What You Should Know About Federal Income Tax
Federal income tax is payable on most different types of income although the way in which you pay tax will differ depending on your employment status.
Our guide looks at all the basics you should know about federal income tax.
What income do I pay tax on?
Federal income tax is due on most types of income including:
- Wages, salaries, commissions and bonuses
- Pensions
- Business income and dividends
- Interest
- Capital gains
- Royalties
- Rent
How do I pay my income tax?
If you are employed, your tax is generally deducted by your employer.
If you’re self employed, you normally pay your tax every three months based on your estimated tax bill.
If you don’t work, you normally also pay your tax every three months based on your estimated liability.
What are tax deductions and how do I claim them?
There are a number of tax deductions you can claim for which reduce the amount of your taxable income. These are dependent on your circumstances and include:
- Job expenses
- Education expenses
- Home mortgage interest
- Student loan interest
- IRA deductions
- Tax preparation fees
- Moving expenses
- Alimony paid
If you are an employee you will give information about your deductions to your employer using Form W-4.
Working out tax deductions can be a complicated business and so many people use specialist tax preparation software or pay a tax advisor to complete their tax returns.
What tax return do I complete?
The annual tax return form that must be filed by casino great britain all taxpayers as individuals is the 1040 although there are various different versions of it.
The 1040EZ version can be used if your taxable income is under $100,000 and you meet other conditions. These include your filing status being ‘single’ or ‘married filing jointly’, not claiming for dependents, no adjustments to income being made and that the only tax credit you claim is the ‘earned income’ credit.
The 1040A version can be used if your income is from wages or salaries, tips, social security benefits, pension and IRA distributions, interest and dividend income and capital gain distributions. In addition, your adjustments are limited to student loan interest and IRA deductions, educator expenses or tuition and fees deduction. You are also only able to use this form is your tax credits claimed are the education credit, child tax credit, child and dependent care credit, additional child tax credit, earned income credit, elderly credit, or retirement savings contributions credit.
The 1040 form also has a number of schedules which may need to be completed. For example, these include Schedule D (for capital gains), Schedule E (for rental real estate income, royalty income and S Corporation income), Schedule B (interest or dividends) and Schedule A (for deductible taxes medical expenses).
There are other forms that you may have to complete alongside your 1040 form. These include:
- The 1099 form – deals with non-employment income
- The 1098 form – deals with various deductions
Do I always use a 1040EZ as that’s the easiest form?
Carl – Not necessarily. The 1040EZ doesn’t offer some valuable tax breaks found on the other two returns. For example, you wouldn’t be able to deduct student loan interest or IRA contributions by using a 1040EZ.
Using a longer tax form could cut your tax bill.