The US tax process is something that everyone needs to understand enough to file their income taxes, but likely something that most don’t understand enough. It’s not surprising, either, as it can be confusing to the uninitiated.
Many Americans think about taxes in the run-up to April, and then quickly forget about them, but the process runs throughout the year. For those that aren’t self-employed, the process starts when you start a new job. An annual wage is agreed upon between the employer and the employee, which makes up your gross income. A W-4 form is then filled in, which takes information like your marital status, if you have children or not, and if your spouse works to define your allowances. The information in this form will determine how much money is withheld from your paycheck and deposited into a Federal Reserve Bank. Your W-4 form ensures that you pay the correct amount of tax throughout the year and don’t underpay.
How to File Your Income Taxes
When you file your income tax in April, you’re essentially making sure that you’ve paid the correct amount throughout the year. If you’ve overpaid, you’ll receive reimbursement, and if you haven’t paid enough, you’ll find yourself writing a check, which makes the process so important.
A simple method to understand your income tax is using a calculator; check this out for a good example that can save you a lot of time. To start, you need to add your gross income up, which is a combination of your income, interest from investments, annuities, and your pension. You then take away any adjustments such as alimony, moving expenses, student loan interest, etc., to reach your AGI or adjusted gross income.
You can either take away a standard deduction from your AGI or use your itemized deductions, using the highest figure. Examples of itemized deductions include dental or medical expenses, state taxes from the previous year, and charity contributions.
The next step is to remove any personal exemptions from 2013, allowing up to $3900 to be subtracted. With this removed, you’re left with your taxable income.
Several factors will change the amount of tax you’re liable to pay, as the US uses a progressive taxation system that increases the percentage you pay depending on your earnings. Use the IRS tax table to see where your taxable income falls, and mark up your status as single, married, filing single or jointly, etc.
Before you reach your final taxable amount, you can also remove any tax credits you may qualify for. Examples include child tax credit, which allows you to subtract $1000 for each child that qualifies. There are also credits for those that have lower incomes and for people with childcare expenses. The final number is the amount that you need to pay in tax. If this is higher than what you’ve already paid, you’ll need to pay the difference, and if it’s lower, you’ll qualify for a refund.