Taxes aren’t fun; we all know that. But, they have to be done anyway. Luckily, our comprehensive guide can get you through even the toughest tax situation. So, let’s begin!
What are taxes?
Taxes are fees imposed on people and businesses to fund the operations of a government entity. They can be imposed at the federal, state, and local levels, and take the form of taxes on income, real estate, consumption (sales tax), or various business activities.
Taxes imposed by the federal government generally represent the largest tax most people pay. And because the tax code is set up to favor certain practices—and discourage others—taxes can even have an impact on how we live, spend, and even invest our money.
Most states, and even a few municipalities also impose income tax. But since most are patterned off of the federal income tax code, and have a much smaller impact, we’re going to focus on federal income tax in this guide.
How to file your tax return
When you file your income tax, one of the most critical decisions you’re going to make is whether you’ll self-prepare, or hire a professional to prepare your return for you. We’re going to take a look at the pluses and minuses of both methods.
This is easier to do than ever, because there are so many excellent tax preparation software programs you can use to get the job done.
The advantage of these programs is that they work on a simple question-and-answer basis. The program presents the relevant questions, and you enter the information into a box. Once all the information has been input it into the program, the software will then handle all the calculations, as well as preparation of all necessary statements and schedules.
What’s more, the programs also work to maximize your deductions, and minimize your tax liability. They also perform a variety of checks, to make sure the return is accurate.
If you’re going to self-prepare, using a tax software preparation program is the only way to do it. Here’s a comparison of the tax software we mentioned above:
Liberty Tax Online
For simple tax returns
For simple tax returns
For simple tax returns
For simple tax returns
Import Return from Competitor
Yes, by PDF
Yes, from TurboTax & H&R Block
24/7 Live Support
Chat & email
Live chat & phone support
Email or phone
Create W2 & 1099 forms
Prepare Forms 1065 (Partnerships)
Free Guidance + Premium Representation ($44.99)
Free in-person audit support
Direct representation at no extra charge
Prices are up to date as of March 6, 2019.
Hiring a tax professional
As good as tax preparation software has become, hiring a professional tax preparer may make sense if you have a particularly complicated tax situation, don’t feel comfortable doing your own taxes, or simply lack the time.
But just be aware there while you can get a good tax software program for anywhere from about $40 to well under $200, you’ll pay anywhere from several hundred to several thousand dollars by engaging the services of a professional tax preparer.
But if you do decide to use a paid preparer, there are three you should consider:
Enrolled Agent (EA)
These are tax preparers who are required to pass a certification exam, as well as have qualifying experience doing taxes. They can also represent you before the IRS during an audit. They are generally the least expensive option among paid preparers.
Certified Public Accountants (CPAs)
More expensive than EAs, CPAs are best used for complicated tax returns, particularly if you expect to need ongoing tax advice throughout the year. CPAs are licensed and experienced, and automatically certified to represent you before the IRS.
Very few people use tax attorneys to prepare their returns. But if your return is particularly complicated, or if it has certain legal issues, tax attorneys are the best choice. Unfortunately, they’re also the most expensive.
Filing your tax return
If you owe money
You’ll have to send payment with your return. You can still e-file, but you’ll need to send your payment electronically, via IRS Direct Pay.
If you can’t afford to pay the full amount due, you can request more time to pay. The IRS will give you up to 120 additional days to pay the amount due. You’ll need to contact the IRS and have the arrangement approved prior to the filing date.
If the 120 extension to pay doesn’t work for you, you can also set up an installment agreement. The agreement will give you up to 72 months to pay your tax debt. But if the amount due is greater than $25,000, you will need to complete a financial disclosure.
If you expect a refund
If you e-file your return, your refund will generally be processed and paid to you within 21 days of the e-file acceptance date. If you file a paper return, it will take between six to eight weeks.
You can use the IRS Where’s My Refund tool to track the progress of your refund. But tax preparation software typically tracks your refund for you, so you’ll know when to expect your money.
2018/2019 tax deadlines
The major dates for the 2018 tax season, along with other dates you need to be aware of to file your 2019 tax return, include:
- January 15, 2019—Last federal income tax estimate due for the 2017 tax year
- April 15, 2019—First quarter federal income tax estimate due for the 2018 tax year
- April 15, 2019—Deadline for filing 2017 Individual Income Tax returns
- April 15, 2019—Last day to make a 2017 IRA contribution (Keogh and SEP contributions can be made as late as October 15, 2018, if you file for an extension)
- June 15, 2019—Second quarter federal income tax estimate due for the 2018 tax year
- September 15, 2019—Third quarter federal income tax estimate due for the 2018 tax year
- October 15, 2019—Extended individual income tax return due for 2017
- January 15, 2020—Fourth quarter federal income tax estimate due for the 2019 tax year
This information is buried in the list above, but it’s worth a more specific mention. There are different retirement plans, having different contribution deadlines. Those deadlines are as follows:
- IRAs—Your contribution must be made by April 15, 2019.
