Income Tax Basics

Basic tips on income taxes

Almost everyone who works in the US has to pay federal income tax.  Taxes go in to the Federal Reserve and are used to pay for the federal government and the running of the country.  If you get a paycheck it is usually taken out before you receive your pay.  The amount of income tax that is taken out varies depending on your circumstances, where you work and where you live.

Taxes don’t usually come up for most of us until tax season comes along.  April 15th is usually the filing deadline – though if this falls on a weekend it gets put off until the next business day.

Many people do their own taxes and submit them either by mail or electronically.  For others it is just too difficult to understand or their situation is complicated and so they hire a tax professional to do the work for them.  These experts are kept very busy during tax season.

The tax year for personal taxes runs from January 1st through December 31st.  After the tax year ends your company should send you a W2 which shows the amount of earnings you made during the previous year.  It will also show the amount of money that was withheld from your pay to cover income tax etc.

Once you receive your W2 then a tax form should be filled out using the information on the W2 and mailed to the IRS by April 15th.  The IRS will then process your form and decide if the amount you have withheld matches the amount you owe.  If you have withheld more, the difference will be returned to you as a refund.  If you have withheld less,  you owe the IRS the balance.

The amount of tax you pay depends on certain factors – tax deductions and tax credits.   Examples  include your marriage status, the amount of children in your household, whether you’re self employed or whether you work out of a home office.  So you may not have to pay as much tax if you are married or if you have children.  These can be offset as deductions and are ways to save money.

Tips on income taxesTo get the best results you should plan ahead for your taxes.  Planning can make life easier and save you money in the year ahead. Tax planning should be a continuous process undertaken throughout the year.  This is a good time to determine whether you qualify for any tax deductions and tax credits.   If you are currently making a financial plan for 2012 then tax planning should be an integral part of this plan.

You should begin your planning by checking your withholding amount.  75% of Americans pay too much each month and end up getting a refund.  If you accurately estimate your withholding amount then your monthly paycheck could grow.  You should also keep all your tax information and records in a safe place.  These include last year’s return, W2s, pay stubs, mortgage stubs, receipts for itemized deductions, charity receipts, business travel mileage, bank and credit card statements, medical, dental and pharmaceutical receipts, etc.

Make a checklist of all the items you will need each year.  Designate files to hold your tax paperwork so that it is readily accessible.   Having things in an orderly manner will make tax season much less demanding and more stress free.  And a final reminder – you should always keep a copy of your old personal tax records and documents for at least the past three years.

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