An In-depth guide to Understanding Tax Forms and How to File Tax Returns in 2020
As a taxpayer, the whole process of tax filing can be overwhelming, especially if you’re a beginner. If you have a job or you’re in business, you are required to file tax returns with the IRS showing your total income, deductions, federal government credit claims, and tax bill. The tax-filing process is mandatory for every citizen, and it happens all year long. In many cases, most employees have their money withheld from their earnings and sent to the government. Therefore, the process of filing tax returns ensures you pay tax appropriately. It returns any excess deductions or charges the areas you didn’t pay. For the tax-filing process to be effective, you need to fill the necessary forms and understand how file returns are processed.
The Necessary Tax Forms and Why You Need to File Returns
At the end of every pay cycle, you’ll receive various forms necessary for your tax return process. The tax forms hold essential details, including information about your earnings and the applicable deductions. The tax forms include the 1099 NEC, which establishes income for nonemployees. It’s used for income earnings from other sources like rentals, or contracting, or from any other source apart from employment. Similarly, if you have a regular job, your employer issues you a W-2 form with essential details such as your income and the tax withheld from your earnings.
1099-INT is another necessary tax form. It’s a type of 1099 that indicates the interest earned from your savings accounts. On the other hand, form 1098 contains details of interests received from your mortgage or student loan. Don’t forget that filing tax returns is important. It identifies the overpayments or underpayments made on your paycheck that can be adjusted. Additionally, you may be able to lower your taxes by getting a refund on the tax paid if you take certain credits offered in the tax code. Probably the most crucial reason to file tax returns is to report extra earnings that should, but not reflected on your taxable income.
How to File Tax Returns
Typically, there are three ways to send your tax reports to the IRS. The first way is to have your returns submitted by a third party. Many approved tax preparers throughout the country have the authority to file tax returns on behalf of taxpayers. Alternatively, if you get stuck, you can get a professional to navigate through your tax filing and sending process. Or better still, the volunteer tax services can help complete the process for you.
The second option is mailing your tax returns. It involves filling out the forms and then submitting them to the IRS. If you’ve not used this method before, you could get their address from their website. While it’s easy to use, the IRS says it might take up to eight weeks to process the forms, which are quite long and can cause delays if you were expecting a refund. Lastly, you can use the e-filing services to file your returns. If you’re familiar with tax filing, this is maybe the easiest and fastest method to report your returns to the IRS. It’s the best method because electronic submission avoids possible mistakes that could easily happen when using other means.
How Taxes are Determined
The tax you pay is directly proportional to your total earnings. The IRS employs a progressive tax criterion. Meaning, your tax rate increases as your income grows. And the less you earn, the lower the tax rate you attract. Earnings are usually categorized in tax brackets, which attract different tax rates. For example, the 2020 category brackets state a 24% tax rate for single individuals whose total income ranges from $85,525 to $163,300, and the brackets move up as your income increases.
People with regular paychecks are issued a W-2 form that indicates crucial information about their earnings and possible deductions. This information is a crucial determinant of how much tax you owe the federal government or how much it owes you. Similarly, if you make your income from other sources like real estate investment, freelancing, rentals, or you’re self-employed, you’ll receive a 1099 form. The information pertaining to all your earnings is then transferred to form 1040. But you can reduce your tax through deductions. Deductions happen by the contributions you make to nonprofit programs. For instance, if you contributed to charities the previous year, the amount can be deducted from your tax returns on the current year.
The tax filing process may sound complicated, especially if you’re doing it for the first time. With so many forms to be done and regulations to abide by, it can be daunting. But if you learn the requirements and steps to follow, it’s manageable. Also, keep in mind that delaying or failing to comply with tax measures and regulations can attract penalties. Therefore, if you find the process challenging, you can find a professional to help out.