The Internal Revenue Services (IRS) collects the federal tax, and the Department of Taxation/Revenue manages the state tax. In some cases, you have to pay local government taxes as well.
In addition to these, you have to consider deductions, credits, and other variables to calculate your net taxable income and the income tax. Moreover, you must file your federal income tax returns as per the applicable deadlines to avoid penalties and, in some cases, even imprisonment.
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However, preparing to pay your annual taxes can be quite unnerving. But knowing some of the hacks can make it easier and quicker. So, before we delve to learn how to file your federal taxes, let’s get a knack of some important things that you must keep in mind.
Points to Keep in Mind When Paying Taxes
1. Federal Taxes vs. State Taxes
You may have to pay just the federal tax or both the federal as well as the state taxes. Let us look at the federal and state tax rules:
- Federal Tax
After the enactment of the Tax Cuts and Jobs Act (TCJA), tax regulations underwent significant changes. However, the US still follows the progressive tax system, which has seven tax brackets and marginal tax rates – 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
The threshold income depends on whether you are single, married, the head of the household, or if you have any other status defined as per the law.
- State Tax
States have two systems of collecting taxes– the flat income tax system and the progressive income tax system. Eight of the fifty states in the United States of America follow the former method, and thirty-three states follow the latter.
Some states have no taxation at all. This includes – Nevada, Texas, Alaska, Florida, South Dakota, Washington, and Wyoming. New Hampshire and Tennessee impose a tax on income from interest and dividends.
2. Deductions and Credits
You can either itemize your deductions or opt for the standard deduction. Since the standard deduction limits have doubled, it would be advisable to opt for it, instead of itemizing your deductions. Standard deductions figures are as follows:
- For Individuals: $12,000
- For Head of the Household: $18,000
- For Married Couples: $24,000
The personal and dependent exemptions have been eliminated. If we talk about credits, some of the most prominent ones are:
- Child Tax Credit: $2,000 (or $1,400 if you don’t owe any tax)
- Dependents: $500
- Qualified Business Income Deduction: Up to 20% of the business income, plus 20% of the income from Real Estate Investment Trust (REIT) and Publicly Traded Partnership (PTP)
Now that you have known some important information, it would be helpful in filing your Federal and State taxes.
How to File Federal and State Taxes?
You don’t need to file the federal income tax return if your income is below the threshold limit. However, you need to file different tax returns for the federal and state tax, respectively.
To file taxes, you may choose to use either free or paid tax preparation software programs. Alternatively, you may elect to fill out paper forms and mail those forms to the IRS, or you have the option to hire a tax preparer.
Prepare the following documents before filing federal tax:
- W-2 Form: Get it from the employer before January 31. It serves as proof of your income and the taxes withheld from your income.
- 1099 Form: Business and government agencies use it to report various types of income, like freelance income, income from gambling, interest, dividends, real estate, retirement income, pensions, etc.
- Proof of health insurance cover
- Receipts of donations, medical, and business expenses
Once the documents are ready, follow these steps to file federal tax:
- 1040, 1040A, and 1040EZ Form: For filing Federal tax, a US citizen, resident alien, or US citizen living abroad must fill the 1040 form.
- Choose the filing status based on whether you are married or unmarried. Also, check the percentage you contribute to the household expenses.
- If you have low income or fall under a similar category, you are eligible for free tax return preparation.
- Now calculate your total earnings and total credits. You can either opt for standard deduction or itemize your deductions. Fill out the form or hire a tax preparer to complete the process.
- Once filed, you can check the status of the federal tax return. Usually, you will receive your refund within 21 days.
Federal & State Taxes For Sole Proprietors, Small Businesses, and Corporations
If you operate as a sole proprietor, you can report income and expenses on a Schedule C attachment along with the income tax return. If you work as a corporation or in a partnership, you have to fill Form 1120. While processing the Schedule C Form is a straightforward affair, Form 1120 may appear a little complicated to the untrained eye.
While filling the Schedule C Form, you have to report your income and expenses in the marked fields. After deducting expenses from the income, add the net profit or loss amount in the personal income tax return. Reporting your business earnings is simple in case of the Schedule C scenario.
However, when you process Form 1120, you have to fill in more details to calculate your business income, expenses, and returns. One distinct downside of Form 1120 is that your business income is separate from your personal income. This process leads to more complications and more taxes.
File your Taxes Before the Deadline
Ensure that you file your taxes correctly and before the deadline. If you have valid reasons, it may be possible to apply for an extension. However, it is advisable to wrap it up beforehand.
The process of filing federal tax returns can be quite complex. Therefore, you may want to seek professional help or use tax preparation software to file federal taxes.
Though filing your Federal Taxes may seem daunting, keeping the above points in mind will help you get through. Remember to file them on time!
Editor’s note: This article was originally published in March 2019 and has been updated for comprehensiveness.