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Individual Tax filing

At some point early every year, everyone begins scrambling to figure out which tax forms they need to file for their income tax. Some people may even be confused about what to do when the deadline is on a weekend or public holiday.

There is a lot about the individual tax filing process that you should be aware of before you file your tax return. This guide will help you understand all about the tax filing and income tax. But before we can move on to talk about the individual tax filing and forms, let us first understand what an individual tax return is.

What is an Individual Tax Return?

The individual tax return is the form submitted to the local, state or federal government agency for reporting personal income, and calculating and paying income tax. This tax filing is a kind of income tax return filed by an individual, both single and married taxpayers, and with or without dependents.

In short, any individual who earns a certain amount of income has to file an income tax return. The form that the individual uses for tax filing is a version of the Form 1040 which includes the Form 1040, Form 1040A, and Form 1040-EZ. As soon as the taxpayer completes the form, they will need to submit it to the IRS by April 15th every year. The selection on the kind of tax form is based entirely on the filing status, deductions they wish to claim, their income, and any credits the individual may receive.

You will learn all about the various parts, the requirements for filing and understand all about the individual tax filing below:

Requirements for filing individual tax returns

There are lots of things that would determine if you need to file a federal individual income tax return. It is determined based on:

  • your gross income
  • your federal tax filing status
  • whether you received a specific credit or owe a tax liability
  • whether you are claimed as a dependent on another individual’s income tax return

To explain better, here is a simple table to help you understand who needs to do individual tax filing based on their income and status.

Filing Status / Gross Income (at least)

  • Single – $12,000
  • Married filing Jointly – $24,000
  • Married filing Separately – $5
  • Head of Household – $18,000
  • Qualifying widow(er) with dependent child – $24,000

Gross income here means the total income that you get in the form of cash, services, property and goods. This also includes any income that comes from outside the United States. Also, if you do not live with your spouse at the end of the year or when your spouse may have died, and your gross income was a total of $5 in the whole year, you need to file a return regardless of your age.

The above criteria is only the beginning of how and if you should file for your tax return or not. There are many other requirements that can help you understand better.

Additional Filing Requirements

Other than the requirements mentioned in the previous table, you also need to file a return if any of the following applies to you:

  • You owe taxes like Medicare and Social Security, on tips, or on wages you got from your employer who did not withhold the taxes;
  • You owe the alternative minimum tax or recapture taxes;
  • You owe taxes like Medicare, Social Security or RRTA tax on group term life insurance, on a health savings account or on tips reported by your employer;
  • You owe household employment taxes (If you only owe this tax, you can just file the Schedule H alone);
  • You owe additional tax on a qualified plan which includes an individual retirement account (IRA), or other tax favored account (If you only owe this tax alone, you can just file the Form 5329 only);
  • You had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes;
  • You had net earnings from self-employment of at least $400;
  • You or your spouse (if you both are filing jointly) received:
    • HSA, Medicare Advantage MSA, or Archer MSA distributions; or
    • Advance payments of the health coverage or premium tax credit were made for you, your spouse, or a dependent; or

It is advised that you still file for the income tax return if you can get some money back. For instance, you should file your tax return if the following applies to you:

  • You qualify for the health coverage tax credit;
  • You qualify for the premium tax credit;
  • You qualify for the refundable American opportunity educational credit;
  • You qualify for the additional child tax credit;
  • You qualify for the earned income tax credit;
  • You made estimated tax payments for this year or you have overpayments for last year’s estimated tax; or
  • You had income tax withheld from your pay.

In short, if any of these apply to you, then it is important for you to file an income tax return.

Federal Income Tax Brackets

With this clear, let us now talk about the federal income tax bracket. You might be aware that the state and federal government have different tax rates and rules. Here we will discuss about the federal income taxes. There are seven federal tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. And these brackets are based on the filing status and taxable income.

The federal tax rates keep changing every year and you can easily find out about it on the IRS website or take the help of a lawyer. To help you better, we have gathered the information for the year 2019-2020 and shared them below.

The tables shared below shares the brackets and rates that apply in the 2019 tax year and relate to the tax return you will file in 2020.

