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Filing your taxes can seem daunting, but it’s important to know that there are resources available to ease the stress. Let’s break down the basics of tax filing, so you can feel confident in preparing your return and look forward to receiving your refund!
The Internal Revenue Service (IRS) defines taxes as required payments of money to governments that are used to provide public goods and services for the benefit of the community as a whole. These mandatory payments might go to our federal, state, and/or local governments, and they help fund public works like resources, programs, infrastructure, etc. for the constituents of that government. Federal taxes may go towards national defense, social security, or Medicare and Medicaid. State and local taxes typically fund things like education and public school systems, public transportation, and financial assistance.
Individual Income Taxes are taxes levied on wages, salaries, or other forms of income an individual earns. In the U.S., we use a progressive tax structure, meaning that the more income an individual earns, the more taxes they will pay. A person’s filing status and the income source may affect the tax rate they are required to pay.
Corporate Income Taxes are taxes that companies pay to federal and state governments based on their business profits. This type of tax is mostly reserved for C corporations because LLCs, S corporations, sole proprietorships, and partnerships can be reported on the owner’s individual income tax.
Payroll Taxes are withheld from employee paychecks to fund Medicare and Social Security. Employers also pay these taxes, matching the sums of each employee’s deduction. Payroll taxes were authorized by the Federal Insurance Contribution Act, so you may also hear them referred to as FICA taxes.
Capital Gains Taxes are taxes levied by the federal government on profits from selling an asset that has appreciated in value. Common examples include selling cars, houses or real estate, machinery, stocks and bonds, etc. The rate of taxation may depend on the amount of time you’ve owned the asset or your taxable income.
Property Taxes, also called ad valorem taxes, are based on the value of your assets, typically immovable assets like land and buildings, as described by an appraiser. These are charged by local governments and may require reassessment every few years. These taxes are often used to fund things like public schools, roads, and emergency services.
Estate Taxes are levied on the transfer of property following the owners’ death. Estate taxes were created in an effort to prevent tax-free wealth within the most affluent families. In 2023, the exclusion limit was $12.92 million, meaning you would only pay estate taxes if the estate’s value exceeds $12.92 million. Most U.S. taxpayers will not run into estate taxes in their lives.
Sales Taxes are levied at the point of sale as a customer completes a purchase and can depend on the type of goods or services being sold. Sales tax rates vary from state to state, with some (Alaska, Delaware, Montana, New Hampshire and Oregon) having none at all. In many states, local jurisdictions like cities and counties charge their own sales tax.
When you start a new job, you complete an IRS W-4 form, which lets the company know how much tax to withhold on each paycheck. This takes into account your filing status, number of dependents or other exemptions, and state and local taxes. Then, throughout the earning year, your employer withholds the designated amount of income tax from each paycheck. In January of the following year, you will receive a W-2 form from your employer to complete your tax return, also known as Form 1040. You may also receive documents from your previous employers during that year, financial institutions, etc. that will be important when filling out your return.
In the U.S., we use marginal tax brackets and a progressive framework to determine the federal income tax rate. With this structure, a defined tax rate is applied to the amount of taxable earned income in that bracket (shown in the table below). There are different tax brackets for each potential filing status.
For example, an individual making $65,000 annually will pay a 10% tax on $11,000; 12% on $33,725 ($44,725-$11,000); and 22% on $20,275 ($65,000-$44,725).
Sometimes, getting started is the hardest part, especially when it comes to filing your taxes. Initially, it seems like a huge load to take on, but breaking it down into bite-sized steps can make it more manageable. Below, we dive into each step towards filing and paying your taxes, so you can get started early and receive your refund as soon as possible!
To start, make sure you have the social security numbers and key information of yourself and your spouse or dependents if necessary. Tax documents may range depending on your situation. You might have a W-2, 1099, or 1099-INT. You’ll want to collect relevant receipts to support your tax documentation. If you’re a 1099, or independent contractor, you’ll want to keep your receipts for deductible expenses like gas, meals, etc. You may also have a receipt if you’ve made any charitable donations throughout the year. And, you should have copies of documentation showing your previous tax returns, contributions to your retirement accounts, property taxes, state and local taxes, and educational expenses.
There are three main ways to file your taxes. First, you might choose to print out your Form 1040 from the IRS website, complete it by hand, and mail it back to the IRS. This option generally isn’t recommended because your tax return holds a lot of personal information about you and the postal system isn’t always the most secure. Digital filing can also help prevent common mistakes on your tax return with safeguards that won’t let you complete the return without double checking.
