FAQ

Whether you’re required to file a tax return will depend on several factors, including your gross income, filing status, age, and whether you’re a dependent on someone else’s federal income tax return. And you may have to file even if you don’t owe any tax.

According to the IRS, income includes money, property or services. Any income is taxable unless the law specifically exempts it, and all taxable income must be reported on your tax return. Some nontaxable income must be reported, too, even though you won’t pay taxes on it.

Tax filers are treated differently based on household status. To inform the IRS of which rules apply to you, you’ll have to choose a filing status. There are five: single, married filing jointly, married filing separately, head of household and qualifying widow(er) with dependent child.

A dependent is a person you’re responsible for supporting. If you can claim a dependent, you can become eligible for certain tax breaks, including the child tax credit. You may also qualify for head-of-household status.

The U.S. has a progressive tax system, so not all your income is necessarily taxed at the same rate. Tax brackets refer to the range of incomes taxed at specific rates, while your marginal tax rate is the highest tax bracket applicable to your income.

Beginning with the 2018 tax year, a single Form 1040 replaced the previous three versions — Forms 1040, 1040EZ and 1040A.

The simplified 1040 form, which you’ll use to file your 2020 individual federal income taxes, is half the size of recent forms and uses a “building block” approach to simplify the filing process. Taxpayers with more-complex tax situations may need to submit additional forms (called “schedules”), but all 150 million individual U.S. taxpayers start with the same basic form.

Deductions reduce taxable income. You have a choice between taking a standard deduction or itemizing your deductions. When you itemize, you reduce taxable income by the value of certain expenses deductible under U.S. tax law. For example, if you pay mortgage interest, you can deduct the interest paid — but only if you itemize.

To decide which deductions to take, compare the value of the standard deduction versus the total value of your itemized deductions. For 2020, the standard deduction amounts are:

  • $12,400 if you file as single or married filing separately
  • $18,650 if you file as head of household
  • $24,800 if you file as married filing jointly

Because tax reform significantly increased the standard deduction, you may find your itemized deductions don’t exceed the standard deduction amount for your filing status.

Both tax credits and tax deductions can reduce the amount of tax you must pay. Deductions reduce the amount of income you pay taxes on, which in turn can reduce your tax. Credits are a dollar-for-dollar reduction in the amount of tax you owe.

If you had an income of $30,000 and took a $1,000 deduction, you don’t have to pay tax on that $1,000 of income. The deduction could save you $200 (assuming a 20% tax rate on that $1,000).

By contrast, a $1,000 credit would reduce the actual amount of tax you owe by that $1,000. So if you owed $3,000 in taxes, you’d now owe $2,000 and save $1,000.

The deductions and credits you’re eligible to claim vary depending upon your situation. Here are some deductions that you can claim even if you don’t itemize.

  • Contributions to individual retirement arrangements, including IRAs, SEP-IRAs, Simple IRAs and solo 401(k)s (these phase out at higher incomes)
  • 50% of self-employment taxes
  • Student loan interest up to $2,500
  • Tuition and fees for higher education up to $4,000 if you fall within income limits
  • Health savings account contributions made with personal funds

Deductions you may be eligible to claim only if you itemize:

  • $10,000 maximum for the aggregate of state and local taxes paid (SALT taxes)
  • Interest on up to $1 million of eligible home mortgage debt for loans taken out before Dec. 15, 2017, and up to $750,000 of eligible home mortgage debt for loans taken out after that
  • A deduction for medical expenses, but only if they cost at least 7.5% of your income
  • A deduction for charitable contributions that don’t exceed a set percentage of income

And finally, here are credits you may be eligible to claim.

  • The earned income tax credit provides a credit for lower-income Americans. The IRS EITC Assistant can help you determine if you qualify.
  • The child tax credit provides a credit of up to $2,000 per qualifying child for tax years 2018 to 2024. As much as $1,400 of this credit is refundable. Eligibility begins phasing out at $200,000 in income for single filers and $400,000 in income for married couples filing jointly.
  • The child and dependent care tax credit is valued at 20%–35% of the costs of allowable care expenses, up to $3,000 in expenses for the care of one qualifying person. A taxpayer caring for two or more dependents could claim a maximum credit of $6,000.
  • The American opportunity tax credit provides a maximum credit of $2,500 for qualifying educational expenses paid for eligible students. The credit is available only for tuition paid for the first four years of post-secondary education and there are income limits.
  • The lifetime learning credit provides a maximum credit of $2,000 per year for postsecondary educational costs. There are also income limits, and the credit is worth only 20% of qualifying expenses, up to a $10,000 maximum.

Depending on your situation, there are probably other deductions and credits you can claim. Tax Prep Buddies can identify any tax breaks you may be eligible for.

Each year, you’re required to file your federal income tax return for the previous calendar year by Tax Day. Usually, the filing deadline is on or around April 15, though if the 15th falls on a weekend or holiday the deadline can be bumped to the next business day.

  • Mail: The address to mail in your return will depend on the state you live in (the IRS offers a list of addresses)
  • IRS e-file: The e-file system is free if your income is $72,000 or less
  • Free online tax filing: Like with a service such as Credit Karma Tax®
  • DIY: With fee-based tax-preparation software
  • Paid tax professional:Tax Prep Buddies

However you choose to file, be aware that submitting your return electronically has several advantages. If you’re owed a refund, you could get it sooner via e-file, since the IRS processes e-filed returns more quickly than paper returns.

According to the IRS, most refunds are issued within 21 days for taxpayers who e-filed and who are having their refund directly deposited. Refunds take up to six weeks if you submitted paper returns. Claiming certain credits or deductions might delay your refund. You can check the status of your refund on the IRS “Where’s My Refund” website.

If you can’t afford to pay your taxes, it’s imperative you still file tax a return and make arrangements to pay what you owe. Failing to file and/or pay your taxes on time will result in interest and penalties.

If you can’t afford to pay the full amount you owe by the deadline, the IRS has multiple payment options that could help, including installment agreements. Keep in mind that you’ll still owe interest, and possibly penalties, even if you enter into a payment arrangement.

Costs and fees of payment plans vary depending upon the duration of your plan and whether you apply by mail or online.

What is tax preparation? Tax preparation is the process of preparing tax returns, often income tax returns, usually for a person other than the taxpayer, and mostly for compensation.

 

 

How Much is Tax Prep?

The standard cost for a basic tax form prep is about $176.(1) That cost tops an average of 1040 and state return with no itemized deductions. But do not be scared of that number just yet. While the national standard is a good starting point, a lot of things arbitrates the real cost.

Are tax preparation fees deductible? Your preparation fee deduction is not limited to the cost related to having an expert prepare your return. Other common and related tax expenses such as tax planning advice and guidance in a tax-related audit, tax software, and criminal researches can also be deducted.

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