Single Filers

Tax RateTaxable Income BracketTax Owed
10%$0 to $9,70010% of taxable income
12%$9,701 to $39,475$970 plus 12% of the amount over $9700
22%$39,476 to $84,200$4,543 plus 22% of the amount over $39,475
24%$84,201 to $160,725$14,382.50 plus 24% of the amount over $84,200
32%$160,726 to $204,100$32,748.50 plus 32% of the amount over $160,725
35%$204,101 to $510,300$46,628.50 plus 35% of the amount over $204,100
37%$510,301 or more
$153,798.50 plus 37% of the amount over $510,300

Married, filing jointly

Tax RateTaxable Income BracketTax Owed
10%$0 to $19,40010% of taxable income
12%$19,401 to $78,950$1,940 plus 12% of the amount over $19,400
22%$78,951 to $168,400$9,086 plus 22% of the amount over $78,950
24%$168,401 to $321,450$28,765 plus 24% of the amount over $168,400
32%$321,451 to $408,200$65,497 plus 32% of the amount over $321,450
35%$408,201 to $612,350$93,257 plus 35% of the amount over $408,200
37%$612,351 or more$164,709.50 plus 37% of the amount over $612,350

Married, filing separately

Tax RateTaxable Income BracketTax Owed
10%$0 to $9,70010% of taxable income
12%$9,701 to $39,475$970 plus 12% of the amount over $9700
22%$39,476 to $84,200$4,543 plus 22% of the amount over $39,475
24%$84,201 to $160,725$14,382.50 plus 24% of the amount over $84,200
32%$160,726 to $204,100$32,748.50 plus 32% of the amount over $160,725
35%$204,101 to $306,175$46,628.50 plus 35% of the amount over $204,100
37%$306,176 or more$82,354.75 plus 37% of the amount over $306,175

Head of Household

Tax RateTaxable Income BracketTax Owed
10%$0 to $13,85010% of taxable income
12%$13,851 to $52,850$1,385 plus 12% of the amount over $13,850
22%$52,851 to $84,200$6,065 plus 22% of the amount over $52,850
24%$84,201 to $160,700$12,962 plus 24% of the amount over $84,200
32%$160,701 to $204,100$31,322 plus 32% of the amount over $160,700
35%$204,101 to $510,300$45,210 plus 35% of the amount over $204,100
37%$510,301 or more$152,380 plus 37% of the amount over $510,300

How tax brackets work?

From the above, you might understand that the US has a progressive tax system, where a person who has a higher income will pay higher federal income tax rates and those with lower income will pay lower tax rates. But before you get confused, being “in” a tax bracket does not mean that you have to pay that federal income tax rate on everything you make.

The government decides on how much tax you owe by dividing the taxable income into chunks, which is also called the tax bracket, and each of these chunks get taxed at the corresponding tax rates. This is the beauty of it and you will not be paying tax on your complete income. To understand better, check out the examples below.

Example #1

Let us take an example where you are a single filer who has a taxable income of $33,000. This means that you are in the 12% tax bracket in the year 2019. But do you need to pay tax on all the $33,000 that you earn? Actually, you will only have to pay 10% on the first $9,700 and 12% on the rest of the income, which will be on $23,300. In short, you will pay $970 plus $2,796, for a total of $3,766 as tax.

Example #2

Let us take another example to explain and say you earn about $60,000 in a year. In this case, you will have to pay 10% on the first $9,700, which is about $970. And then you will have to pay 12% on the chunk of income between $9,701 to $39,475 (which will be $3,572.88) and you will have to pay 22% on the rest of the income (which is $4,515.5) because a part of the taxable income will fall under the 22% tax bracket. This means that you will have to pay a total of $9,058.38. This is about 15% of your total income, even though you fall in the 225 tax bracket.

Note: It should be noted that this is the deal only for the federal income taxes and not for your state taxes. Every state has a different tax bracket and it is difficult to explain all here. So, you will need to connect with an accountant to understand what your state taxes are.

How to get into a lower tax bracket?

If you are looking for a way through which you can get a lower tax bracket and pay for a lower federal income tax, then here is what you can do:

  • Become eligible for tax credits. This can help in reducing the tax you owe. Although, it does not affect the bracket you are in.
  • Use tax deductions properly on your tax return. This helps in reducing the amount of income that is subjected to taxes. In short, you can fall into the lower bracket if you are able to deduct from your income with tax deductions. (You will find out more about deductions in the next sections.)

In short, take all the deductions and try to be eligible for any tax credits. This will help you pay lower taxes to the government. Just ensure that it is as per the rules of the IRS and tax laws. Seek advice from a tax professional or a lawyer if you have questions when filing your income tax return.

Income Sources

Did you know that about 80% of the US federal government revenue comes from individual income tax payments and payroll taxes? In short, you are contributing to the largest source of revenue for the country. Regardless of this, you will be getting and filling a lot of forms during the tax period every year. Below are the forms that you will receive and which will help you in your individual tax filing:

Form W2 (if you are an employee)

Form W2 is a tax form that shows the amount of state and federal income taxes withheld from your paycheck by your employer. This form is then used by the employee to file their federal and state income tax returns. As per the IRS, every employer needs to report the salary and wage information to their employees on form W2. After this, the employer send the form to the employee and to the IRS before January 31st.

