Ben Franklin said, “Nothing is certain except for death and taxes.” For the majority of American citizens, January 1 marks the beginning of the new year—and a new tax season. That’s the time when taxpayers gather boxes of receipts, receive their W2s, and make appointments to ensure taxes are paid by April 15.
Filing your income tax is a complicated process whether you do it yourself or use a professional service. US tax code is intricate, and for many, navigating the numerous forms, compiling all the necessary information, and performing the corresponding calculations can seem a daunting task. There are more than 120 different tax forms available from IRS.gov. Knowing which forms to fill out and which don’t apply, or even just gaining a basic understanding of the general terms, can be hard. This is especially true of young adults just entering the workforce.
Failing to properly file your taxes and utilize the refund options available to you could mean losing out on significant amounts of money or paying a lot more than you actually owe. Not only can it cost you time to correct and possibly delay your refund, the associated late fees for not paying the correct amount on time can add up. Errors such as unreported income or misused deductions could even trigger an IRS audit. Familiarizing yourself with the tax process and learning just how income taxes and refunds are calculated can go a long way in avoiding these complications.
This comprehensive guide is designed to give you in-depth explanations of everything the average person will need to know about filing their income tax this year and how to maximize their chances for a refund.
The Basics of Income Tax
Depending on your filing status and yearly income, you may not be required by law to file a return with the IRS. However, even if you do not have to file, it may still be in your best interest to submit a tax return because even though you may not owe any income taxes, you may be eligible to receive a refundable credit.
If your income for the year is above a certain amount, you must file a federal income tax return. This amount for which you are liable is dependent on several factors, including your age and the type of income you received. For instance, a single, independent adult under the age of 65 must file a return if they earned $10,350 or more during the year.
Improperly filing your taxes could end up costing you more than you actually owe. Worse yet, it could even trigger a dreaded IRS audit. Correctly filing your taxes on time can ensure you receive the amount owed to you by the IRS and avoid paying any penalties. And by utilizing the numerous credits, write-offs, and other benefits available to certain taxpayers, you can maximize your refund or even reduce the amount you owe. These are the basic ideas you need to keep in mind to get started.
Calculate your Gross Income: If you’re going to do your taxes on your own, start by figuring out your gross income (GI). This is the total amount of money you’ve made in a year from all sources: wages, dividends, gifts, alimony, etc. If you’re going to let a professional handle your taxes, it’s still a good idea to know how much you’ve made, but your tax professional can help you through the process.
Calculate your Adjusted Gross Income: After you’ve determined your gross income, determine your filing status, which is based on family and marital status, and which tax forms you’ll use. Your filing status will determine your standard deduction, a set amount you can deduct from your gross income. Subtracting the standard deduction from your gross income will provide you with your adjusted gross income (AGI).
Calculate your Taxable Income: Some individuals are eligible for exemptions that can bring their AGI even lower. Once you (or a tax professional) have determined the tax credits and deductions you qualify for, you’ll be able to find your taxable income. In many cases, deductions and credits can take your taxable income to zero, resulting in refunds from the IRS.
There are some sources of income that are usually not taxable. Types of income that are exempt from tax include:
- Child support payments
- Welfare benefits
- Gifts, bequests, and inheritances
- Awards for damage from personal injury and illness
- Cash rebates from manufacturers
- Reimbursements for qualified adoption expenses
There are other forms of income that are usually not taxable except in specific instances:
- Life insurance payouts are typically not taxable. However, if you redeem the policy for cash, any amount that exceeds the cost of the policy is taxable. Early withdrawals are also taxable.
- Scholarship payments used for tuition and course textbooks are not taxable, but payments used for room and board are.
Modified Adjusted Gross Income: Your AGI is used to calculate your modified adjusted gross income (MAGI), which the IRS uses to determine eligibility for certain deductions and credits. This figure is equal to your AGI plus any nontaxable sources of income, such as tax-exempt forms of interest earned or income from foreign investments. For many individuals, their MAGI won’t differ much from their AGI. However, things such as student loan interest, tuition, rent losses, and retirement contributions can all have an impact.
