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Understanding Income Tax Returns

It takes a lot of money to run the country and to fund all of the services that it provides. The main source of income for the federal government and most state governments is income taxes. Most people who earn income are required to file a federal income tax return with the Internal Revenue Service (IRS), the agency that is responsible for collecting income tax. 

A tax return is paperwork you file to report your income from all sources, as well as claim any applicable deductions for certain expenses. After determining which deductions apply, the resulting figure is your taxable income. The total amount of taxes you may owe is a percentage of your taxable income, and this percentage depends on your tax bracket.

The process of filing a federal income tax return is extensive and often requires you to gather multiple forms, receipts and other supporting documents. The documents you need may vary depending on your sources of income, whether you are a business owner, if you have investments if some of your income is from multiple states or countries and other factors. Americans with complex financial situations may choose to hire a tax preparer to help them with the tax filing process. The IRS also provides free taxpayer assistance. 

Who Needs to File a Tax Return?

Only people who earn more than a certain amount of money (gross income) are required to file a tax return. This income threshold is different depending on your age and your filing status. If you earn no income, you are typically not required to file a tax return. However, you may choose to do so if it may help you qualify for tax breaks and credits, including:

  • Earned Income Tax Credit
  • Child Tax Credit
  • American Opportunity Tax Credit
  • Health Coverage Tax Credit

If you are unsure whether you should file a tax return, you can use an online IRS tool called the Interactive Tax Assistant.

Determining Your Filing Status

When preparing your federal income tax return, the first decision you’ll likely make is to choose a filing status. Your filing status affects the deductions and tax credits you can claim. Filing status is associated with your marital status as of December 31st of the year you are filing taxes for. 

You can choose from the following statuses:

  • Single
  • Married filing jointly
  • Married filing separately
  • Head of household
  • Qualifying Widow(er) with dependent child

What Do I Need to File My Taxes?

Filing a federal income tax return requires you to gather certain documents and information, such as identification information like names, birthdates and Social Security numbers for each family member. If you are owed a refund from the IRS, it is helpful to have your bank routing and account numbers in order to expedite your payment.

Other necessary documents include those that relate to your income, such as a W-2 form, 1099 form, health insurance forms and Affordable Health Care statements. If you are self-employed, you generally must provide your business income and expense records. 

Regular employees – those who are paid regularly by a company or business – typically complete a W4 form during the hiring process and have taxes taken out of each paycheck. This information is shown on a W2 form, which records employment income. Independent contractors – those who control their own wages and employment – do not usually have taxes withheld from their paychecks. Instead, they typically receive 1099-MISC forms from anyone who paid them for a service.

It is also helpful to gather medical and dental expense receipts, education expense documentation including daycare, as well as real estate and property tax records to determine which deductions you may claim. 

Most people use the IRS Form 1040 to file their tax returns, but some people may need to file other versions of the 1040 form as their main tax return document. For example, older Americans may opt to use the 1040-SR, which features a larger print.

You may also be required to file additional documents, called schedules, depending on your deductions or the type of income you have earned. For example, self-employed individuals typically file a Schedule C form to report any income earned as an independent contractor.

Tax Credits and Deductions

You may qualify for tax credits that reduce the total amount of income tax you owe. For example, individuals and married couples with low to moderate-income may be able to claim the Earned Income Tax Credit. 

A deduction can also reduce your tax liability. The IRS has a standard deduction, which is a fixed amount that you can deduct depending on your filing status. The alternative is to itemize your deductions, line by line. While this involves more time and paperwork, it may result in a lower tax bill for some filers.

How to File a Tax Return

Once you complete all the necessary paperwork, you can file your tax return with the IRS. There are several ways to do this:

  • IRS Free File: This free tax filing service is offered by the IRS and can take two forms: guided online tax preparation at an IRS partner site or with Free File electronic fillable forms. To use the guided tax preparation, your adjusted gross income must be $73,000 or less.
  • Download, fill out and print the applicable tax forms and schedules and mail your return to the IRS. You can do this with or without the help of a tax preparer.
  • Go to a Taxpayer Assistance Center to get in-person help filling out your tax returns online or in hard copy.
  • Use a third party online tax preparation software, such as TurboTax or TaxAct, to prepare your tax return. File electronically or print and mail it to the IRS.

After Filing a Tax Return

If you are due a tax refund, you can choose to receive it via a mailed check or direct deposit, which is the fastest way to get paid. If you owe money to the IRS, you can pay online with IRS Direct Pay, include a check with your paper tax return or set up a payment plan online if you cannot afford to pay all of the taxes due at the time of filing. Businesses can pay their taxes using the Electronic Federal Tax Payment System (EFTPS).