“In this world nothing can be certain, except death and taxes” (Benjamin Franklin). Taxes are an expense that everybody has to deal with throughout their life. Taxes give the government money to provide services for the public. Every adult needs to know how to pay their taxes because not paying taxes can result in legal trouble and negatively impact your well-being.
When do I file my taxes?
Usually, the due date for income taxes falls in the middle of April every year. For this upcoming year, tax day is April 15, 2022.
How do I file my taxes?
In order to know if you are required to file taxes, a person has to have a certain amount of income for that specific year.The minimum income level that requires a person to file taxes depends on your filing status (Ex: Single vs. Married, Independent vs. Dependent, 65+ or younger). For example, if your filing status is single, independent, and under age 65, you would need at least a gross income of $12,400 to be required to file taxes for that year. It is important to have all your paperwork organized to properly assess your income for the year. Paperwork that illustrates a person’s income for the year comes from W-2’s (job income form) and any other income, earnings, and interest statements (Ex: investment accounts, 1099 forms, etc). Other paperwork that should be gathered are any receipts that can be used to reduce your tax expenses (Ex: charitable contributions or medical expenses).
If a person files taxes themself, they can do so by paper or electronically through a tax software (Ex: TurboTax or H&R Block). A person can also file taxes through a professional Tax Accountant who has credentials like the CPA (Certified Public Accountant) designation. The tax form used to actually “file” taxes with the government is the 1040 form. This form takes all the paperwork mentioned previously and puts it in one place to assess your tax liability for the year. You can access this document online or by receiving it through mail.
What determines how much I owe in taxes?
The amount of taxes you owe depends on a variety of different factors that determine your taxable income. The first factor is the income itself. Following that, your filing status and the federal tax brackets determine the rate that your money is taxed. The tax brackets break down a person’s income by taxing a person’s money at different rates depending on the person’s size of income. For example, the tax rate that you pay for the first roughly $10,000 of personal income is lower than the tax rate paid for income above $10,000 and so on. (2021 Tax Bracket Figure below)
Moving on, there are also opportunities a person can take advantage of to reduce the amount they pay in taxes. Three tax avoidance strategies that can reduce your overall tax burden are adjustments, tax deductions, and tax credits. Adjustments are a way to reduce tax liability because it can reduce your gross income resulting in a lower adjusted gross income (AGI). Examples of tax adjustments include student loan interest and Individual Retirement Account (IRA) contributions. A person’s AGI determines what type of tax deductions and credit they can receive. Tax deductions come in two forms: standard and itemized. The standard deduction is a predetermined number that the government sets reducing your tax liability depending on your filing status. Itemized deductions are items that reduce your taxable income (Ex: mortgage interest or gifts to charity). You are able to choose whichever form gives you the larger deduction (Standard or Itemized). The last way to reduce your tax liability is through tax credits. Tax credits do not affect your taxable income but are a way to reduce your tax burden “dollar for dollar.”
Taxes can be overwhelming, especially as a young adult when you’re new to the “game.” There are plenty of resources (Tax Accountants, IRS website, etc.) though, a person can use to support themselves with this responsibility. At the end of the day, “Uncle Sam” gets a portion of everybody’s income, making it important to understand your financial situation to avoid overpaying in taxes!
Disclaimer: Thegrownwave.com is a personal finance blog, not a professional investment advisor. The content produced from the blog is provided for free and only for informational purposes. Thegrownwave.com does not and cannot promise the accuracy and reliability of any content in comparison to your individual circumstances.
Sources:
Gilstrap, A. (2020, March 11). moneyunder30.com. https://www.moneyunder30.com/understanding-difference-tax-credits-deductions-adjustments.
Orem, T. (2020, December 4). How Much Do You Have to Make to File Taxes? NerdWallet. https://www.nerdwallet.com/article/taxes/do-i-need-to-file-a-tax-return.
Orem, T. (2021, May 13). 2020-2021 Federal Income Tax Brackets & Tax Rates. NerdWallet. https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets.
Smith, L. (2019, December 10). Factors That Affect How Much Income Tax You Pay. SmartAsset. https://smartasset.com/taxes/factors-that-affect-income-tax.
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