Need to Know How to File Income Taxes?
It is a day that every American dreads — April 15th, better known as Income Tax Day. If you don’t know how to file income taxes, Tax Day is more like a Tax Nightmare. Failure to file income taxes is serious business, and can lead to penalties, fees, or even prosecution and jail time.
Even though the IRS (the government agency that oversees income taxes) is a “kinder, gentler” version of itself and prosecutes and audits taxpayers less often and with less trepidation, failure to file income taxes is bad news. The good news is that getting in trouble with the IRS takes a special kind of idiot — if you learn how to file income taxes online you won’t ever have to deal with the negative consequences that come in a little white envelope marked IRS.
Learning how to file income taxes is a big part of a teenager’s life — most people get their first “taxable income” while they are teenagers working part time while they finish high school. Though kids hear their parents groan about “Tax Day”, they are probably totally in the dark about what it is and what they have to do to act within the law.
A History of the IRS
The roots of what we now call the IRS (Internal Revenue Service) go way back to the Civil War. President Lincoln working with the Congress created the position of “Commissioner of Internal Revenue” in 1862.
That same year, legislation was enacted to create a Federal income tax — the purpose was to help pay war expenses. Just ten years later, the income tax was repealed. War expenses were down and the government didn’t see a need to continue to tax individuals.
When Wyoming ratified the 16th Amendment in 1913, Congress had the majority it needed to enact a new income tax. The first income tax was a one percent tax on personal income, and the first Form 1040 appeared. At that time, only incomes above $3,000 had to pay the one percent tax — the very wealthy (people with net incomes over $500,000) paid a six percent income tax. Easy enough, and far less complicated than our current tax code.
In recent years, the IRS has become increasingly modern — The IRS Restructuring and Reform Act of 1998 reorganized the IRS into a more “private sector” type of organization. The IRS now thinks of itself as a business with customers rather than as a government entity dealing with taxpayers.
How to File Income Taxes – Step by Step
- Your first step in learning how to file income taxes is figuring out whether or not you even have to file a tax return. If your income is low enough, you probably don’t have to file. Your age has nothing to do with it — if a child makes a certain amount of income they have to pay the same as an adult.
- Your next step is to determine your “filing status”. Different life situations qualify you for different filing statuses. Filing status refers to your marital status, and in many circumstances you can choose which filing status to file under. In some cases, one filing status may get you a bigger refund, so you’d obviously want to file under that status.
- Now figure out how many personal and dependent exemptions you have. Personal exemptions are exemptions for yourself and your spouse, if you have one. Dependent exemptions are anyone who you can claim “depends” on you financially — there are legal definitions of these words that you need to understand before just assuming someone is your “dependent”.
- This is the start of the “tough part” of learning how to file income taxes. You need to calculate your net income and any adjustments you have. Not all money that you make is taxable. Read the IRS forms carefully to figure out if that gift of $500 your aunt gave you for graduation is taxable or not. After you’ve worked out your net income, you need to figure out if you have any income adjustments. Certain conditions allow a taxpayer to subtract money amounts from your income and lower your total taxes — such as college tuition or government loan payments and interest.
- Next, calculate your deductions. At this point, you can pick between accepting what is called a “standard deduction” or a more complex itemized deduction. No matter which you pick, your deduction will lower the amount of your income that is considered taxable.
- Pretty soon you’ll have a hard figure in hand — your actual “income tax” amount which you will have to pay. Income tax is your taxable income minus adjustments, deductions, and exemptions. There are special tax tables that can teach you how much your total income tax is.
- Do you have any credits? You can earn credits against your income tax for certain expenses, like money spent on non-working children.
- In some cases you may have additional taxes to pay, like a state income tax. Not every state charges a state income tax, so don’t pull your hair out immediately. Self-employed individuals need to pay careful attention to additional tax requirements.
- Now you’ll have a number in hand called “total payments” — these are taxes already withheld by your employer, your estimated tax payment, and something called the earned income tax credit. The total is how much you have paid or has been paid for you, which will determine if you owe the IRS money or if they owe it to you.
- Now that you know the amount of taxes that you have overpaid or (hopefully not) underpaid, you know how much money the government owes you, or you owe them. If you didn’t earn a refund, you need to setup a payment plan to pay off the money you owe the IRS.
If you know how to file income taxes properly and on time, April 15th is nothing to be scared of. Most of us get some kind of tax refund (depending on our income and other factors) so in a way, filing income taxes is kind of like winning a mini-lottery or getting free money.
After you file your income taxes, sit back and wait for your government-printed refund check — or, in some cases, a direct deposit to your bank account. What you do with your refund money is your business. This year, I plan on buying a new set of tires and driving off into the sunset, into another year of income taxation.