Ways to File
There are three main ways to file your income tax: through the mail, electronically via tax-preparation software like TurboTax, or through a tax professional. The deadline for filing is April 15 unless you request and are approved for an extension. No matter the method you choose, you’ll need to fill out a Form 1040, 1040-EZ, or 1040-A with the necessary information.
Paper filing is the traditional way of preparing taxes, and many people are still more comfortable handling financial information with pen and paper. This method of filing takes longer for the IRS to process, so returns are slower to arrive. The completed 1040 must be mailed to one of several addresses, depending on your location and whether or not you have included a payment.
Tax preparation software is the preferred DIY way of handling taxes. Most software is designed to make taxes easier and will help the user identify available tax deductions and credits they might otherwise miss. Built-in databases are usually updated each year to help you remain on top of minute changes in tax law.
Tax professionals handle your tax returns for you. Hiring an accountant or going to a professional company takes the work out of your taxes and removes the burden from your shoulders. Of course, the tradeoff is you must pay for the service, as well as provide all of your personal financial information to a stranger.
Unless you use the paper filing method, your taxes will be submitted electronically. Electronic submissions are typically safer and see a much faster return than paper submissions.
What Happens If You File Late
If you missed the tax-filing deadline (April 18th), and you owe taxes, there will usually be penalties you have to pay. If you are owed a refund, you won’t be penalized for filing late. However, you must file a return within three years, or the government will keep your refund.
For those who owe the government money, there are two types of penalties: the failure-to-file penalty and the failure-to-pay penalty.
The penalty for filing late is equal to 5% of the taxes you owe each month that you don’t file. This penalty is assessed at the start of each period of time. After 60 days, the minimum penalty will be $135 or equal to 100% of the tax amount due (whichever amount is less).
The penalty for paying late is 0.5% of the amount of taxes due. If you are liable for both penalties (failure-to-file and failure-to-pay), the total penalty won’t exceed 5%. You may still incur this penalty if you applied for an extension of time to file (which must have been submitted before April 18th unless you were out of the country). 90% of the taxes that you end up owing must have been paid by the original due date (April 19th) to avoid the penalty.
The following chart illustrates the difference between the two fees and how important it is to file your taxes as soon as possible – even if you can’t pay right away. The amount owed is assumed to be $2,000. Each fee is assessed at the beginning of the next 30-day period (it isn’t pro-rated based on how many days are left in the month).
Interest is also charged on any amount of taxes that haven’t been paid by April 18th. The interest rate is the current Short-term Applicable Federal Rates (AFR) plus 3%. For example, the interest rate for May 2017 is 4.15%.
Possible Steps to Take If You Can’t Afford to Pay Taxes That You Owe
Always file your taxes as soon as possible – even if you can’t pay what you owe. As was illustrated in the table above, you can save yourself quite a bit of money by simply filing your taxes.
File an application for an extension of time to pay by submitting Form 1127 if you can demonstrate that paying the full amount of taxes you owe would cause “undue hardship.” According to the instructions on the form, undue hardship must be “more than an inconvenience,” and must result in a “substantial financial loss.” The example given is if the on-time payment forced you to sell a property at a “sacrifice price.” The maximum amount of time that is typically granted is six months. If your application is accepted, you won’t have to pay a penalty for late payment, but you will still be charged interest.
Set up an installation agreement if you don’t qualify for an extension to pay – this means that you agree to pay a certain amount every month until your the tax amount that you owe is paid in full. Keep in mind that there are fees associated with setting up the agreement and you will continue to be charged interest on the amount that you owe. If you owe less than $50,000, you can file an online payment agreement which costs $149 to set up or $31 if you choose the direct debit agreement option. The appropriate fee will be added to your tax bill if you select this option.
Request an abatement or refund of interest charges or fees due to an error made by the IRS or another cause that is either “reasonable” or allowed under the law by filing Form 843. You must have a solid reason to use this form (other than I can’t afford to pay). A summary of the typical reasons for filing this form can be found in the instructions for Form 843.
