Income tax basics – everything you should know

If you don’t have a lot of experience with taxes and tax returns, it can be quite overwhelming. This is why we’ve prepared this quick overview of taxes that gives you all the income tax basics you need to know.

Income tax basics

Do I need to file a tax return?

There are different requirements for filing tax returns and whether or not you need to file one depends on your income in the year in question, age and your filing status. For instance, in 2019 all single adults under the age of 65 were required to file a tax return if they made $12,200 or more in that year. You can check the exact requirement on the IRS website to find out if you need to file a tax return. But even if you don’t need to file a return, it might still be a good idea to do it because the IRS may owe you money because you paid more in taxes than you should have.

How to calculate your income tax?

Essentially, doing your tax return yourself comes down to a few simple steps:

First of all, you need to figure out what your gross income is. This can be done by adding up all the money you’ve made in the past year from all sources, including wages, tips, alimony, dividends, etc. Next, you need to calculate your adjusted gross income (AGI) by subtracting the standard deduction for your filing status from your gross income. Your filing status depends on your marital status and determines your standard deduction and the type of form you’ll use to file your tax return.

Once you’ve calculated your adjusted gross income, you need to determine your taxable income. To do this, you need to do your research or consult a tax professional to find out which tax exemptions, credits and deductions you may be eligible for, calculate those deductions and subtract them from your AGI to find out your taxable income.

What sources of income are non-taxable?

There are several types of income that are not subject to taxes. These include welfare payments, inheritances, gifts, child support payments, life insurance payouts and some other income types. You should use the IRS website to carefully check whether different types of your income are taxable, as having errors on your tax return can cause serious issues even if the errors were made unintentionally.

Finally, you should calculate your modified adjusted gross income by adding your nontaxable income to your AGI.

How to file federal taxes?

Generally speaking, there are three ways to file your taxes: you can file your federal tax return on paper by mailing it to the IRS, have a tax professional prepare and mail your tax return or use tax preparation software to prepare your return and file it electronically. If you don’t want to hire a tax preparer or pay for tax filing software, there are free tax programs available but they have a more limited service compared to paid tax prep software. The deadline for filing your taxes is April 15 every year but you can request a 6-month extension if necessary.

 

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