How to File Taxes

Though simple in essence, tax filing can feel more complex than it is, especially if you’re unfamiliar with tax terms and norms. Here are the tax items many people search for information on, with links to articles that explore each one:

• Adjusted gross income (AGI): The first step in determining your taxable income is AGI – all the money you made for a year minus special adjustments, like retirement plan contributions and student loan interest. Read “What Is Adjusted Gross Income?”
• Modified adjusted gross income (MAGI): To qualify for certain credits and deductions that can lower your tax, you have to add back in one or more of those adjustments to get your MAGI. Read “What Is Modified Adjusted Gross Income?”
• Deductions: These can lower your taxable income so you owe less tax, but are subject to various limitations and restrictions. Read “7 Top Tax Deductions for Homeowners” and “What You Need to Know About the Moving Expense Tax Deduction.”
• Credits: Tax credits are dollar-for-dollar reductions in your actual tax bill, not the income on which you’re taxed, so they can be more valuable than deductions. And they’re practically a world unto themselves, which is why you’ll want to read “What Is a Tax Credit?” which links to in-depth looks at the most popular tax credits.
• Retirement: Taxes don’t retire just because you do. But they do change – and what you do from the moment you start your retirement savings may affect how much you have to pay. For more, read “What You Should Know About Taxes in Retirement.”
• Estate/Inheritance tax: Most people in the U.S. don’t pay U.S. estate or inheritance taxes because the amounts that are exempt from federal taxation are very high – but some states have high inheritance taxes and low exemptions. Read “Paying Tax on Your Inherited Money”   

Now, here’s a discussion of frequently asked tax questions:

In general, if you work you should file taxes. The IRS has a big list of conditions² that will tell you for sure, but it usually boils down to you should file taxes if your gross income is a minimum of $12,400 if you’re single, or $24,800 if you’re married. And if your income is lower than that, as long as your employer sent you a W2 showing federal income tax withheld from your pay, you’ll want to file a tax return to get that money back. Even if you didn’t pay any income tax, but have at least some earned income, there are several tax credits that might result in a sizable government check for you.

Yes, and the IRS has tried to make this easier through its Free File Alliance.³ The Alliance is a group of professional tax prep companies that have agreed to offer free e-filing software for you to use online, or fillable forms to download. Naturally, their “freemium” business model means they’ll try to get you to upgrade, for a fee, and if your taxes are complex that may be a good idea. But if all your income comes from employers who sent you W2s, you can consider ignoring those upgrades thanks, in part, to the increase in the standard deduction resulting from the 2017 Tax Cuts and Jobs Act (TCJA). The higher standard deduction simplifies many people’s taxes because they won’t have to itemize deductions.

Yes. The IRS says it’ll usually process your return and send you a refund (if it owes you one) in 21 days if you e-file. If you mail it in, you’re looking at six to eight weeks, minimum.

Unless you’re 65 or older, you’ll start with the 2020 Form 1040.⁴ While it’s only two pages, if you’re eligible to claim any tax credits or itemize deductions you’ll end up filling out other forms and/or worksheets whose results you’ll enter into your 1040. Here’s the giveaway: Despite its brevity, the preliminary Form 1040 for tax-year 2021 has a 115-page instruction manual.⁵

The IRS starts accepting returns at the end of every January for the prior tax year, though in 2020 it delayed until mid-February because of last-minute tax changes. Employers generally have until Feb. 1 to send your W2 (or 1099 for contractors), which you must have in hand in order to file. The deadline by which you must file is April 15, unless you apply for a six-month automatic extension, which gives you until October 15. But as the IRS likes to remind you, that’s an extension for filing your tax return, not for paying your taxes. If you end up owing them money, they’ll charge you interest and penalties unless you pay an estimated amount by April 15.

Selected 2021/2022 Federal Income Tax Rates & Brackets

Source: IRS

Since the U.S. has a progressive tax system, the more you earn the higher the percentage you’ll pay when you file your taxes. For every tax year, the IRS publishes income “brackets” showing how much you pay at each level – the accompanying table shows the 2021 and 2022 tax brackets. But as with many things tax, it’s a little more complicated than it looks. In practice, your income is taxed at many different rates. Here’s an example to clarify: You have $180,000 in taxable income for 2021 and are married. You look at the table, and conclude that you owe 24% of that in taxes, or $43,200, since the chart says incomes above $172,750 and less than or equal to $329,850 are taxed at 24%. But here’s how our progressive tax system actually works for that amount:

• Your tax is 10% on the first $19,900
• 12% on the amount between $19,900 and $81,050
• 22% on the amount between $81,050 and $172,750
• 24% on the amount between $172,750 and $329,850 (or in your case, $180,000)

Your actual tax on $180,000 would work out to $31,242, which is $11,958 less than if it was all taxed at 24%. Luckily, no one has to do that much math; the IRS also publishes tables every year that do all that, giving you an exact tax amount for your income. Note that all these amounts are for 2021 incomes only; income tax brackets typically are adjusted each year for inflation.

You have to choose a filing status before you can file your taxes. There are five tax filing statuses, and they can make a big difference in the tax you owe. Just look back at the chart in the last section, and you’ll see that married couples filing joint tax returns get to pay lower tax rates on double the income of single people – unless you’re a very high earner. Here is the IRS’ list of filing statuses, in order of lowest to highest “effective” tax rates, with the percentage of 2019 tax returns for each one⁶:

• Married Filing Jointly or Qualifying Widow(er) with dependent child, which have identical tax rates (35%)
• Head of Household (an unmarried person who pays more than half the cost to maintain a home for others) (14%)
• Single (49%)
• Married Filing Separately (2%)
  

In general, credits and deductions are tax breaks designed to encourage Americans to behave in ways that Congress believes will serve the public good. The biggest breaks – and most obvious examples – are probably marriage and homeownership, both of which are believed to make society more stable. The tax system also provides incentives to get a job (even a low-paying one), have children, get higher education, save for retirement, and buy electric cars – among others. 

Deductions lower your tax because they are subtracted from your income before you calculate how much tax you owe. You can itemize deductions – which requires a lot of math and documentation – or simply take the so-called standard deduction, which the IRS allows everyone to take with no questions asked. For 2021, the standard deduction is $12,550 for single people and $25,100 if you’re married filing jointly. For tax-year 2022, the standard deduction is $12,950 for single people and $25,900 if you’re married filing jointly. 

Tax credits are subtracted from the actual tax you owe, and some – called refundable tax credits – can earn you a check from the IRS even if you don’t pay any income tax at all. As that difference suggests, tax credits can be very valuable to you depending on your income level and other factors, which is why Credit Intel has devoted a whole series of articles to the subject, beginning with “What Is a Tax Credit?”