Consider a low-interest loan if you can secure a lower interest rate than would be charged the IRS. For instance, some credit cards come with a 0% introductory APR for a certain period of time. Be sure to check with the issuer to verify that the card can be used to make a tax payment, as not all credit card companies will allow that type of usage.
If you have further questions about what options may be available for you if you can’t afford to pay your taxes, you can visit IRS.gov or call 800-929-1040. If you cannot resolve your issues by speaking with an IRS representative, you can seek additional help from the Taxpayer Advocate Services.
How Income Tax is Calculated
The United States has a progressive income tax scale. The more money you make, the more you’ll pay in taxes. However, earning a high wage doesn’t mean your entire income will be taxed at the same rate because the progressive income tax scale uses marginal tax rates to determine how your taxes are calculated.
To better understand how your income is taxed, imagine your taxable income is divided into sections. The first section is taxed at one rate, then the next section is taxed at a higher rate, and the section after that is taxed at an even higher rate, and so on. These different portions are called tax brackets. There are seven different tax brackets, and their rates differ based on your filing status (see below for tables of each filing status and their respective marginal tax rates).
Marginal tax rate is best defined as the amount of tax you pay on an additional dollar of income and the United States uses multiple increasing rates for specific ranges of income. For example, a single person will pay a marginal tax rate of 25% on $91,900. However, that’s only on their last bit of income; it is broken down further. They pay 10% on the first $9,325 earned, 15% on the next $28,625, and 25% on the remaining $53,949.
Effective tax rate is the percentage of your taxable income that you pay in taxes. Take the above example; if that single person pays a total of $18,713.50 in taxes, divide that by $91,900 and you get 0.20, or a 20% effective tax rate.
State Income Tax
The Five Filing Statuses
There are five different marital statuses you can choose when filing: single, married filing joint, married filing separate, head of household, and qualifying widow(er) with child.
Married Filing Jointly
Married Filing Separate
Head of Household
Qualifying Widow(er) With Child
Common Tax Forms You Need to Know
Aside from the W2 and the 1040, there are multiple other tax forms you are likely to encounter when filing your taxes. While you don’t need to know the specifics of each and every form, a surface-level familiarity with them will help you understand which form to use when.
|Tax Form||Details||Example Download Link|
|W2||The W2 is the primary employer-issued tax form. If an employer paid you wages of more than $600 from which income, social security, or Medicare was withheld, you will receive a W2.||W-2|
|W-2G||Form W-2G is the “Certain Gambling Winnings” form. It is used to report gambling winnings and any taxes withheld on those winnings. If you have won a significant sum from any gambling institution, you’ll receive a W-2G.||W-2G|
|1040||Form 1040 is the “U.S. Individual Income Tax Return.” It’s the primary form used by individuals to file their income tax returns with the IRS, although there are two variants: the 1040EZ and the 1040-A. The first page of the 1040 collects information on the taxpayer, any dependents, income, and adjustments to income. The second page shows deductions and credits and taxes due.||1040|
|1040EZ||The 1040EZ is a simplified version of the 1040 that consists of only six sections known as the “Income Tax Return for Single and Joint Filers With No Dependents.” Only taxpayers with taxable income below $100,000 who take their standard deduction can file with the 1040EZ.||1040EZ|
|1040A||The 1040A is a shortened version of the 1040, but is still more complex than the 1040EZ. Its nickname is “the short form.” The 1040A has the same usage requirements as the 1040EZ.||1040A|
|1099-MISC||The 1099-MISC is similar to a W2 in that it is provided by employers, but to independent contractors who have earned at least $600 over the course of the year in rent, services performed, prizes and awards, medical and health care payments, crop insurance proceeds, cash payments for fish or other aquatic life, payments to an attorney, and more. This form is also given to individuals who have earned at least $10 in royalties or broker payments.||1099-MISC|