Form 1099 (if you are an independent contractor or self-employed)

Form 1099 is a tax form used to report the income received by self-employed and independent individuals. This is then used to report the income on their personal income tax return. The payer needs to fill the form 1099 and send one copy to the contractor and one to the IRS. There are different kinds of form 1099, including the 1099-K and 1099-MISC. Each one is used to report different kinds of income.

When you prepare your income tax return, you will need to report all your taxable income that you received in a year using any of the above forms that you get based on what you do.

Schedule D, Form 8949

This form is used for those people who have sold or bought any additional assets like stocks, property or any other assets. But both the forms are not used. Before 2011, all the transactions for capital gains and losses were reported on Schedule D. But now, these transactions need to be reported on form 8949. And the total from this form is then carried to Schedule D.

The IRS needs all the brokers to report the cost or other basis for capital asset transactions like the sale of mutual funds, bonds, or stocks. In short, you need to file this form if you have sold any assets in the last tax year mentioning the capital gain or loss you incurred. This is done before you can complete the Schedule D.

There are two sections in the form: One for short term capital gains and the second for the long-term capital gains. Plus, you will need to check three of the following options in both sections:

  • Check the Box A if the broker reported the basis of your capital asset transaction(s).
  • Check the Box B if the broker did not report basis.
  • Check the Box C if you had capital asset transactions that weren’t reported to you on Form 1099-B or substitute statement

You will need to check the three options shown in part 1 and part 2 of form 8949. Also, you might have to prepare more than one form 8949 if you have sold different kinds of assets. Each form will be for each kind of asset. You will then use this information to fill in the Schedule D in the form 1040 (individual income tax return) which will be explained in detail below.

Learn more about the form 8949 and capital gains here!

Standard deduction vs itemized deduction

As mentioned above, you can claim many deductions while you file your income tax return. These deductions are categorized into two categories: standard and itemized. The standard deduction lowers your income by a fixed amount, while the itemized deductions are made up of a list of deductible expenses. You can choose which one you want to claim based on which lowers your tax bill the most.

Let us understand each of these two kinds of deductions better.

Standard deduction

As mentioned above, the standard deduction is a fixed amount that is reduced from your income on which you are then taxed. And the standard deduction is based on your filing status. The currently standard deduction values are:

  • For head of household — $18,000
  • For married filing jointly or qualifying widow(er) — $24,000
  • For single or married filing separately — $12,000

The standard deduction also increases if you are blind or are 65 or older. Additionally, if you are the head of the household or single, it is increased by $1,250 and if you are a qualifying widow(er) or married, it is increased by $1,550. In fact, two out of every three income tax returns claim the standard deduction. The standard deduction:

  • Permits you to get a deduction even if you have no expenses that qualify for claiming itemized deductions.
  • Lets you avoid keeping receipts and records of your expenses in case you are audited by the IRS.
  • Removes the need to itemize deductions, such as charitable donations and medical expenses.

Itemized deductions

Itemized deductions also reduce your taxable income. For instance, if you are in the 12% tax bracket, every $1,000 in the itemized deductions would knock about $120 off your tax bill. In fact, you can benefit from itemizing your deductions on Form 1040, Schedule A in case you:

  • Had large, unreimbursed miscellaneous expenses;
  • Made large contributions to qualified charities;
  • Had a large, uninsured casualty (wind, flood, fire) or theft losses;
  • Paid mortgage interest and real estate taxes on your home;
  • Had large, out-of-pocket medical and dental expenses; or
  • Have itemized deductions that total more than the standard deduction you would receive.

Nonetheless, your itemized deductions can be less than your standard deduction, and you can still choose to claim the itemized deductions. This can take place only if you itemize on your state and federal income tax returns and get a larger tax benefit than what you would get if you claimed the standard deduction on your income tax returns.

But do not assume there is no limit to it. In case your adjusted gross income (AGI) from Form 1040, Line 37 was more than a certain amount, some of your itemized deductions would be limited. Currently, you limitation applies if you AGI is more than:

  • $313,800 if married filing jointly or qualifying widow(er)
  • $287,650 for head of household
  • $261,500 for a single taxpayer
  • $156,900 if married filing separately

Common Itemized Deductions

With all this clear about what standard and itemized deductions are, you can now fill out your federal income tax return. Once you get your total deduction value, you need to subtract that from your AGI to get your taxable income value. But if you decide to go with itemized deductions to reduce your tax, you need to know about the options that you have open.

Below are the most common expenses that qualify for itemized deductions.

