With Q3 coming to a close and FALL upon us, we are getting closer and closer to end-of-year business activities.
And THAT much closer to Tax Season!
This blog will be the first of a two-part series on Tax Filing basics. Last week we went over business taxes which you can check out here: https://www.strategictaxaccountant.com/post/how-to-file-business-taxes-the-basics
If you’re an individual or a new business owner interested in understanding your annual Income Tax Return, this blog is for you!
Benjamin Franklin said, “In this life, nothing is certain – except death, and taxes.” I know that hits different for our financial professionals and small business owners in the audience!
When and why we file taxes
Let’s touch on the foundation of when and why we file taxes. Income tax is mandated by the Federal (and some States) regulations, to fund social resources and programs.
Most people who earn income (the majority of income types) will owe Income Tax to the government.
If you’re an employee of a business or company and receive a paycheck, your employer (most commonly) would be withholding tax from your wage and sending (“remitting”) it to the IRS on your behalf.
The employer is also responsible to “match” your portion of payroll taxes, remitting both to State and Federal.
After the close of the year, when “tax season” begins, you file your taxes directly with the IRS using Tax Forms you’ve received (from employers, school tuition, banks, health insurance, etc.)
If too much money has been withheld and paid to the government for you, you’ll receive a refund from the IRS. If not enough money has been withheld from you, you will owe the remainder to the IRS (based on how much more income you made).
The amount you owe in Income Taxes is on a “Bracket” tier system, in which there are seven total tiers – they are updated as presidential administrations change.
For this upcoming tax season
For 2022, an individual who made $10,275 - $41,775 will owe 12% of their YTD Income to the IRS. A married couple filing separately (MFS) would fall under the same conditions, separately.
A married couple filing jointly (MFJ), making a combined $20,550 - $83,550 will also owe 12%.
Head of Household (HOH) filers would have to make over $14,650.
Tax Day is April 15th every year!
So Tax Season is generally regarded as January through April. However, during the pandemic, the IRS one-time extended the filing due date into May for 2021.
The year must fully end before you can receive Tax Forms (W-2, 1099s) from your employer, school, insurance provider, stocks, credit union, lender, etc. This is why you received your W-2 and other forms in January/February, and why the season starts for many at this time.
The foundation for all Individual taxes is this: your Form 1040, and your Form W-2.
IRS Form 1040
Is the U.S. Individual Income Tax Return -- the main form for filing your taxes. Every person files this form (unless they’re not a person, but a Corporation -- more on that next episode).
Form W-2
Is your Wage and Tax Statement, issued to you by your employer. This item details how much you earned in wages, and how much in taxes were withheld and paid to the IRS for you out of your checks.
This might ring a bell: When you start a new job, your employer has you fill out New Hire paperwork, which includes a Form W-4 -- the Employee’s Withholding Certificate. This is your communication to the employer about what Tax Status you are (Single, MFJ, MFS, HOH), and how much or how little you’d like withheld from your checks.
If you receive a Form 1099 from your employer or client, you’re an Independent Contractor.
Taxes are not withheld from your earnings; you are responsible for setting part aside, tracking all business-related expenses, and filing a Schedule C to report income when taxes come due.
Once you have all Tax Forms received from the companies you’re expecting them from, you can begin preparing your return. There are popular platforms like TurboTax and FreeTaxUSA which are very user-friendly for entry-level tax preparation.
For extensive Deductions and Credits, or special Entity Types, there are more sophisticated tax preparation platforms available. It’s highly recommended (and to your benefit) to consider working with Tax and Accounting Professionals when dealing with these levels of return filing.
From here, you just enter in your personal (“taxpayer”) details, prior tax information, wage and earning information (exactly as it appears on all forms). Once everything is entered, you’ll move on the Deductions phase.
This is where you can claim Charity contributions, Medical expenses (if they exceed a certain amount), and more for deductions to your Tax Liability – or, a reduction in the overall “amount” the IRS sees you made, after expenses, that are subject to tax).
However, most individuals do not have enough expenses and deductions to supersede the yearly Standard Deduction granted to most taxpayers by the IRS.
A brief explanation about the “Standard Deduction” which limits write-offs for Individuals…
The 2022 Standard Deduction is $12,950 for “Singles” under 65 that are not blind.
Blind individuals have a special increase; it’s doubled for those age 65 and blind.
MFS individuals have the same $12,950 Standard Deduction.
HOH individuals’ Standard Deduction is $19,400.
MFJ individuals’ and Surviving Spouses’ Standard Deduction is $25,900.
NOTE: for Married Filing Separately: if one partner files an Itemized Return and does not take the Standard Deduction (say, they’re a business owner), the other partner MUST file itemized, and can NOT take the Standard Deduction.
A 1099-paid taxpayer would prepare their taxes more similarly to a business owner -- reporting their earnings on a Schedule C, itemizing their expenses/deductions for working in order to reduce the taxes they owe to the IRS on their yet-to-be-taxed earnings (or even get a refund!).
If this is you, subscribe and visit next week for Part Two: “How to File Business Taxes (The Basics)”
And that’s it! The Individual Tax Return is the cornerstone of how more complicated tax return types are filed.
Tax Preparation is not impossible and quite understandable. It just takes up a more precious resource than we pay to the Federal government -- our TIME.
Time to understand what forms and filing types are needed, time to remember information that’s taken place over the last year, and time to physically go through the filing process.
STA’s owner has prepared a Tax Preparation Masterclass for people looking to stop paying H&R Block for their simple taxes and understand their own taxes, do their family members’ taxes, understand business taxes, or prepare others’ taxes of all varieties as a side hustle!
Visit www.strategictaxaccountant.com for more information, or contact us directly.