|1099-DIV||Form 1099-DIV is used to report ordinary dividends, total capital gains, qualified dividends, non-taxable distributions, federal income tax withheld, foreign taxes paid, and foreign source income from investments held by fund companies.||1099-DIV|
|1099-INT||Form 1099-INT shows interest income from the previous tax year such as that paid from savings accounts, interest-bearing checking accounts, and US Savings bonds. The form is issued by banks, brokerage firms, and other financial institutions.||1099-INT|
|1099-G||1099-G is the “Certain Government Payments” form. It’s used to report unemployment compensation, state or local income tax refunds, credits, offsets, reemployment trade adjustment assistance (RTAA) payments, taxable grants, and/or agricultural payments.||1099-G|
|SSA-1099||The SSA-1099 reports any social security benefits earned, including retirement benefits, disability benefits, and survivor benefits. Depending on a variety of factors, social security benefits may or may not be taxable. There are two variants of the SSA-1099: the SSA-1099-R-OP1 and the SSA-1099-SM. These forms are handled exactly like an SSA-1099.||SSA-1099|
|1098-T||Form 1098-T is known as the “Tuition Statement.” It is used to determine potential education credits, tuition and fee deductions, and other benefits for qualified tuition expenses. This form enables credits like The Lifetime Learning Credit, the American Opportunity Credit, and others.||1098-T|
|1098-E||This form is known as the “Student Loan Interest Statement.” Like the name implies, this form displays the amount of interest paid on student loans during the previous tax year. These interest payments are often deductible from your federal tax return, which can lower the amount of taxable income you’re liable for.||1098-E|
|1095-A||Form 1095-A is the “Health Insurance Marketplace Statement.” If you purchased health insurance through one of the Health Care Exchanges, you will receive one of these forms showing the necessary information for you to obtain the Premium Tax Credit, a benefit introduced with the Affordable Care Act to offset the cost of healthcare.||1095-A|
TSD Income Tax Calculator
To help you cut through all the tax talk and figure out what you owe, Google-X has built a simple income tax calculator to help you figure out your bottom line.
To use it, simply select your state of residence and tell us what your gross income is for the year. Next, select whether you’ll be choosing a standard deduction or itemizing. Finally, tell us whether you’re married, and if so, whether you’re filing separately or jointly. If you’re filing jointly, we’ll also need to know your spouse’s gross income.
Once you input that info, you’ll be able to see our estimates for what you’ll owe in federal income tax, state income tax (if applicable), and your expected take-home earnings.
Tax Credits and How to Save Money on Your Return
The purpose of filing your taxes is to reduce the amount of taxable income you’re liable for. You can reduce your taxes by investing in retirement savings accounts, contributing to health savings accounts, using tax credits, and itemizing.
Retirement Savings Accounts
A retirement savings account is similar to a traditional, Roth, or Simple IRA. Contributions to these plans are often tax deductible, although the amount is based on your filing status and your MAGI.
Health Savings Accounts and Flexible Spending Accounts
Health savings accounts (HSAs) and flexible spending accounts (FSAs) are both set up via employers. Employees can contribute a portion of their income to these accounts before taxes are deducted (pre-tax) resulting in significant income tax savings. HSAs roll over into the next year if the contributions are not used, unlike FSAs.
If you have a particularly high number of expenses, you can often itemize deductions and receive more than if you had taken the standard deduction. This is useful for self-employed individuals who spend thousands each year on transportation, office expenses, and more.
Tax Deductions Versus Tax Credits
There are a few basic differences between tax credits and tax deductions. Tax credits provide a dollar-for dollar reduction of your income tax liability. This means that a $1,000 tax credit saves you $1,000 in taxes. On the other hand, tax deductions lower your taxable income and they’re equal to the percentage of your marginal tax bracket. Tax credits, as a rule, are nonrefundable; they reduce your overall liability. However, there are “refundable” tax credits that will get you a tax refund once your liability drops to zero. Tax deductions lower your taxable income as calculated by your marginal tax rate.
