit and Deduction?

Both tax credits and deduction help reduce your tax bill. Many confuse the two, while some think they are the same. 

Credits present a dollar for dollar reduction on the amount of tax owed. Meanwhile, deductions reduce the amount of taxable income. Both reduce tax paid but in different ways.

Take a situation where your taxable income is $20000 at a 20% rate. Should you take a $1000 deduction, that saves you $200 in taxes.

A credit, reduces the exact amount. If you owed $4000 in taxes, a credit of $1000 would mean you now owe $3000.

  1. Which Tax Credits and Deductions are Applicable?

Deductions one is eligible for depend on the situation. Here are some deductions you can make:

  • 50% of self-employment taxes
  • Out-of-pocket health savings 
  • Student loan interests of up to $2500
  • Individual retirement contributions (401(k)s, IRAs, Simple IRAs, and SERP-IRAs)
  • Tuition fees totaling to $4000, so long as you are within given income limits

The following deductions only apply if itemized:

  • Charitable contribution deductions that do not go beyond set income percentages
  • Medical expense deductions costing at least 7.5% of your income
  • $1 million in home mortgage interests for loans taken before Dec. 15, 2017, and $750000 for those taken after that
  • $10000 maximum deductions for state and local tax aggregate payouts (SALT taxes)

Some credits claimable are:

  • Lifetime learning credit that maxes out at $2000 annually for postsecondary study costs
  • American opportunity credit maxing out at $2500 applicable to eligible students for the first four years of postsecondary studies
  • Child and dependent care credit maxing out at $3000 per person and capped at 20-35% of allowable care expenses
  • Child tax credit provision of 2018-2024 allowing up to $2000 per child with $1400 of it refundable

The above are just some tax credits and deductions. You should stay on the lookout as new provisions could mean changes or a repeal of some. Better still, it may come with fresh additions.

  1. Do I Have Dependents?

Dependents are people whose care is your responsibility. That makes you eligible for child tax credits explained above. Any child under 19 years you care for or below 24 years but attending school full time, qualifies. 

Further to this, the child should live with you more than half of the year. They should also provide less than half of their expenses. They are also prohibited from filing joint tax returns unless when claiming refunds.

Relatives can be dependents under some conditions. First, they should not be claimed as dependent by other people. Then, they should have lived with you the whole year and earn too little to warrant support.

  1. How Should I File a Tax Return?

Filing taxes is possible through multiple means:

  • DIY: You can file taxes on your own by using free tax preparation softwares
  • IRS e-file: This system is free for those with incomes below $72000
  • Online Tax Filing: There are many online tax filing services
  • Mail: You can mail in your returns to various state-dependent addresses as listed by the IRS
  • Through paid professionals: If you find the process hard or have complexities, professionals are out there to help you

Whichever way you choose to go, remember electronically filed taxes are convenient. The IRS handles them first increasing your chances of getting your refunds sooner, where applicable. 

  1. What Happens If I Cannot Afford Taxes Owed?

If you cannot afford to pay tax owed, you need to file returns first. Then, you can make arrangements to pay instalments owed at a later date. Failure to file returns and make payments on time attracts interests and penalties.

Should you have some of the amount owed, the IRS provides for installment payments. Take note though, even under such an arrangement you still owe interests and sometimes penalties. Accruing costs depend on the period and means through which you make the installments application.

Conclusion

The common questions we just answered form the very basics of tax returns filing. It is important to note that most answers depend on various factors. Your income, tax rates, whether you have dependents among others.

Many of the answers are not rigid. Policies and taxation laws keep on changing. Therefore, it is important to keep abreast of such changes.