It’s been said there are only two certainties in life – death and taxes. While tax season can be stressful, understanding the documents involved, your filing status and a few key terms and dates make the process much less intimidating and actually reasonably manageable.  

Documents

W4. This is a document you fill out on your first day of employment with a new employer. You provide some of your financial data and dictate to your employer exactly how much money you want withheld from each paycheck for your federal taxes.

W2. Your employer issues this document to you (either by mail or electronically) in January that provides information about how much money you earned as their employee, how much was withheld for federal taxes, social security wages, Medicare wages and tips. This is a document you (or your accountant) will reference during the filing process.

1099-DIV. This document is issued by banks and/or financial institutions when you receive dividends or distributions from investments. 

1099-INT. This document is issued by banks and/or financial institutions when you earn $10 or more in interest on funds.

1099-R. This document is issued when you are the recipient of of retirement benefits such as pensions, annuities or other retirement plans (including as a beneficiary of another party’s plans).

1099-G. This document is most often issued for unemployment compensation or state and local income tax refunds. (The “G” designates the money came from a government).

1099-MISC. This is the “catch all” document to note various forms of income the most common of which are rent(s), prizes and awards and medical and health care payments.

1095-A. You’ll receive this document if you purchased a health insurance plan through the Health Insurance Marketplace.  

Form 1040. This it the form you complete to file your federal taxes. 

Form 4868.  You file this form if you need an extension to file your taxes. Your deadline to do so will change from April 15 to October 15. But know that just because you filed for extension, if you owe taxes, you still need to pay them by April 15.

Filing Status

Single.You file as single status if you are unmarried and do not have any dependents.  

Married, Filing Jointly. You file as married, filing jointly if you are legally married and want to file one tax returns that acknowledge both parties’ income and deduction information.

Married, Filing Separately. You file as married, filing separately if you are legally married but want to file two tax returns – one for each party. acknowledge both parties’ income and deduction information. The main reason for filing separately versus jointly is if the credits and deductions are significantly higher than they would be if you filed together. (But note, this is rare).

Head of Household. You file as Head of Household if you are unmarried (with a few exceptions) but have “maintained a home” for a qualifying person or dependent. In order to constitute “maintaining a home”, you must have paid more than half of the costs to maintain the home for the year you are filing.

Key Terms

Withholding. If you look at your paycheck, you’ll see a line item of “Federal Tax Income” and a dollar amount attributed to it. This is the amount your employer withholds and then gives to the federal government on your behalf. 

Dependent. According to the IRS, a dependent is “either a qualifying child or a qualifying relative of the taxpayer”. If you aren’t sure if someone would qualify as a dependent for tax purposes, you can answer a few questions using this tool on the IRS’s website. 

Deduction. A deduction is an expense or list of expenses that reduces your taxable income amount. 

Standard Deduction. A standard deduction is a fixed amount (based on your filing status) that reduces your taxable income. This amount often changes annually.

Itemized Deduction. There are certain expenses that you can add up to form an itemized deduction. You should only use this option if this total is more than the standard deduction. (As a point of reference, less than 14% of people itemized their taxes in 2019). 

Adjusted Gross Income (AGI). Your AGI is how much money you earned in a whole year (your gross income) minus any eligible expenses or deductions. 

Tax Rate. The percent of your AGI that you owe in taxes.

Tax Bracket. Your tax bracket is based on your AGI and filing status. For reference, the higher your AGI, the higher your tax bracket and rate.

Capital Gains Tax. This tax occurs when you sell an asset (the most common example is stocks) for more than you paid for it initially. Most of the time, this rate is 15% on the difference between sale price and purchase price. 

Tax Liability. Your tax liability is how much money you owe the government in the form of taxes and is found by multiplying your tax rate times by AGI. 

Credit. A tax credit is an amount of money that taxpayers can subtract directly from taxes owed to their government. Unlike deductions, which reduce the amount of taxable income, tax credits reduce the actual amount of tax owed (www.investopedia.com).

Final Tax Liability. This is the final amount you owe the government. The formula for finding your final tax liability is (Gross Income – Deductions) x Your Tax Rate – Credits.

Tax Refund. If your employer withhold more taxes than you owe (e.g. your final tax liability), the IRS pays you the difference in the form of a refund check.

Garnishment. If you owe child support, funds to a federal agency (including federal student loans), state income taxes or unemployment compensation you were to pay back, the United States Department of Treasury will collected those funds by garnishing your tax refund up to the amount owed.

Important Dates

January 1 through December 31. When determining your gross income, include every dollar that was earned between these two dates – nothing more and nothing less.

February 1. By law, all of your 1099s and W2s have to be in the mail (or available to you electronically) not later than February 1st so that you can file.

April 15. This is the day your Form 1040 must be filed by. Also, should you owe taxes, your check (or payment) must be postmarked before or on this date. If you fail to meet these deadlines, you will be charged a fine as well as interest on any taxes you owe. You can file after April 15th if you file an extension, but you still must pay by April 15th. 

Conclusion

When it comes to filing your taxes take your time, make a few key decisions and do the appropriate research. The process doesn’t have to be overwhelming and confusing. 

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