When the concept of taxes is brought up, many people’s brains turn off. Tax laws seem like an overly complex topic that only those who spend years in school studying could ever understand. However, that’s not the truth. While you may not know every tax law ever written, it’s likely you can learn enough to better your own tax situation. Here are five important tips you can utilize when trying to understand how tax laws affect you.
Everybody Must File A Tax Return
Tax laws are constructed for all persons, organizations, companies, and non-profits. Every person or entity must file a tax return at the end of the tax season, with no exceptions. Yes, there are certain exemptions that people can enjoy as being a non-profit over a for-profit company. However, at the very basis of the tax law, everyone has to record their income and submit a tax return to the federal, state, and local governments alike. By understanding this concept, it can help to start to breakdown the complexities of tax law into more manageable chunks.
All Income Is Taxed At Some Point
While you may think that income is simply what you receive in your paycheck or from your customers, it includes much more than that. Income can be from earned income like wages, or from interest, dividends, pensions, and profits on your existing investments. The only money which is considered exempt from income tax is gifts and scholarships. Your income is taxed on a progressive calculated bracket basis. The more money you earn, the higher the tax rate is in the income bracket that you qualify for. Therefore, the more money that you make, the more money you will owe in taxes.
Know What Deductions Are And How To Use Them
We’ve all heard the term ‘tax deduction’ and we know it means getting some of our money back. However, in order to apply for deductions, you need to understand what they are and which ones you’ll be able to apply for. Allowed deductions are considered a credit to a person’s income tax based on expenses from their adjusted gross income. For most individuals, the standard deduction is going to be their highest credit amount. This is an amount set by the government based on your tax filing status and income. You can, conversely, opt for itemized deductions if you have many expenses that total more than the standard deduction. Itemized deductions include mortgage interest, charitable contributions, medical expenses, and state taxes.
Everyone Files A Form 1040
One of the most confusing parts about filing taxes in the past was what form you were to submit to record your income. There was the 1040 and the 1040EZ. Thanks to new changes in the tax laws to simplify filing, there is now only one form. This is the Form 1040 and all tax filers must fill it out. You’ll find this short two-page form fairly easy to file as it simply recaps the credits, deductions, and income that you report.
Late Filing Can Be Costly
When it comes to taxes, the due date is typically April 15th of the following year. This means that your tax return for the year of 2018 is due on April 15, 2019. When tax season rolls around, you may find yourself owing money that you don’t have. The solution is not to wait until you have it. Rather, you’ll want to set up a payment plan with the IRS in order to help avoid late filing penalties and fees. Realize that there are multiple fees that can be tacked onto your initial tax bill in the event you don’t file. There’s the non-filing fee and the non-payment fee. As long as you file on-time, you can avoid that costly fee.
Understanding tax law can feel like an overwhelming task for anyone. The truth is that you should be mainly concerned with the tax laws that govern the way you file your individual taxes. For example, if you file for a single tax return, then you should be learning about tax laws affecting single persons not business tax laws. By sticking to the area of tax law that you’re dealing with directly, you can set yourself up for paying less in taxes.