No matter your career, paying taxes is an inevitable part of earning an income for most people. The amount you pay depends on many factors – starting a new job, buying a house, getting married, having children. So, it’s important to understand how and why Uncle Sam is using your money. These common tax terms and concepts will prepare you for April 15, aka Tax Day.
Simply put, we’re required to pay taxes to help pay for government programs and initiatives that benefit all citizens. Think: health programs, social security, and security and defense. Did you know Abraham Lincoln levied the country’s first income tax in 1862 to fund the Civil War?1 And fun fact: since 1950, income tax has been the U.S. government’s largest source of revenue.2
The Internal Revenue Service classifies income as money, property or services, and nearly all of it is taxable. This includes wages or salaries, bonuses, tips, commissions, royalties and the fair market value of property or services through bartering. However, a few exceptions exist that may be nontaxable. These can include inheritances, health care benefits, child support, alimony and life insurance money received when a loved one passes away.
Take a look at your most recent pay stub. You’ll likely notice a chunk was taken out of your wages or salary for taxes. This is called withholding. When you file your taxes, you’ll get a refund if you withheld too much throughout the year. But if you didn’t withhold enough, you’ll likely have to pay the IRS to make up the difference.
Tax forms can be complicated. But for many, these basic forms are all you need to file:
• W-4: You’ll complete this when you start a new job. It instructs your employer how much of your paycheck to withhold for taxes.
• W-2: Your employer will send this to you at the end of each year. It shows wage, salary info and the taxes withheld from your paycheck. A copy also goes to the IRS.
• 1040: This is the basic form used to file an individual tax return. You must file if you earn more than $100,000, have itemized deductions or sold property, among other things.
Your filing status can determine your filing requirements, standard deduction and how much you might owe. All taxpayers fall into one of five categories:
1. Single • 2. Married filing jointly
3. Married filing separately • 4. Head of household
5. Qualifying widow with dependent child
Unsure which filing status fits your situation, or think multiple could apply? The IRS offers an online questionnaire to help you determine what to select on your tax return.
Deductions are used to lower your taxable income. Many taxpayers choose to take the standard deduction, which is an amount set by the government based on your filing status. For 2019, for example, the standard deduction for those who are married filing jointly is $24,400.3
The other option is to itemize your deductions. This might make sense if you had expenses during the year like medical bills, mortgage interest, charitable gifts or student loan interest. In most cases, you’re allowed to use whichever deduction results in a smaller taxable income.
If you want to avoid IRS penalties, it’s crucial to stay on top of these tax dates:
April 15: The deadline to file individual tax returns. NOTE: If April 15 falls on a weekend or civil holiday, the deadline is extended to the next working day.
October 15: The deadline to file individual tax returns if you requested a filing extension on or before April 15.
Estimated quarterly tax payment deadlines: If you’re self-employed, you’ll have to make four quarterly tax payments based on your estimated annual income. These are due April 15, June 15, September 15 and January 15.
Want to learn more about reducing your current or future tax burden? We’ve got you covered with this info about tax strategies.