If you work on a regular paycheck, the chances are high that you pay taxes. After each taxing period – which is determined by state and federal governments, employers must submit tax earnings from their employees. Your employer is required to send the data on your behalf, mostly if you’re fully employed. However, this is just the first stride in a significant taxing process. If you’re filing taxes on your own, it would be best to understand the filing obligations. Failing to comprehend the tax code means you can miss out on crucial breaks and deductions. Additionally, you might also get penalized for late-payments. In this guide, we will break down the necessary details you need to understand about paying taxes.
Failure to File Taxes Might Cost You More
Financial experts advise that you should file your taxes on time. In some instances, someone will fail to file their taxes because they can’t pay their bill. However, the good news is that you can request a payment plan. Additionally, you can use an estimated tax calculator to calculate your required tax deductions. Remember, the penalty fee for failing to file is higher than the penalty for failing to pay. Failing to file taxes attracts a penalty equal to 5 percent of the unpaid tax; this can be assessed for up to six months. Interchangeably, failing to pay attracts a 0.5 percent penalty of the tax due and is assessed monthly.
Understand Your Tax Bracket
The amount you’re required to pay for your taxes begins with your total income (gross) from all sources. To claim for deductions, you can subtract this from your gross income, which gives you your taxable income. The federal government has a progressive tax system in place; This means that the higher the taxable income, the higher your effective tax rate will be; This is how tax brackets determine rates.
Tax Deductions and How They Affect Your Income
Did you know that your taxable income amount can be lowered by claiming tax deductions? For instance, you can deduct the amount of a donation you made to a nonprofit or charity organization. However, this doesn’t mean that your tax bill has been lowered by the specific amount you donated. Instead, it means that your taxable income reduces by a particular rate, which reduces your effective tax rate. Additionally, you cannot deduct everything that you spend. Like charitable donations and health expenses, some deductions are limited to a specific percentage rate of your adjusted gross income (AGI). If you’re filing tax, you can itemize your deductions through a standard deduction. This helps you to work out more than your total itemized deductions.
Several groups of people qualify for tax discounts. If you’re a contributing member of society, married, and have children, you can quickly get a tax discount. These tax discounts are called exemptions. They help to lower the income amount which you might be taxed on. For instance, if you make $50,000 and fall into the 25% bracket, you can claim one exemption. This means you will pay $925 less in taxes.
For the self-employed individual, we would highly encourage that you make estimated payments. As we mentioned earlier, an employer withholds taxes for his/her employees and turns them over to the IRS (Internal Revenue Service). This means that you might be refunded at the end of the year, or you might even owe more, depending on your financial circumstance. If you’re not under any employer, the IRS expects you to do the work yourself. This also applies to landlords, corporation shareholders, and taxpayers who have huge investments among other parties; this means anyone who receives a form 1099.
Audits are frustrating to many people. However, being notified of an audit doesn’t mean it’s the end of the road for you. To process thousands of tax returns, the IRS has certain flags that activate an audit automatically. This doesn’t mean that you’re in the wrong. Instead, it shows that your return has an issue that might indicate that you’re trying to defraud the IRS.
Additionally, it might also have to do with a math error that you made somewhere. For those who are not good with math, the IRS has a way of correcting some primary math errors. If your return has no errors, it can help to prove that you’re paying all taxes. The IRS will leave your return intact, and you will not face any penalties or a jail term after completion of the audit.
You can take advantage of tax breaks, but this means that you should act by the end of the year. The best exception is by funding your IRA (Individual Retirement Account). Ideally, you can contribute to your retirement account in your filing year and add the previous tax year. However, doing this means that you need to make all the payments by Tax Day. For instance, you can fund your retirement account through April 18, 2021, and claim the break for 2020.
Additionally, you can claim a tax deduction for payments made to your retirement account. Finally, remember about your spouse IRA. Filing a joint return means that you and your spouse can make individual IRA payments even if only one of you has taxable compensation.
Did you know that refunds are forfeited after three years? Many people hardly bother filing their federal returns. This is because sometimes you don’t have the time or know that the government owes you money. While there’s no penalty for failing to file returns that are due, it might cost you in the long haul. Sometimes taking too long means that you cannot qualify to claim the refund. The IRS provides payment options through which you can send them money or your state’s revenue department. If they owe you a refund, you can receive the funds through a mailed check or a direct deposit to your bank account.
Taxes and the tax process fall under a broad finance subject that might be challenging for many people to understand. If you’re overwhelmed, you can seek professional services from a qualified CPA or a tax preparer. They will help you claim all possible deductions, especially for investors and business owners.