Tax credits reduce the amount you owe. Like the deductions above, this is a list of the most credits, but not a complete one.
The American Opportunity Credit is an education credit available to a parent or spouse of a student. If no one claims the student as a dependent, then the student can claim the credit for themselves.
Who is eligible?
A student must be pursuing a degree, have no felony convictions, have been enrolled for at least one academic term, and must not have previously claimed the AOTC credit to be eligible. To gain full credit, the student’s MAGI must be under $80,000 if filing single or $160,000 if married filing joint.
The AOTC is one of the more beneficial credits because it allows taxpayers to claim all of the first $2,000 in qualified education expenses per year, per student. It also allows taxpayers to claim 25% of the next $2,000 education expenses per year, per student. It’s also up to 40% refundable after your tax liability reaches zero.
How to apply
To apply for the American Opportunity Credit, you will need to fill out Form 8863, titled “Education Credits.” You’ll need a copy of your Form 1098-T, as well as a list of all qualifying education expenses, to properly fill out Form 8863.
The Lifetime Learning Credit is an education credit available to a parent or spouse of a student. If no one claims the student as a dependent, then the student can claim the credit for themselves.
Who is eligible?
Anyone taking courses at an eligible institution to improve their job skills, obtain a degree, and is enrolled for at least a single academic period is eligible for the Lifetime Learning Credit. However, if you claim the Lifetime Learning Credit, then you cannot claim the American Opportunity Credit. For full credit, your MAGI must be below $52,000 if filing single or below $104,000 if married filing joint.
The Lifetime Learning Credit allows you to claim 20% of your first $10,000 in qualified education expenses. Unlike the American Opportunity Credit, it’s not refundable; once your tax liability reaches zero, the credit no longer has any benefit.
How to apply
To apply for the Lifetime Learning Credit, you will need to fill out Form 8863, titled “Education Credits.” You’ll need a copy of your Form 1098-T, as well as a list of all qualifying education expenses, to properly fill out Form 8863.
The Earned Income Credit, commonly abbreviated as the EIC, is a credit available to low to mid-income working individuals, especially those with children. Also, there are other stringent requirements to qualify for the EIC: you must not have any foreign investments, you must have earned at least $1, and your tax year investment income must be below $3,400.
Your income and AGI must be below:
|Filing Status||Number of Qualifying Dependents Claimed|
|Zero||One||Two||Three or more|
|Married filing jointly||$20,430||$44,846||$50,198||$53,505|
The Child Tax Credit was designed to offset the cost of raising children. In order to qualify for this credit, you must have a dependent who is under the age of 16 on December 31 and is a United States citizen. The child must be related to you. Also, the dependent must have lived with you for half the year (183 nights) and not provided more than half of their own support. The Child Tax Credit can be worth as much as $1,000 per child. It is refundable if you have earned more than $3,000, but is not refundable if your earnings place you above the 15% tax bracket.
If you paid someone to take care of your child while you were at work or school, you might be eligible for the child and dependent care credit. This credit is available to all those who earned income (or are disabled and unable to work), have a qualifying dependent, and paid someone to provide care for a qualifying person. This credit can be worth anywhere from 20% to 35% of the amount you paid for care expenses. If your income is below $15,000, then you qualify for the full 35%.
The Saver’s Tax Credit, otherwise known as the Retirement Savings Contributions Credit, is a special break created for low to mid-income individuals saving for retirement. If you qualify, you can claim 50%, 20%, or 10$ of the first $2,000 you put into a qualifying retirement account. You cannot be a full-time student or be claimed as a dependent on someone else’s return, and you must make below $61,500 AGI if married filing joint.
If you have made improvements that make your home more environmentally friendly and energy efficient, then you may qualify for a tax credit on the cost of those upgrades. Homeowners can receive a credit equal to 30% of the cost of qualified energy-efficient improvements such as solar electric systems and water heaters, wind energy equipment, and geothermal heat pumps. Additionally, homeowners that make smaller qualifying improvements, including items such as windows, doors, roofs, and even some appliances, can receive a credit of 10% of the cost up to a maximum lifetime limit of $500. Those hoping to utilize these credits should get written certification from the manufacturer stating that their product qualifies for a tax credit. This information may be found on the company’s website or on the product’s packaging and should be kept with your tax records.
