In many ways, tax season is similar to basketball season. Nerves are jittery and tension is high, especially among the rookies. First-time tax filers may find the term “March Madness” fitting, and it’s understandable. There are numerous forms, complex instructions and the looming possibility of owing money to the Internal Revenue Service (IRS). However, with a good coach and plenty of time to prepare, it’s easy to march into tax season without going crazy.
Rules of the Game
The U.S. Federal Government levies a tax on income. As an individual’s income increases so does the respective tax rate. According to the U.S. Department of the Treasury, the purpose of the structure is to ensure that people are taxed according to their ability to pay. It’s a progressive structure, similar to how a good player gets more court time. Other personal situations such as filing status, income, exemptions and deductions also affect how much you’re expected to pay.
Filing Status: Basketball teams have five starters and the IRS has five filing statuses: single, married filing jointly, married filing separately, head of household and qualifying widower with dependent child.
Income: For each filing status, there is a corresponding tax bracket that incorporates income range and tax rate. Your tax rate could be anywhere between 10 to 15 percent of your annual income.
Exemptions: Exemptions allow you to reduce taxable income by a certain amount. Allowed exemptions include yourself, your spouse and dependents. A dependent is a relative who relies on you for their financial support (usually a child). Note: If you are a dependent, you are not allowed to claim an exemption for yourself on your return.
Deductions: Deductions are a reduction of taxable income. Most taxpayers are entitled to the standard deduction; those who don’t qualify can itemize their deductions. If you decide to itemize (if itemized deductions exceed the standard deduction), the IRS allows certain expenses to be deducted. Medical expenses, state income or sales tax and certain types of loan interest are some itemized deductions.
The U.S. tax system is based on a pay-as-you-go methodology. Estimated taxes are withheld from pay and sent to Uncle Sam throughout the year. By April 15 of each year, the previous year’s returns are prepared and filed. If too much estimated tax was paid over the course of the previous year, you’ll get a refund, and vice versa. This is done when you fill out a W-4 form, which determines the amount of federal income tax to be withheld from each paycheck.
Choosing a 1040 form: When filing personal taxes, you’ll choose from three versions of the 1040 form. Here are a few differences:
- 1040EZ: Select if you are a single or joint filer with no dependents.
- 1040A: Select if you claim tax credits and deductions for things like student loan interest and tuition.
- 1040: Select if you made more than $100,000, had self-employment income, or dependents.
Gather your paperwork — 1040 form instructions, receipts for deductions, etc. — and any additional forms before filling out the 1040. This will help the process move quickly and ensure that nothing is missed. The 1040 form can be filled out online at irs.gov (which is easier) or by hand:
Filing Status (lines 1-5): Select your status.
Exemptions (line 6): Select yourself if no one else can claim you as a dependent. You can also select a spouse and any eligible dependents.
Income (lines 7-22): Enter all income (refer to and attach the W-2 form). Be sure to include tips and income from investments.
Adjusted gross income (lines 23-37): Enter the adjustments to gross income, which include deductions from your IRA, student loan interest and tuition and fees. Calculate the adjusted gross income (AGI) by subtracting the aforementioned deductions from the total income on line 22.
Tax and credits (lines 38-60):
- Choose the standard deduction or itemize deductions. For itemized deductions, add together eligible deductions with a separate form, Schedule A. Be able to prove all deductions with receipts and records. In the end, it’s worth the effort because taxable income is reduced.
- Calculate your tax liability. Find your filing status and taxable income on the tax table located in the instructions.
- Subtract available credits.
Payments (lines 61-71): Enter tax previously withheld from the W-2 or 1099 forms.
Refund (lines 72-74) or Amount You Owe (lines 75-76): Did you pay more than your tax liability? Then the IRS will refund the difference. If you paid less, then you owe the difference to the IRS.
Federal taxes can also be e-filed. E-filing allows you to easily alley-oop tax information to the IRS via a legitimate third-party tax company. The process can be free if you make less than $56,000 annually. E-file reduces tax stress by computing the math automatically, processing everything electronically and making sure the right deductions and credits are used. It’s like having a personal coach.
Or do it old school. Send the form via certified mail with a return receipt to the regional processing center. Once you understand the concepts, filling out the form is the easy part. Now, picking out who will win the NCAA championship, that’s a whole other ball game. If you need assistance when filing your return, resources are available online at irs.gov/help.