Any government must collect taxes if it is going to operate. Taxes are collected from the people in some manner. Over the centuries, different methods have been used. Today, the primary method of collection taxes from the people in the United States is the Federal Income Tax.
Income taxes are common for working people, companies, partnerships and other entities. Successfully completing the annual Form 1040 for personal income taxes can seem to be overwhelming. Many people prepare their own returns. Another person may use computer software to walk them through the process and still others will hire someone else to complete the form for them. There are other simpler forms that may be more suitable for certain low-income groups.
For most, completing the 1040 form and filing the tax return is important. If you paid more taxes than required, a refund will be forthcoming. If your tax payments during the year were not adequate, the Internal Revenue Service (IRS) will be expecting a check.
The trauma or mystery of the annual tax return can be made easier by understanding some key terms. The following list will not cover every situation. Furthermore, the IRS has a habit of changing rules, sometimes through its administrative authority and other times because of acts of Congress.
The following explanation of terms may make the annual task of determining your federal tax liability easier. Keep in mind, there are always exceptions and if there are any unusual circumstances in your life affecting your income, consult the IRS or a professional tax preparer.
The first thing to understand is that the money you earn in the year 2015 will be reported on your 2016 Federal Income Tax Return. Many people would think 2015 incomes would be reported on the forms for 2015. That is not how the IRS works. Assuming everyone has filed their 2015 return, claimed their 2014 tax deductions, and filled in all the blanks, then they are aware that the activity was reported on the 2015 IRS Tax Return Form, even though the income was for 2014.
Understanding the following issues and how they apply to your tax return, will provide some guidance regarding the records that should be kept throughout the year and how to apply the numbers to achieve the best benefit possible.
Sometimes the maximum benefit will be a larger refund. In other cases, reducing the amount of taxes owed to the IRS will be the result.
The IRS Terminology
What are deductions?
Deductions fall into many categories. They cover certain areas that are identified as non-taxable, if they comply with all the necessary criteria. The following definitions will explain the different types of deductions that are available. Often deductions, credits, write offs are referred to as tax breaks, in that they are intended to lower the taxes that might be owed or give the taxpayer a break. There are no official “tax breaks,” but there are a number of methods that can be used to reduce federal income taxes for some people.
What is the standard deduction?
When the annual tax return is filed, the taxpayer has two choices. There is the standard deduction which is based on the number of people in the household that do not file separate returns. Usually, this refers to the husband, wife and children. At some point, the children will be on your own. However, in cases of special-needs children or your disabled parents, you may be able to claim them as dependents. Once the number is determined, the taxpayer can claim an amount that is adjusted annually by the IRS and is then multiplied by the number of persons identified on the tax return.
If this method is chosen, completing the remainder of the tax form will be relatively easy. Usually individuals or couples just starting out, with no high medical expenses, home-mortgage interest or large amounts of contributions will file the standard deduction. However, sometimes it is more advantageous to figure your taxes using other available options.
What can be included in itemized deductions?
If you have children, a mortgage on the house, high medical expenses, give a considerable amount to charity, using the itemized deduction method may be the best choice. Itemized deductions are a group of deductions that can be used to lower your tax liability, if the taxpayer is eligible to take the deduction.
Among the items that can be included as part of itemized deductions are:
Interest and points on the mortgage for your primary home
Certain business expenses
Medical expenses, including insurance premiums
State income taxes
State and municipal sales taxes
Casualty, disaster and theft losses (including federally Declared Disaster Areas (excluding losses covered by insurance)
Contributions of money or items to a church or charitable organization can also be deducted. Monetary donations are fully deductible. The value of donated furniture, books, appliances, and other items has to be at fair market value.
Miscellaneous expenses (defined by IRS)
According to the IRS, tax credits reduce the amount a tax that must be paid. A refundable tax credit will not only reduce the federal tax that may be owed, but could result in a refund.
Currently, some of the credits for individuals include:
Earned Income Tax Credit for low-income families
Child and Dependent Care Credit
Child Adoption Credit
Always read the latest regulations regarding credits and do not assume that the rules followed in a previous year are the same for the current year. Charges are frequently made.
How do “tax write offs” affect a person’s income taxes?
In many ways, the “write offs” are same as deductions, but are aimed at more targeted groups. Tax write-offs are available for education expenses and job searches along with the other deductions already discussed. The rules regarding the write-offs and deductions are frequently changed.
Therefore, if filing your own return, check with the IRS for the latest information publication and carefully review it for changes. If using tax software or a tax filing service, determine if there are aware of any changes in the rules governing these write-offs and other deductions. Ask these questions each year. The rules can change every year.
Why is it so hard to understand the tax system?
The federal income tax system is complicated. Something that was once allowed, such as interest on an automobile lease, is no longer deductible. Furthermore, always keep in mind the tax year for which you are filing a return.
When filing the 2015 return, you were dealing with your 2014 income. In addition, because of the introduction of the Affordable Care Act, which provided subsidies to people with lower income, an additional form had to be included with the 2015 return, to account for any excess subsidies that were paid.
Do the tax laws change every year?
This gets to a technical point. The law may or may not be changed. However, definitions and rules used to administer the law may be changed. Some tax laws may also be changed, added or deleted. Numerous deductions are allowed.
Furthermore, some old deductions have been repealed. Other deductions only deal with special circumstances. Getting help from the IRS during tax season can be difficult because of the volume of telephone calls that are received. Therefore, it is suggested you start working on your tax return as early as possible. If you owe money, the payment can be delayed to near the filing deadline.
Does the nation really benefit from levying income taxes?
The federal income tax is the largest source of revenue for the United States.
The income tax is followed by revenues from bonuses, lease payments and royalties from oil and gas activities involving federal lands and waters.
Taxes are used to pay the operating cost of the government, which includes operating the Internal Revenue service as well as all the other governmental agencies, special program, the military, and other expenses.
Thus, the government is very active in making certain that returns are filed promptly, and taxes collected through payroll withholding; quarterly payments for self-employed people and lump-sum payments when tax returns are filed.
If the tax laws appear to be overwhelming, help is available through several national income tax preparation firms, computer software that will walk a person through the process, private accountants and charitable organizations.
Keep good records. Save receipts for medical expenses, job-related-expenses and other deductions that might be claimed. Keep copies of past returns and all the supporting documentation. Federal law allows the collection of income taxes. It is important for taxpayers to understand the areas that affect them and to maintain the documentation to support any deductions that may be claimed.
If income taxes were not collected, many services often taken for granted, would not be funded. Discussions have surfaced in recent years with regards to the possibility of replacing the income tax with a value-added tax (VAT) or national sales tax. Both systems are possibly viable, but may not be flexible enough to allow the deduction of interest on a home mortgage, charitable contributions, or the medical costs of a person who suffers from a serious illness or injury.
The Federal Income Tax Law may someday be changed. However, for the moment, and the foreseeable, future, it appears that it will remain in place as the method used to collect the number-one source of revenues.