Medical Expenses

This is an obvious one. Almost everyone knows that you can deduct medical expenses from you AGI. But this is only possible in a limited way. The medical expenses that exceed 10% of your AGI can be deducted (and 7.5% if you are over 65 years old). The things you can deduct under this include necessary surgery (not cosmetic) costs, physical handicap costs, insurance premiums, doctor’s fees/co-pays, prescriptions, and transportation to a medical facility. In fact, you can deduct 24 cents for every mile you traveled for medical care.

State taxes

Another thing that you can deduct if your local and state taxes that you paid on your income during the year. This is a great way to reduce your tax. Just know that you can only deduct the taxes if you claim itemized deductions.

Home Mortgage interest

In case you have a mortgage running for a property you just purchased, the interest on the mortgage is deductible as an itemized deduction. A lot of people qualify for this because it is permitted on up to the first $1,000,000 borrowed on a mortgage. This deduction is allowed for two residences per taxpayer. Additionally, you are also allowed to deduct the interest on a home equity loan only if the loan is less than $100,000.

Charity contributions

In case you are a person who gives out money or property to a charity, you can deduct these gifts as an itemized deduction. Tithing to your church also falls under this. Just to be clear, contributions to needy families and political parties are not included.

Miscellaneous deductions

Other than the deductions mentioned above, there are some miscellaneous deductions that you can claim. But keep in mind that you can deduct them only if they exceed 2% of your AGI. These expenses include job-hunting expenses, subscriptions to professional journals, business use of your home, tax preparation fees, expenses for uniforms, qualified educational expenses, and unreimbursed business expenses. These are just a few to mention. You need to consult an accountant to know more about it.

Forms 1040

Now that you know all the parts that will help you in your individual tax filing, let us get to the main point – filing form 1040. And with this said, it is high time you get acquainted with Form 1040. You should know things like – who needs to file the form and how to file it? So, let us get into it.

What is Form 1040?

Form 1040 is for individual tax filing given to the IRS. It is used to report the total income that a person earns in a year. You would also find out how much of this income is taxable after all the personal exemptions, deductions, and credits. This will help you find out how much tax you owe or how much refund you get from the government.

In fact, this form can handle many sources of income and more complicated tax situations that arise for a freelancer or an independent contractor. But if you are a sole proprietor, you need to fill out the Schedule C to report your income or loss in your company.

Other than this, not everyone needs to file the form 1040. You are supposed to file the form only if:

  • You want to itemize your deductions
  • You earned self-employment income (greater than $400)
  • You have taxable income of at least $100,000
  • You earned income as a shareholder in an S corporation, in a partnership, or as a beneficiary of a trust

With this clear, do you know what to do if you make a mistake in a form and have already submitted it? Well, in this case, you need to send an amendment form and this cannot be done on the same form or a new 1040. For this, you need the form 1040X. Form 1040X is used for correcting the errors you made in the main form.

But this is not the only variant of the form 1040. There are two more that you might have heard of which have been explained below.

1040EZ and 1040A

Before 2019, there were different versions of Form 1040 which included the form 1040EZ and 1040A. Nonetheless, these forms no longer exist. The IRS now wants everyone to use the redesigned Form 1040.

How to file Form 1040?

You need to download the form from the IRS website and fill it out. There are various sections in the form where you need to report your income and deductions to calculate the tax you owe to the government. As mentioned earlier, you will need the forms W2 and 1099-MISC, whichever is applicable to fill additional details in the form.

The process to fill the form is pretty simple, as below:

  1. On the first page, begin calculating your adjusted gross income (AGI). This will be done by reporting all the sources of income you got in the year, unless the source is tax-exempt. The sum of each source is your total income. Moreover, if you received a form 1099-MISC, you will have to fill in the Schedule C of the form 1040.
  2. Now, you need to claim your deductions. You can easily itemize your deductions using the form 1040 or just take the standard deduction for your filing status by completing Schedule A of the form. Once you make your deductions, you can reduce the taxable income for yourself and one for every dependent you claim.
  3. Other than this, every taxpayer is entitled to a fixed exemption every year. The amount changes every year. So, subtract your exemptions to get your AGI which will then be subjected to the income tax.
  4. Using the tax bracket and the form 1040 tax table, you can then determine the amount of tax you need to pay or get as refund on your income. After that, sign the form and file it online or through the mail. Do not forget to add the amount, in case you haven’t paid the complete tax yet.

The Deadline

Just remember that you need to submit form 1040 for your individual tax filing to the IRS by April 15th every year. You can ignore this date only if you have filed for an extension, but still need to pay the withholding tax on your income.

Conclusion

With this clear, do not forget to take the help of a professional accountant or lawyer with your individual tax filing. Without the help, you might lose the chance to get some deductions and also might make some mistakes filing for the income tax return. If you are a person who wants to start a sole proprietorship and need some help in registering your business or need some mentorship, IncParadise can help you. Contact us to know more!

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