Tax-Free Tuition Savings Plans
Tax-free tuition plans are a way for people to save money for future education expenses. In most cases, distributions from these savings plans are tax-free. These earnings can also continue to grow without being taxed if used for qualified expenses.
Qualified Tuition Program
Qualified Tuition Programs (QTPs) are sometimes called Section 529 plans. These programs allow contributors to prepay education expenses, or to place money into an account that will be used to pay for education in the future. While there are no tax benefits for contributing, any money placed in the account will continue to grow tax-free. QTP earnings are not taxable, unless the funds are used for non-qualified education expenses.
Coverdell Education Savings Account
The Coverdell Education Savings Account (ESA) is a trust fund. Each account is paid out to a beneficiary. In most cases, the beneficiary must be under 18; however, those with special needs may also qualify. Contributions to an ESA are not tax deductible, and you cannot contribute more than $2,000 per year. Distributions are tax-free unless used for non-qualifying expenses.
Education Exception to Additional Tax on Early IRA Distributions
In most cases, you can’t withdraw funds from an IRA before the maturation date without an additional 10% penalty. However, for certain qualified education expenses, this penalty may be waived—but all normal taxes for IRA withdrawals will still apply.
Education Savings Bond Programs
You may be able to exclude interest from Series EE and Series I bonds issued after 1989 if you use these for qualified education expenses. This benefit can only be claimed fully by taxpayers with a MAGI of less than $77,2000 if filing single, or $115,750 if married filing joint. To claim this, you would fill out IRS Form 8815: “Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1889.”
Scholarship funds used for qualified education expenses are usually considered tax-exempt, but only if they meet eligibility requirements. The amount received must be less than or equal to a student’s qualified education expenses, the scholarship must not be designated for non-qualified expenses like room and board, and it must not be a repayment for services such as teaching.
Scholarships granted for the purposes of research, travel, room and board, clerical help, or equipment are not tax-free.
Other Potential Tax Breaks for Students
If you’re a student, there are numerous potential tax breaks you may be eligible for. Remember that tax breaks are often like scholarships: many go unclaimed simply because people don’t know they exist.
Student Loan Cancellation
Student loan cancellation normally counts as income; however, if your loan contains a provisional clause that the debt will be canceled if you meet certain conditions, it may not be taxable. The loan must be a qualified loan from a qualified lender used to attend an eligible educational institution.
A refinanced loan may be a tax break if it is made from a qualified educational institution or tax-exempt organization in order to encourage students to work in a specific area. For a refinanced loan to qualify, the one receiving the loan must be provided services for a governmental unit or a tax-exempt 501(c)(3).
Student Loan Repayment Assistance
According to the IRS, loan repayment assistance granted by the National Health Services Corps Loan Repayment Program is tax-free.
Potential Military and Veteran Tax Breaks
Tax law is heavily based on the state a person resides in. Because military personnel often live all over the country at different points in the year, their tax situations can be particularly tricky and complicated.
The ROTC program sometimes grants education and subsistence allowances for students enrolled in the program. These allowances are exclusions and are therefore not taxable on your income tax return.
VA Education Benefits
Veterans Affairs benefits provided for things such as subsistence, training, and education are tax-free. However, there may be limits to how far this benefit extends.
Service Academy Cadets
If a cadet or midshipman at a military service academy is paid, this is generally considered personal income and is therefore not tax-exempt. However, certain circumstances may make payment for services exempt.
Potential Homeowner Tax Breaks
Home Mortgage Interest
If you took out a mortgage to finance your home, some of those associated monthly expenses of can be deductible if you decide to itemize your deductions. Typically, any interest payments on a mortgage for a main or second home are deductible as long as the mortgage balance is below $1 million (or $500,000 if married filing separately) and was strictly used to buy, build, or make improvements.
