Nearly all U.S. employees and companies must pay federal income taxes to the Internal Revenue Service (IRS). At the beginning of a new year, you will need to file an annual tax return to confirm that you have paid your share.
Your tax returns reflect how much money you earned in a year, plus how much income tax you expected to spend, and how much you actually spent. If you manage to overpay, you will get a tax credit which is something everyone wants. If you do not pay enough, you are going to owe money. For 2020, you need to file your taxes between January 2021 and April 15, 2021. This may change so it is a good idea to make sure you check the due date on the IRS.gov site often.
The ABC of Tax Filing
Filing taxes is something a large percentage of the working American population does. For that reason, you need to know the basics behind it. Here you have the four most important tax words to know:
- Filing: This means submitting your form and tax money to the IRS.
- Tax Return: It is the evaluation you get after the IRS reviews your tax files. Once this process is done, you can claim the income tax credit.
- Schedules: These are different tax forms. It has nothing to do with the year. It just points out the different terms to meet every year.
Who Has to File a Tax Return?
In the U.S., most people with revenue at the end of the year need to file a tax return. Knowing if you need to apply depends on several factors like your age, net taxable income, filing status, and dependent house members.
Here are the main requirements:
- If your net taxable income is higher than the amount of your deductions, which in 2020 was $12,400, then you need to file for tax returns.
- If anyone claims you as their dependent, and your net taxable compensation is $1,050 or higher, you also need to file for tax return.
- If you are above the age of 65, the income limit is $2,700. If you earn above that, you need to file as well.
What do you need to file your tax return?
In order to complete your tax return, you need specific financial documents:
- W-2 forms: This form is used by employers to report how much you have earned and how much tax you have had withheld. By January 31, all employers must send W-2 forms to their employees.
- 1099 forms: It states how much money you made from other income sources apart from your employer. There are several models for each of your sources of income. The most common types are pension transfers (1099-R), interest income (1099-INT), social security payments (SSA-1099), dividends (1099-DIV), and miscellaneous income (1099-misc). If you had a side-hustle, then the 1099-misc is what you should receive.
- 1098 forms: This form exclude tax rates and other charges like tuition expenses from your tax returns.
- Receipts: Every receipt you have had throughout the year (or a ledger recording them).
- Tax returns from the previous year, if they exist.
Which is Your Filing Status?
Another very important factor is your filing status. It will define your tax rates, tax credit eligibility, and your deductions among many other aspects. It is very possible to be eligible for multiple status, but it is up to you to choose the best one before filing your taxes. Right now, there are five filing status categories:
- Single: If you are not married or you legally divorced, use the single filing status.
- Head of Household: This status is for people who are not married and who pay more than half of the annual expense of a house.
- Married: This status is for married couples who tend to share expenses.
- Married Filing Separate: This is for couples who are married but wish to file their tax returns separate.
- Widower: This for people whose spouses have died within the last two years, they have not remarried, and they have a child under age.
If you are uncertain which filing status you should choose, the IRS offers a quick questionnaire to help you decide.
Which Is The Top 5 Tax Software To Use When Filing A Tax Return?
There are several ways that your tax return can be filed. The oldest and less common way is to do it manually. However, taxes can be very complicated and time-consuming. That is why most people prefer to use tax software to file their taxes. However, if you earn an annual income of $69,000 or less, you could be eligible for an IRS Free File service that lets you use the IRS Tax software free of charge. Also, there are more popular choices of tax software that you can choose. Most of them are not free, but you can be assured that these will do everything needed to file your taxes. All you need to do is answer a few questions about your wages and expenditures for the year and these will identify all the credits and deductions you are eligible for. Last but not least, these will fill out your forms and file them for you. It is easy as that. Here you have the top 5 tax software for 2020 filing:
1. TurboTax
Price: $60-$200
TurboTax is one of the most expensive tax software in the industry with prices varying from $60 to $200. However, it is one of the most reliable and used software in the country.
Benefits:
- It uses a Q&A style to fill out the forms.
- Great customer interface for beginners.
- It has a free version.
2. TaxSlayer
Price: $17 & up
Benefits:
- You do not need to download any apps, everything can be done on the website.
- It helps you file every type of form that you may need.
- It offers a call with a tax expert in case you do not understand the interface.
- TaxSlayer is one of the cheapest software at just $17.
3. H&R Block
Price: Free up to $105
Benefits:
- It offers a wide variety of services according to different packages that range from zero cost to up to $105.
- This app is available for download or online usage.
- You can have live assistance from tax practitioners at an extra fee.
4. Credit Karma Tax
Price: Free
The biggest benefit with Credit Karma Tax is that it is a completely free tax software that is ideal for specific tax situations. You do not get help from tax specialists and it cannot be download, but it is still a solid choice for those people with very simple tax returns and low incomes.
5. Jackson Hewitt
Price: varies depending on the complexity of your return.
Benefits:
- You can either visit the website or go to one of their 6,000 office locations around the country.
- The app uses an interview-style process to guide you in filing the forms.
- There is also a live chat and phone support in case you get stuck.