The second option is e-file or submitting your tax return online. While this may sound intimidating, there are lots of easy ways to digitally file your own tax returns, and many e-file software providers offer a free version for simpler tax returns (like your W-2s) that walk you through the process. We’ll talk more about some of these in Step 4.
Finally, you may elect to file your return through a professional tax preparer. This is usually the best option if you have more complex returns to file, so you can ensure there aren’t any mistakes on your return. For example, if you own a business, have a side hustle, or if you just have additional questions, it’s a good idea to seek guidance from a tax professional.
Tax credits are dollar-by-dollar amounts taxpayers can claim to reduce their income tax bills or increase their refunds. Tax credits can be refundable, non-refundable, or partially refundable. If a tax credit is refundable, this means if the taxes you owe are less than the credit amount you’ll get the remainder of the credit back on your tax refund. Non-refundable tax credits are not eligible for refund, so while they can help lessen your tax bill, you won’t be getting money back for them. Partially refundable credits have a portion that will be eligible for refund and a portion that is not.
Commonly used tax credits to look into and see if you might qualify for include:
The Earned Income Tax Credit is offered to qualifying individuals with low-to-moderate earnings.
The Child Tax Credit helps families save on their taxes.
The Child and Dependent Care Tax Credit provides a tax break for those who had to pay for child care in order to maintain a job during the year.
The Adoption Tax Credit assists families in the adoption process with offsetting costs of the adoption on their taxes.
Education Tax Credits help students in higher education reduce their tax bills.
The Saver's Credit helps offset the cost of taxes using your retirement plan contributions.
The IRS is also offering credits to incentivize environmentally friendly switches like the Clean Vehicle Tax Credit for folks with hybrid or electric vehicles and the Home Energy Tax Credits for those opting for cleaner energy sources in their homes.
Earlier, we talked about the different ways you can file your tax return.
If you choose to file by mail, your first step will be printing out the required Form 1040 and filling it out accurately and completely. Next, you’ll need to mail the completed return to the IRS. You can find where to send your completed return by visiting the IRS website.
If you choose to file with a tax preparer, you’ll need to set up an appointment with your chosen preparer and be sure to bring the documentation and information we discussed in Step 1. The tax professional will work through the return with you and will file it on your behalf.
If you choose to e-file your own taxes, you can find an overwhelming amount of e-file software providers online, so to save you the trouble, we’ve compiled the below list that will help you file your tax returns on your own for free! Remember, some of these providers may only offer a free version for simpler tax returns.
The IRS also offers the Volunteer Income Tax Assistance (VITA) program where qualifying tax filers can get basic tax return preparation from certified volunteers at no cost. This service is offered to individuals who generally make $64,000 or less, individuals with disabilities, and individuals that speak limited English.
When you’re finishing up your tax return, you’ll be able to choose how you want to receive your refund. The most popular way to receive your refund is direct deposit, so the funds are added to your account as soon as they’re available. You can also opt to have your refund sent as a check in the mail, but again, this is less secure.
If you do owe taxes, you’ll be able to make a digital payment to the IRS using your bank account or debit/credit cards, or pay by mail with a money order or check. You may also apply for a payment plan, if you aren’t prepared to pay everything upfront.
Taxes are almost always due on April 15th the following year, unless that date falls on a weekend or holiday. Taxes for the 2023 earning year are due on Monday, April 15, 2024. Massachusetts and Maine both have state holidays that fall on the 15th, so residents of these states have until Wednesday, April 17th.
If you need additional time to file your return, you may request an extension from the IRS of up to six months. Keep in mind that this extension will only apply to filing your return, and you’ll still be required to pay the taxes due on time.
The IRS may charge you a penalty if you don’t submit your returns on time or make your payment on time. You may also be subject to a penalty if you don’t accurately complete your return. No need to worry! The IRS understands that mistakes happen, and if they do, often you’ll receive a proposed amendment to your return from the IRS directly before you get left with a penalty fee. The IRS charges interest on penalties, so it’s best to get your taxes filed and paid on time to avoid the further burden down the road.
Generally, you can expect to receive your refund in 21 days (or three weeks) if you file online. Keep in mind that this is an estimate, and you may receive your refund sooner or later than the 21 days. Using direct deposit rather than requesting a paper check can help you get your funds quicker because you won’t have to wait for them to come in the mail. If you’ve opted to submit your return by mail, the process may take longer.
You can check the status of your refund with the IRS Where’s My Refund tool.