- Keogh and SEP IRAs—Contributions can be made as late as October 15, 2019, as long as you have filed for an extension on your taxes by April 15.
- Employer sponsored 401(k) and 403(b) plans—Contributions were required to be made by December 31, 2018.
How are tax rates determined?
Tax rates are periodically determined by Congress, based on the budgetary needs of the government. However, for at least the past 30 years, tax brackets have been indexed to the rate of inflation. This is to prevent people being pushed into higher tax brackets by inflation. Indexing is set to begin on the 2018 tax brackets beginning in 2019.
Indexing increases the dollar amount of each tax bracket consistent with the inflation rate. But it does not change the tax rate itself for each tax bracket.
2018 tax brackets are as follows:
|Tax Bracket/Filing Status||Single||Married Filing Jointly or Qualifying Widow||Married Filing Separately||Head of Household|
|10%||$0 to $9,525||$0 to $19,050||$0 to $9,525||$0 to $13,600|
|12%||$9,525 to $38,700||$19,050 to $77,400||$9,525 to $38,700||$13,600 to $51,800|
|22%||$38,700 to $82,500||$77,400 to $165,000||$38,700 to $82,500||$51,800 to $82,500|
|24%||$82,500 to $157,500||$165,000 to $315,000||$82,500 to $157,500||$82,500 to $157,500|
|32%||$157,500 to $200,000||$315,000 to $400,000||$157,500 to $200,000||$157,500 to $200,000|
|35%||$200,000 to $500,000||$400,000 to $600,000||$200,000 to $300,000||$200,000 to $500,000|
|37%||Over $500,000||Over $600,000||Over $300,000||Over $500,000|
The new tax law
The 2018 Trump Tax Law is the most comprehensive change in the US income tax code in more than 30 years.
Let’s look at the highlights of what’s changed:
We’ve presented the 2018 tax rates above. But the tax rates of 10%, 12%, 22%, 24%, 32%, 35% and 37% replace the previous rates of 10%, 15%, 25%, 28%, 33%, 35% and 39.6% on the same income brackets.
Standard deduction increase
The 2017 standard deductions were $6,350 for singles, and $12,700 for married filing jointly. Under the new tax law, they’ve increased to $12,000 and $24,000, respectively.
Elimination of personal exemptions
You used to be able to claim $4,050 per eligible dependent in your household, including yourself, your spouse and any dependents you have. That’s gone under the new law.
Elimination of forms 1040EZ and 1040A
For 2018 and beyond, all returns will be filed on form 1040.
Changes in the “Kiddie Tax”
Before 2018, if a child had more than $2,100 in unearned income, that income would be added to the parent’s taxable income, to be subject to their tax rates. But for 2018, and subsequent years, the arrangement has been simplified.
- The first $1,050 in unearned income by the minor is tax free
- Above $1,050 is taxed at the child’s rate, not the parent’s rate
The child must be either under 19 years old, or under 24 years old and a full time student.
Qualified business income deduction
Small businesses may be able to deduct up to 20 percent of their qualified business income, plus 20 percent of qualified real estate investment trust dividends, and qualified publicly traded partnership income.
The deduction phases out with incomes between $157,500 and $207,500 for singles, and between $315,000 and $415,000 for married filing jointly.
Child tax credit increased
The credit was $1,400 in 2017, but increases to $2,000 for 2018. This is also subject to being phased-out, beginning with a modified adjusted gross income of $200,000, or $400,000 if married filing jointly.
Mortgage interest deduction reduced
For home mortgage indebtedness incurred after December 15th, 2017, the interest deduction will be limited to loans up to $750,000, or $350,000 for married filing separately.
Under previous tax law, you were permitted to fully deduct interest paid on a home mortgage of up to $1 million. You can continue deducting mortgage interest on up to $1 million of indebtedness on loans taken before that date.
Deduction for state income, real estate, and sales tax limited
Under the previous tax law, there was no limit on how much you could deduct for states and local income, sales, and real estate taxes. But for 2018, your deduction is limited to $10,000 if you are married filing jointly, or $5,000 if you’re single.
Certain deductions eliminated completely
For 2018, deductibility of moving expenses, mortgage insurance premiums, job related expenses, and other miscellaneous deductions has been eliminated.
