Income Tax Filing: The Basics & Step-By-Step Guide

Income tax filing can seem like a complicated task, especially for those new to the process. However, understanding the basics can make it manageable and even beneficial. Knowing what to file, when to file, and how to maximize deductions and credits can save time and money.

In this guide, we’ll break down everything you need to know about filing your income tax.

Why File Income Taxes?

The primary reason to file income taxes is that it’s legally required. However, there are also other significant benefits to filing, even for those who may not owe any taxes. Some of these include:

• Receiving tax refunds
• Qualifying for tax credits
• Building a financial record
• Avoiding penalties for missed filings

If you’re employed, self-employed, or earning income through investments, you must file a tax return to report your earnings and any eligible deductions.

When Should You File?

Tax season typically starts in January and extends until mid-April. For most taxpayers in the United States, the deadline is April 15, though it may be adjusted if that day falls on a weekend or holiday. Filing early can give you peace of mind, help you get your refund faster, and allow you time to address any issues if they arise.

• January to April 15: Standard tax filing period
• Mid-February: Deadline for employers to provide W-2 forms to employees
• October 15: Extended deadline for those who file for an extension

Filing early or applying for an extension, if needed, can help you avoid late filing penalties.

What Documents Do You Need?

Gathering the right documents before filing can make the process smoother. The following are some of the common documents you may need, depending on your income sources and tax situation:

1. W-2 Forms: These are provided by your employer and show your yearly earnings and tax withholdings.
2. 1099 Forms: If you’re self-employed, freelancing, or earning interest or dividends, you’ll need these forms.
3. Bank Statements: Any interest or investment income should be documented.
4. Student Loan or Tuition Statements: If you’re in school or paying student loans, these documents can help you qualify for education credits or deductions.
5. Receipts for Charitable Donations: Charitable giving can provide deductions, so save those receipts.
6. Medical Expenses: Some medical expenses may be deductible if they meet a certain threshold.
7. Property Tax Statements: If you own property, these payments might be deductible.
8. Retirement Contributions: Contributions to certain retirement accounts, like IRAs, can be deducted.

Steps to Filing Your Taxes

Once you have all necessary documents, follow these steps to complete your filing:

1. Choose Your Filing Status
   • Your filing status affects your tax bracket and standard deduction. Options include single, married filing jointly, married filing separately, head of household, and qualifying widow(er).
2. Calculate Your Gross Income
   • Gross income includes wages, salaries, interest, dividends, and other earnings. This total will be adjusted for deductions.
3. Subtract Adjustments and Deductions
   • Adjustments include retirement contributions, student loan interest, and health savings account contributions. Deductions reduce your taxable income and can be either standard or itemized.
4. Apply Tax Credits
   • Tax credits directly reduce the amount of tax you owe and include the Child Tax Credit, Earned Income Tax Credit, and education credits.
5. Calculate and Pay (or Receive)
   • After applying all deductions and credits, calculate your final tax liability. If you owe taxes, payments can often be made electronically. If you’re owed a refund, the IRS will process it once your return is accepted.

Standard Deduction vs. Itemized Deductions

One of the most important choices in tax filing is deciding between the standard deduction and itemized deductions.

• Standard Deduction: A set amount that reduces your taxable income. The amount depends on your filing status:
  • Single: $13,850 (2023)
  • Married filing jointly: $27,700 (2023)
  • Head of household: $20,800 (2023)
• Itemized Deductions: Allows you to list individual deductions, including medical expenses, mortgage interest, charitable donations, and state and local taxes.

Generally, taxpayers choose the option that provides a greater deduction. If your itemized deductions exceed the standard deduction, itemizing may save you more.

Types of Tax Credits

Tax credits reduce the amount of tax you owe and can sometimes even provide refunds. Here are a few common tax credits you might qualify for:

• Earned Income Tax Credit (EITC): This credit is aimed at low- to moderate-income workers and can provide a significant benefit, especially for families.
• Child Tax Credit: Offers a credit per qualifying child, which can reduce the overall tax burden.
• American Opportunity Credit: Available to students pursuing higher education, covering qualified education expenses up to $2,500.
• Lifetime Learning Credit: Another education-related credit that offers up to $2,000 per tax return, aimed at adult learners and continuing education.

Each credit has specific eligibility requirements, so review them carefully before claiming.

Filing Options: DIY or Hiring a Professional?

Deciding whether to handle your taxes yourself or hire a professional depends on your personal situation. Consider these points:

Filing on Your Own

Many people file their taxes independently using online software. Filing software has made the process much simpler, with many platforms offering guided steps to ensure accuracy. Advantages of filing on your own include:

• Cost-effectiveness
• Full control over the process
• Often faster refunds with e-filing options

Hiring a Tax Professional

Complex financial situations often benefit from professional tax assistance. Advantages of hiring a tax professional include:

• Expert handling of complex deductions, investments, or business income
• Personalized tax advice
• Support in case of an IRS audit

If you own a business, have numerous income sources, or significant investments, a tax strategist can help maximize your deductions and credits.

Filing Tips to Maximize Your Return

Getting the best outcome from your tax return requires attention to detail. Here are a few tips to help:

1. File Early: Filing early reduces the chances of tax fraud and gives you a jump on any issues that may arise.
2. Double-Check Deductions and Credits: Look for all eligible deductions and credits to ensure you’re not leaving money on the table.
3. Consider an IRA Contribution: Contributions to a traditional IRA made before the tax deadline may reduce your taxable income.
4. Organize Your Documents: Keeping everything in one place prevents last-minute scrambling and reduces stress.
5. Check for Errors: Math errors or incorrect Social Security numbers can delay your refund or trigger an audit.

Filing taxes doesn’t have to be stressful. Approaching it with preparation and understanding can make the process smoother, and it may even provide some unexpected financial benefits.

Whether you choose to handle your taxes yourself or work with a professional, understanding the basics will give you confidence and possibly lead to a better financial outcome. Remember to keep organized records, consider all eligible deductions, and avoid common mistakes for the best results.

Get Started Today With CapForge’s Bookkeeping & Tax Services

Take control of your business finances with CapForge. Our expert team makes managing your payroll simple so you can focus on what really matters—growing your business.

Partner with us today and discover the peace of mind that comes from knowing your financials are in good hands.

Send an email to info@capforge.com or contact us at 1-858-633-3573 to get started. Additionally, you can fill out the form below and we’ll be happy to attend to your needs!