Understanding Tax Return: How to Maximize its Benefits

A tax return is a document that includes financial information about the taxpayer’s income, paid taxes, expenses, and more. Through this document, taxpayers determine their tax due, set up tax payments, or ask for refunds for any taxes they have paid in excess. In the US, tax returns are typically handled by state tax collecting agencies or the Internal Revenue Service (IRS). The latter is a department of the U.S. government in charge of tax collecting and law enforcement.

The main purpose of a tax return is to inform the Internal Revenue Service about how much you earned during the previous year. The paper will also show how much you overpaid in the prior year and how much money the government owes you as a result. Thus, if you make enough money each year, you should file tax returns with the federal government or your state.

Principal Three Sections of Tax Returns

Income

This section lists all the sources of income an individual received throughout the course of the preceding year. It can comprise of salaries, dividends, earnings from a side job, royalties, and capital gains.

Deductions

Tax deductions enable you to subtract specific expenses from your income, lowering the amount of tax you must pay. Some of the most popular tax deductions that you can list on your federal income tax return are as follows:

A. A personal exemption is a sum consisting of a list of permissible costs. It may include

  • Medical expenditures,
  • Local and state taxes,
  • Home loan interest,
  • Casualty losses,
  • Charities.

B. Standard deduction reduces your income by a set percentage. Here is the standard deduction amounts for the 2021 and 2022 tax years

  • Single: $12,950
  • Head of household: $19,400
  • Married filing separately: $12,950
  • Married filing jointly: $25,900
  • Widow (er): $25,900

C. Charitable contributions to different organizations and churches, as well as donations of goods to charity, are also tax deductible.

D. If you have a mortgage, you can deduct the interest from your taxes.

E. Contributions to tax-advantaged accounts. You can deduct your Traditional IRA, 401(k), or HSA contributions.

Tax credits

A tax credit lowers a taxpayer’s total tax obligation directly and dollar-for-dollar. It differs from deductions since the latter lowers taxable income rather than the taxpayer’s tax burden.

Who Should File Tax Returns?

U.S. citizens and permanent residents who work in the country should file a tax return if they earn more than a specific annual income threshold. For example, an individual under 65 who is single and earned $12,550 or more in 2021 must file taxes in 2022, while married couples filing jointly must do so if their combined income was at least $25,100 in 2021. For the tax year 2021, the breakdown is as follows for all filing statuses:

  1. Single: $12,550
  2. Head of household: $18,800
  3. Married filing separately: $12,550
  4. Married filing jointly: $25,100
  5. Widow (er): $25,1003

You typically do not need to submit a federal tax return if your income is below the above-mentioned thresholds.

When to File a Tax Return?

US taxpayers use IRS Form 1040 to file their personal income tax returns, record the income they received throughout the year, and calculate how much of that income is taxable after taking into account tax credits and deductions. The due date for filing federal individual income tax returns via Form 1040 is generally April 15 of each year if the day does not fall on weekends or holidays. Consequently, the deadline for individual taxpayers to file their 2022 taxes without an extension is April 18, 2023. Taxpayers can also seek an extension until October 15 by filing Form 4868.

How to File a Tax Return: Step-by-Step Instructions

The IRS offers a PDF version of Form 1040 that you can fill out either manually or electronically using the IRS’s Free File Fillable Forms. Copies of tax forms are also available at an IRS Taxpayer Assistance Center.

  1. It is crucial to prepare to fill out Form 1040 by obtaining all of your tax records, such as W-2s from each employer, 1099s, and further evidence of your earnings and deductions. These documents are necessary for calculating and reporting correct data.
  2. The second step is selecting your filing status. Your filing status refers to whether you are filling out the form as a married or single taxpayer, which will impact the portion you will pay.
  3. Determine if you are taking the standard deduction or personal exemption.
  4. Carefully fill out the form with the required data. Form 1040 requests personal information such as name, address, Social Security number, and the number of dependents. Make sure to enter your name, your spouse’s name, and the names of any dependents precisely as they appear on their Social Security cards.
  5. The following lines on Form 1040 require filing a variety of income sources. Wages, salaries, taxable interest, capital gains, pensions, Social Security benefits, and other forms of income must all be reported by the filer.
  6. You must calculate your tax on the second page of the form. Although the Form 1040 Instructions contain tables to assist with the calculations, you can also use tax preparation services or tax software to complete the task.
  7. Claim tax credits. You should add Form 2441 or Schedule 8812 to your claim for tax credits.
  8. If you complete Form 1040 in digital format, you should validate the data by clicking the “Validate” button after entering all the necessary information.
  9. After completing and signing your income tax return, you can either print and send Form 1040 to the address specified in the Form Instructions or file it online.

To Sum Up

As you can see, submitting Form 1040 tax returns is not as challenging as it may seem. The 1040 is two pages long: personal data plus income-related questions. You can complete the form in an hour or two if you carefully follow the aforementioned instructions and prepare all your documents in advance.