Mileage allowances increased
The mileage allowances for 2018are as follows:
- Business mileage—54.5 cents per mile
- Charitable mileage—14 cents per mile
- Medical and moving mileage—18 cents per mile
Additional changes that won’t go into effect until 2019
Items set to be changed for 2019, but not 2018, include:
It’s still deductible by the payer, and taxable to the recipient for 2018. But for divorce decrees issued after December 31, 2018, it will no longer be a tax consideration for either party.
The Affordable Care Act penalty
Many believe the penalty for not having health insurance coverage under the ACA has been eliminated, but they’re only partially right. It’s been eliminated for 2019 and subsequent years. But it still applies for 2018.
Medical expense deduction
If you itemize your deductions, you can deduct unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income. In 2019, that percentage rises to 10 percent of AGI.
Who has to file taxes?
Basically, anyone who has taxable income from any source, earned or unearned is required to file a tax return. However, there are certain thresholds, based on income and specific circumstances that may mean you’re not required to file.
For example, for 2018 you’re generally not required to file a tax return if your income falls below the following thresholds:
- Single, under 65—$12,000
- Single, 65 or older—$13,600
- Married filing jointly, both spouses under 65—$24,000
- Married filing jointly, one spouse 65 or older—$25,300
- Married filing jointly, both spouses 65 or older—$26,600
- Married filing separately, any age—$12,000
- Head of household, under 65—$18,000
- Head of household, 65 or older—$19,600
- Qualifying widow(er) with dependent child, under 65—$24,000
- Qualifying widow(er) with dependent child, 65 or older—$25,300
But even if your income is below those levels, you may still need or want to file a tax return if any of the following circumstances apply:
- You had at least $400 in self-employment income. This will also extend to freelancers, people with side businesses, and anyone who engages in gig work.
- You owe household employment taxesvrradeqwrzeczvvxtzxdcarvdcv.
- Social Security and Medicare taxes owed on unreported tip income.
- You received a distribution from a medical savings account (MSA) or a health savings account (HSA).
- You received an advance payment on the Premium Tax Credit
- Expect to qualify for the earned income tax credit (EIC)
- You’re claiming education credits, and must file to be refunded under the American Opportunity Credit
- You want to claim a refundable Health Coverage Tax Credit
- You adopt a child, and want to claim the Adoption Tax Credit.
- You had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer Social Security and Medicare tax.
Taxable income vs. non-taxable income
Most forms of income are taxable. But the more common ones include the following:
- Wages and salaries
- Income from self-employment
- Tips and gratuities
- Unemployment benefits
- Moving expense reimbursements
- Canceled or forgiven debt
- Alimony (which is also tax deductible if you pay it)
- Income from bartering arrangements
- Gambling winnings
- Pension, annuity and retirement plan income
- Social Security benefits
- Interest and dividends
- Capital gains on the sale of investments or investment securities
There are certain forms of income that are not taxable. These include the following:
- Child support
- Insurance proceeds—in most cases
- Veteran’s benefits
- Aid to Families with Dependent Children (AFDC)
- Meals and lodging for the convenience of your employer
Who doesn’t need to file taxes?
Basically, you don’t need to file an income tax if you either have a total income below the thresholds listed above, or if any of the special circumstances that might require you to file a return even though your income is below those thresholds don’t apply to you.
Also be aware that the following income sources are not considered taxable. You may not need to file a return if any of these represent your entire income:
- Child support
- Insurance proceeds—in most cases
- Veteran’s benefits
- Aid to Families with Dependent Children (AFDC)
There is one group that gets at least a deferred filing date, and that’s those who reside in areas that have been declared federal disaster areas. If you qualify, you may be able to get an extension to file your 2018 return.
What do you need to file taxes?
It may be that the single most complicated part of preparing your income tax return is gathering all the necessary documents. That’s not just your imagination either. A reasonably complicated tax return requires more documentation than a typical loan application.
To keep it simple, we’re going to break it down into four different documentation categories as follows:
- Basic information.
- Income documentation.
- Expense documentation.
- Additional documentation.
Let’s look at each category individually.
- Your 2017 income tax return. It provides certain information, especially any carry-forward numbers, like business losses or capital loss carry-forwards.
- Social Security numbers for you, your spouse, and each of your children or other dependents.
- Your ex-spouse’s Social Security number if you receive or pay alimony or child support.
- If you didn’t have health insurance, you’ll need a marketplace exemption certificate.
- W2s from any employment sources.
- Income information for your dependent children (W2s, 1099s, etc.).
- 1099-MISC for additional income for which income taxes were not withheld (like contract, gig, or freelance income).
