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Monday, Oct 25, 2021
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Finance

Tax 101: An Easy-to-Understand Guide on Important Tax Basics

If you earn wages or income in the United States, chances are you need to file income taxes. Failure to do so can lead to tax penalties and fines.

In most instances, citizens pay taxes throughout the year via payroll taxes. If you’re lucky, when it’s time to file your income tax return, you’re due a refund and won’t end up with a tax bill.

Understanding tax basics for beginners will help you complete and file your tax returns. Keep reading for an easy-to-understand tax guide.

Tax Basics Every Filer Should Know

Not everyone is required to file taxes. If you’re considered a dependent and can be filed on someone else’s taxes, you may not have to file a tax return.

The Internal Revenue Service (IRS) offers guidance relating to filing status and income guidelines. If your income falls below the minimum amount for your classification, you do not file taxes.

Example: If you’re under the age of 65 and earned less than $12,400, you do not have to file taxes. A married couple with both spouses under 65, filing jointly with a combined income under $24,800, are not required to file taxes.

Keep in mind, other conditions could apply, so always consult with a tax accountant. You could have a profit tax from other sources of income.

How Did You Earn Your Income?

How you’re classified by the people paying your wages will dictate which tax forms you’ll need. The IRS requires all employers to mail tax documents no later than January 31st for the tax period that ended on December 31st of the prior year.

A W-2 is for regular employees. It shows your annual income and tax deductions. The 1099 form is mainly used for contractors and freelancers. The form comes from the person or business you provided services to. The 1099T is if you earn money from a savings or investment account.

You may also receive a 1095 form for tax credits from the healthcare marketplace. Or a 1098 form which comes from student loans and mortgage lenders. The form reports the interest you’ve paid for the tax year.

Make sure you’ve received all the basic tax forms before filing your taxes.

Which Forms Do You File?

The basic income tax return requires a 1040 or 1040A. These forms require your name, address, and filing status. You’ll be asked if you’re filing:

  • Single
  • Head of household
  • Married/filing jointly
  • Married/filing separately
  • Widow(er) with dependents

Next, you’ll enter the number of dependents.

Standard Deduction vs. Itemized Deductions

A basic income tax return uses the standard deduction method. This option is for people who do not have a lot of deductions they want to list separately. The person using a basic rate income tax filing does not have deductions that exceed the standard deduction for their filing class.

Don’t Miss the Tax Deadline

These tax basics are easy to follow. For easy processing, use an online tax preparer app to walk you through the complete process.

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