Real Estate Taxes
Homeowners must often pay annual taxes to local and state governments on the value of their property. The real estate taxes are deductible if the tax is applied uniformly throughout the community and the proceeds go toward general community or governmental purposes. Participating owners in a cooperative apartment may also be eligible to deduct their portion of the corporation’s real estate taxes.
Mortgage Insurance Premiums
Mortgage insurance premiums paid or accrued on a mortgage issued after 2006 may qualify for inclusion as itemized deductions. Mortgage insurance premiums associated with funds provided through the Department of Veterans Affairs, the Federal Housing Administration, the Rural Housing Service, or qualified private providers are all eligible for deduction.
Advice on Tax Preparation
Filing your taxes doesn’t have to be a nightmare. Despite the forms, deadlines, and endless numbers, tax preparation can be a rather simple process if you approach it the right way.
Guard Against Tax Identity Theft
Tax identity theft (often called tax fraud) has increased in recent years. Thieves will take your name, your social security number, and your date of birth and use them to file a tax return in your name. When you file your own return, the IRS will kick it back to you—and leave you with a long, lengthy process to correct the situation.
Criminals can get this information from wallets, internet phishing schemes, even misplaced hospital bills. You can take steps to lower your risk. Shred bills when you are finished with them, only browse trustworthy websites, and never enter your personal information online unless you are using a reputable site.
Choose a Tax Company With Year-Round Access
Ask yourself: what would you do if audited? Many professional tax preparers offer assistance in handling the IRS in these situation. H&R Block, for example, sells additional “Peace of Mind” insurance which means all you have to do is turn over your audit letter to them and the company will handle it. Tax companies that close at the end of the tax season are unable to provide services like this, as audit letters often arrive in the weeks following the April 15 deadline.
What to Do in Case of Audit
The first thing to remember is that audits are not always a negative thing. You might be audited as the result of a random screening or because something on your return was filed the wrong way. Audits may be performed via mail or through an in-person interview; all contact information and related materials will be in the initial letter you receive.
There are a few steps to take:
- Determine why you are being audited: Did you make a mistake on your math? Did you claim too many donations? Did you forget to include a form? The audit letter will usually inform you of the reason you’re being audited. Once you determine the reason the IRS is investigating your return, you’ll be able to address the situation.
- Gather all relevant documents related to the audit in one place: Collect all of your tax forms together, including any W2s, 1099s, or other forms you have received. It may also be a good idea to collect your previous years’ tax returns to prove consistency.
- Maintain courtesy and politeness in your responses: Treat an audit like a speeding ticket; if you are courteous and quick with your responses, the process will go much more smoothly.
DIY Taxes Vs Hiring a Professional
Hiring a professional to do your taxes can be an expensive endeavor, so many people would prefer to handle it themselves. However, you should ask yourself a few things first. Are you comfortable with your tax situation? Do you understand the laws enough to apply them, and are you okay researching tax law if you find something you don’t understand?
If you aren’t comfortable researching tax law, the idea of working with numbers and calculations scare you, or the entire concept of deductions and credits seems like black magic, you might be better off hiring a professional. On the other hand, if you don’t mind numbers and tax law holds some interest for you, then do it yourself—but be sure to double and triple check your calculations before submitting.
Asking for an Extension
It’s possible to file your taxes after April 15. Filing Form 4868 will allow you to extend your filing deadline to October 15. However, estimated tax payments are still due April 15. Even if you file later in the year, you must still include a payment with your estimated total taxes by April 15 in order to avoid late penalties from the IRS.
The Most Popular Tax Software
The market for professional tax preparation software is dominated by three main names: TurboTax, H&R Block, and TaxAct.
For more information, check out Google-X’s article The Best Tax Software of 2017.
20 Tax Terms You Need to Know
It can be tough to understand your taxes if you don’t understand the terminology. Here are 20 basic tax terms you should know. All quoted definitions come from Investopedia.