Understanding Personal Income Tax Filing
Filing your personal income taxes is no one’s favorite task. Some dread the complicated, step by step series of questions, documentation, and results; while others are just hoping for a large refund. In this month’s blog, I talk about all things personal income tax filing.
What are personal income taxes? Personal income taxes are taxes you pay to the federal and (most) state governments on the income you earn throughout the year. This generally includes wages and tips earned form your job, but can include other forms of taxable income. The amount you owe is determined by several variables: how much you earned, less deductions or credits, tax brackets and rates.
Tax Filing: In the United States, April 15th is usually when your federal income tax return is due for the previous calendar year. Sometimes this date will vary if it falls on a holiday or weekend. If you cannot meet the deadline, you can file for an extension. It’s important to know that although an extension gives you more time to file, it doesn’t extend the time to pay any taxes owed. But wait! So how do you know how much you owe without filing, so you can still pay on time? When you file an extension, you still need to calculate an estimated amount of taxes owed and make a payment by the regular deadline. To do this, you can look at your last year’s income, deductions, and credits then adjust for any changes. The key is to make a reasonable estimate and pay that. If you overpay, you’ll get a refund.
When it comes to filing your taxes, you have a few options. 1) Paper Filing: You can complete the forms by hand and mail them. However, this manual process can be more difficult, open to errors, takes longer to process, and delays refunds. 2) E-Filing: E-filing is the fastest and most efficient way to file. Many people use tax software like TurboTax, H&R Block, or TaxAct. These applications guide you through the process by asking you questions, making it easier to ensure everything is completed more accurately. 3) Tax Professional: If your taxes are complex or you just want peace of mind, you can hire a certified tax preparer. They are knowledgeable about the various deductions, credits, and other tax laws that might apply. Once your taxes are filed, the IRS and state will process your returns. If you’re due a refund, you can expect it in a few weeks if you e-file. If you owe, you must pay by the deadline to avoid penalties and interest.
Documents You Need: Most employers or other businesses will get the tax document to you between mid-January and early February. Make sure you keep them all together in a file so you are ready. The common forms are: the W-2 (for employees) this reports your total income earned and taxes withheld by your employer. The 1099 (for freelancers/independent contractors) this reports income from self-employment. The 1099-R (for retirees) this reports distributions from pensions, annuities, and other retirement plans. Other documents might include receipts for deductible expenses, mortgage interest statements (Form 1098), Interest Income (Form 1099-INT), or investment income (Form 1099-DIV).
Tax Deductions and Credits can reduce the amount of taxes you owe. Deductions reduce your taxable income. Common deductions include student loan interest, mortgage interest, medical expenses, and contributions to retirement accounts. Credits directly reduce the amount of tax you owe. Some common credits include the Earned Income Tax Credit (EITC) and the Child Tax Credit. You will need to make a choice between whether you take the standard deduction (a fixed amount) or itemize (deduct specific expenses); you cannot do both. In many cases, the standard deduction is simpler and results in a bigger tax break, but it depends on your situation.
Filing status determines your tax rates, standard deduction, and eligibility for certain deductions and credits. If you’re unsure which status is best for your situation, many tax software programs or a tax professional can help guide you to the best option. Here’s a summary outlined by Filing Status, Standard Deduction (2024), Eligibility, and Tax Rate:
Single: $14,600. Unmarried or divorced with no dependents. Typically higher taxes.
Head of Household: $21,900. Unmarried or divorced with a qualifying dependent. Lower tax rates than single. Used when a single parent supports a child or children or cares for an elderly parent.
Married Filing Jointly: $29,200. Married couples. Can also use if your spouse was deceased during the year. Lowest tax rates. You may qualify for various tax credits and deductions that you wouldn’t qualify for if you filed separately. If one spouse earns significantly more than the other, it can help reduce your overall tax burden.
Married Filing Separately: $14,600. Married couples who choose to file separately. Typically higher taxes. Used when a couple who wants to separate their finances for tax reasons, or if one spouse has significant issues (like high medical bills, large deductions, or debt).
Qualifying Widow(er): $29,200. Widowed (who has not remarried) with a qualifying dependent child; Same as Married Filing Jointly. Can file for up to two years after spouse’s death.
Tax Brackets and Rates: In the United States, the federal income tax system is progressive, meaning that the more you earn, the higher percentage of tax you'll pay on income over certain thresholds. This system is broken down into tax brackets—ranges of income that are taxed at different rates. Instead of taxing your entire income at one rate, the IRS taxes different portions of your income at different rates based on these brackets. So, when you move into a higher bracket, only the income above that bracket's threshold is taxed at the higher rate. The tax brackets apply to your taxable income (after deductions and exemptions), not your total income. The tax brackets for Married Filing Jointly are higher than for Single filers. So, a married couple may have a larger income before moving into higher brackets. Here is a link to the IRS 2024 Federal Tax Brackets
Let’s walk through an example for a single filer with $55,000 taxable income in 2024:
2024 tax brackets & rates for a single filer:
· 10% on income up to $11,600
12% on income from $11,601 to $47,150
22% on income from $47,151 to $100,525
Your income doesn’t get taxed at just 22% (the highest bracket you fall into). Instead, it's taxed progressively:
The first $11,600 is taxed at 10%.
The next $35,550 ($47,150 - $11,601) is taxed at 12%.
The remaining income, from $47,151 to $55,000, is taxed at 22%.
Example Breakdown for a $55,000 Income (Single Filer in 2024)
First bracket:
$11,600 * 10% = $1,600Second bracket:
($47,150 - $11,600 = $35,550)
$35,550 * 12% = $4,266Third bracket:
($55,000 - $47,151 = $7,849)
$7,849 * 22% = $1,727
Now, add these up:
$1,600 (10% bracket)
$4,266 (12% bracket)
$1,727 (22% bracket)
Total tax = $7,593
So, for a taxable income of $55,000, you'd pay $7,593 in federal taxes, not $12,100 (which would be the tax if you were taxed entirely at 22%).
Although filing your taxes is not anyone’s favorite task, having a basic understanding of the different aspects is very helpful. Once you understand a little more, you can think through options that may help your tax situation and lessen the stress each year.