Can you imagine having to pay 37% of your income to the IRS? Or receiving a letter from the IRS telling you that you owe thousands of dollars in back taxes? Or worse yet, being audited? These are some of the nightmares that people who don’t know how to handle Income Tax, the most important and dreaded tax in the United States, can experience.
But don’t worry, you don’t have to be one of them. In this article, we’ll teach you what you need to know about Income Tax, how to calculate it, how to declare it, and how to save money in the process. This way, you can sleep peacefully and enjoy your money without fear of the IRS.
How to Calculate Income Tax in 3 Steps
Income Tax is the tax applied to the income you earn from your work, business, investments, properties, inheritances, etc. To calculate it, you should follow these 3 steps:
- Determine your taxable income, which is the money left after subtracting your deductions. Deductions are expenses that the IRS allows you to deduct from your gross income. For example, you can deduct medical expenses, mortgage interest, contributions to retirement plans, donations to charities, and state and local taxes. You can choose between using the standard deduction, which is a fixed amount depending on your filing status and age, or the itemized deduction, which is a list of specific expenses that you must justify with documents.
- Apply the applicable tax rate according to your tax bracket. Tax brackets are income ranges assigned different tax rates. For example, for the year 2023, the tax brackets for a single person are as follows:
| filing status | standard deduction 2023 |
| single, married filing separately | 13850 |
| married filing jointly & surviving spouses | 27700 |
| head of household | 20800 |
- Add or subtract any credits you are eligible for. Credits are benefits that the IRS grants you for meeting certain requirements and directly reduce your tax payable. For example, you can receive credits for having dependent children, for having low or moderate income, or for attending college.
These 3 steps will give you the amount of your federal income tax. But in addition to this, you must also pay state income tax, which varies depending on the state where you live or work. Some states do not have state income tax, such as Florida or Texas, while others have very high rates, such as California or New York.
How to Declare Income Tax in 2 Options
To declare Income Tax, you must fill out and submit Form 1040, or Individual Income Tax Return, to the IRS. In this form, you must report your income, deductions, credits, taxes paid, and refunds or additional payments. You have 2 options to do this:
Electronically, through the IRS website or an authorized software provider. This option is faster, safer, and more accurate, and allows you to receive your refund (if applicable) in less time.
By mail, in printed form. This option is slower, less secure, more prone to errors, and takes longer to receive your refund (if applicable).
The deadline for filing Form 1040 is April 15th of each year, unless it falls on a weekend or holiday, in which case it is extended to the next business day. If you need more time to prepare your return, you can request a 6-month extension, but you must pay an estimate of your tax by April 15th to avoid penalties and interest.
4 Tips to Save Money When Paying Income Tax
Paying taxes is a legal and moral obligation, but that doesn’t mean you can’t look for ways to reduce your tax burden and save money. Here are 4 tips to do so:
Maximize the deductions and credits you are eligible for. Research the requirements and conditions to access them, and keep the documents that support them.
Contribute to a retirement plan, such as a 401(k) or an IRA. These plans allow you to save money for your future and defer paying taxes on that income until you withdraw it. Additionally, some employers match your contributions, meaning you receive free money for your retirement.
Donate to charitable organizations. If you make donations to IRS-qualified nonprofit entities, you can deduct those amounts from your taxable income, provided you have receipts to prove it. Additionally, you will be helping a good cause and improving your social image.
Hire a professional. If your tax situation is complex, or if you don’t have the time or knowledge to do your return, it may be convenient to hire an accountant, advisor, or tax preparer to help you. These professionals can help you optimize your return, find deductions and credits you may not have known about, and avoid errors that could cost you penalties or audits. However, make sure they are qualified, honest, and have a good reputation.
We hope this article helps you, however, if after reading it you feel overwhelmed or confused, remember that at JCN we are your allies for your financial management and regulatory compliance.