- 1099s reporting Social Security income, interest and dividends; pension, IRA or annuity income; state income tax refund or unemployment insurance; or reporting the sale of stock or other securities.
- K-1’s reporting partnership or S-Corporation income.
- W-2G reporting gambling winnings (warning: gambling expenses are no longer deductible).
- Documentation of alimony received, including the Social Security number of the payee.
- For the self-employed, a complete accounting of all your business income and expenses.
- For investment property, documentation of rental income received.
- 1098 reporting mortgage interest and property taxes paid, educational expenses, and student loan interest paid.
- Statements from charities reporting contributions.
- 1095-A, 1095-B, or 1095-C, reporting health insurance premiums paid, and to whom.
- Various forms 5498 reporting IRA, HSA or ESA payments made during the year.
- Home office information (if you plan to take the deduction)—square footage of your office, and of your home.
- Evidence of estimated tax payments made to your state (if you itemize).
- Expenses for rental property.
- Documentation for the purchase of depreciable assets for business or investment activity.
- Documentation of alimony paid.
- Charitable contributions made but not reported by the receiving organization.
- Mileage driven for business, employment, medical or charitable activities, as well as records of payment for tolls, parking and ad valorem taxes.
- Evidence of payment of health insurance, out-of-pocket medical, dental and vision expenses, medical mileage and long-term care insurance.
- Childcare expenses paid, if not supplied by the provider (including the provider’s tax id number).
- Cost of preparation of last year’s income tax returns (self-employed only).
- Sales tax paid on major purchases (which may not apply due to the new limit on state and local taxes).
- Property taxes paid but not reported on Form 1098 by a lender
- Federal and state estimated tax payments made for the tax year
- Cost basis of investments sold (if the information is not provided by a broker)
- Receipts from the purchase of energy efficient equipment installed in your home
- Wages paid to a domestic care provider, including that provider’s tax ID number
- An itemized list of higher education expenses paid out-of-pocket, with documentation
Special tax situations
There are two special tax situations that apply to high income earners, that have undergone significant changes for 2018.
The Alternative Minimum Tax (AMT)
The AMT is designed to prevent high income taxpayers from avoiding taxes through tax breaks. That may be either preferential income sources or excessive deductions. It sets a higher tax rate, and imposes it on your income with the preference items added back.
But the income thresholds the AMT applies to have been increased for 2018, and are as follows:
- Married filing jointly and surviving spouse—$109,400 (exemption phase-out begins at an income of $1 million).
- Single—$70,300 (exemption phase-out begins at an income of $500,000).
- Married filing separately—$54,700 (exemption phase-out begins at an income of $500,000).
Net Investment Income Tax (NIIT)
The Net Investment Income Tax, or NIIT is another result of the Affordable Care Act. It began in 2010, and extends the Medicare tax at a rate of 3.8% to investment income for those with certain high income levels.
- Married filing jointly—$250,000
- Married filing separately—$125,000
- Head of household—$200,000
- Qualifying widow(er) with dependent child—$250,000
If your adjusted gross income exceeds these levels, the tax will be applied to net income from rents, royalties, interest and dividend income, capital gains, and annuities. It will also apply to any passive income from your trade or business.
What are adjustments, deductions, and tax credits?
There are three sources of income tax relief when you file your return. These include tax deductions, tax credits, and adjustments.
These are frequently referred to as “above-the-line” deductions, because you can take them without having to itemize your deductions. They also figure into the calculation of your adjusted gross income. Your AGI is your total income from all sources, less these adjustments.
The most common adjustments are deductions for IRA contributions, self- employed health insurance premiums, and one half the self-employment tax (and also alimony for 2018).
These are deductions taken after calculating your AGI. For that reason, they are sometimes referred to as “below-the-line deductions”. The two primary deductions are the standard deduction, and itemized deductions. Either can be used to reduce your taxable income, before calculating the amount of tax you owe.
Typical itemized deductions include mortgage interest, state and local taxes paid, charitable contributions, and medical expenses that exceed 7.5 percent of your adjusted gross income.
These represent direct reductions of your actual tax liability. For that reason, they can have an even greater tax benefit than tax deductions.
Perhaps the most prominent tax credit is the child tax credit, which is $2,000 per child in 2018. Let’s say your total tax liability for the year is $10,000. If you have two children, you’ll qualify for two credits, for a total of $4,000. The credits will directly reduce your tax liability down to $6,000.
Other popular tax credits include:
Special tax considerations for freelancers and gig workers
These are two growing work styles in the 21st century, and they do provide certain tax breaks.
For tax purposes, freelancers and gig workers are generally considered to be self-employed. That means they’re entitled to the same expense deductions of the self-employed. That includes any expenses considered to be reasonable and necessary in connection with producing your income.
For starters, that means you can file a Schedule C, Profit and Loss from Business with your return. There you’ll report your freelance or gig income, as well as any expenses. Those expenses can include use of your automobile, home office, purchase of inventory or supplies, and routine expenses, such as your cell phone and Internet service.
And since you’re self-employed, you can also set up a tax deductible retirement plan for your business. This can include a Traditional IRA or a SEP IRA that can potentially give you a higher deduction.
Estimated tax payments
Since you’re self-employed, you’ll have to pay quarterly tax estimates. These will include both federal income tax and the self-employment tax.
The calculation of these tax estimates can be especially complicated. But that’s where a good tax preparation software program comes in handy. And that’s what we’ll be discussing in the next section.
The estimated tax due dates are as follows for 2018/2019:
- January 15, 2019—Last federal income tax estimate due for the 2018 tax year
- April 15, 2019—First quarter federal income tax estimate due for the 2019 tax year
- June 15, 2019—Second quarter federal income tax estimate due for the 2019 tax year
- September 15, 2019—Third quarter federal income tax estimate due for the 2019 tax year
- January 15, 2020—Fourth quarter federal income tax estimate due for the 2019 tax year
Common tax terms
Before we drill down into federal income taxes, let’s first layout definitions of common tax related terms. We’ll go in alphabetical order…
- Adjusted Gross Income, or AGI. This is your total income from all sources, like contributions to retirement plans, alimony paid, or certain deductions for the self-employed.
- Alternative Minimum Tax, or AMT. This is a special tax designed to prevent high income taxpayers from using so many tax breaks that their actual tax liability is reduced to zero or very close to it.
- Audit. When the IRS requests that you document that you have correctly reported your income and deductions. Most are done by mail, and involve specific questions the IRS has.
- Capital gains and losses. When you sell an asset for more or less than it’s worth, the gain or loss is referred to as a capital gain or loss. Generally speaking, a gain is taxable, and a loss is deductible.
- Credits. Allowances by the IRS for specific dollar amounts that directly reduce your income tax liability.
- Deductions. Certain expenses you incur can be deducted from your income for tax purposes. Examples include payment of mortgage interest and contributions to retirement plans.
- Dependent. This is someone who relies on you to provide for their support. There is no longer a deduction for dependents, but having one or more can be important in certain tax calculations.
- Exemptions. Prior to 2018, you could take a deduction for yourself, your spouse, and any dependents you had. The deductions represented a reduction in taxable income. They no longer apply for 2018 and beyond.
- Estimated tax payments. The US tax code is based on a pay-as-you-go process. That is, you pay tax on income as you earn it. Income that is not subject to withholding, such as by an employer, requires payment of quarterly estimated tax payments.
- Gross income. This is your taxable income from all sources, prior to adjustments and deductions. It typically includes wages, interest, capital gains, retirement income, and other sources.
- Head of household. This the filing status for a person who is unmarried, but who pays more than half the cost of maintaining a home for themselves and a qualifying person, usually a dependent.
- Itemized deductions. The IRS permits the deduction of certain expenses from your taxable income. Those include medical expenses, state and local taxes paid, mortgage interest, and charitable deductions. However, to take these deductions, they must collectively exceed your standard deduction.
- Marginal tax rate. This is the highest rate at which your income is taxed, based on your highest tax bracket.
- Standard deduction. This is a flat dollar amount you’re allowed to deduct from your taxable income, instead of itemizing your deductions. It benefits those don’t have sufficient deductions to itemize.
- Tax bracket. The IRS assigns tax rate percentages to income based on a certain dollar amounts earned. For example, if you’re single, you’ll pay 10 percent on the first $9,525 of taxable income, then 12 percent under taxable income between $9,525 and $38,700.
- Withholding. This is the amount of estimated tax withheld by your employer, based on the income you earn. It will represent a credit toward the taxes you owe when you file your return.
How long should you keep your tax return?
Most tax experts will recommend you keep your tax return for a minimum of seven years. If you’re in the habit of destroying or otherwise losing your return in less time, you may face the prospect of dealing with an IRS audit or other tax questions without a written record of what your return contains.
Tax software programs will usually allow you to access your returns for at least three years. In addition, most also provide you with the ability to amend your return, should new information appear after you file.
You should still keep a copy of your return, either online or with a paper copy. That will enable you to access it quickly, if you need it for business purposes, such as applying for a loan, or for federal education assistance.
Taxes aren’t fun, but they don’t need to be difficult. With tax software, and a basic understanding of our tax system, filing your taxes doesn’t have to be difficult this year.