If you are the owner of a small business or a freelancer, managing your accounts and handling your tax returns can be a challenge. The American tax system can be very confusing, especially if you are from a creative background.
Take the case of Paul, who branched out on his own after working with various companies as an architect for fifteen years. He considered himself good at numbers and decided to file his income tax returns on his own.
The first year was a disaster, as Paul filled out the wrong forms and had to do it all over again. He finally got it right but ended up missing out on a $1,200 refund because of an oversight.
The next year, on the advice of an accountant friend, Paul downloaded a calculator that took care of most of the calculations and identified the correct forms. Today, Paul still files his tax returns by himself but uses a tax calculator.
If you are determined to file your returns, you too can take the help of a free federal income tax calculator on the internet. Many websites offer these calculators, and we shall go into the details of how they work in this post.
Filing income tax manually can be an extremely tedious and stressful experience. While filling out the forms, you can easily input incorrect information and make calculation errors. You may even miss out on including certain categories or enter them incorrectly.
A federal income tax calculator takes you through the process systematically. Following the step-by-step process helps ensure that you fill out each section with the correct information.
Here's a snapshot of the basic steps you should expect to go through while filing your income tax returns. If you are using a tax return calculator, it will take you automatically through these steps.
Your filing status determines your filing requirements, whether you come under standard deduction, or whether you have to list itemized deductions. Your tax and eligibility for tax credits or IRS tax refunds are derived from your deductions.
Currently, there are seven federal tax brackets in the US, and the percentage of tax on income increases with a proportionate increase in annual income. We call this system a “progressive” tax system. The slabs are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
There is a difference in the upper limit of each slab between single and married taxpayers. The upper limit for each is considerably higher for a married person filing jointly with their spouse.
Using a pay calculator in combination with an income tax calculator makes it easier to compute your taxable income. If you need further support with filing your income tax returns, you can take the assistance of a professional bookkeeping agency like Fincent.
Age is another key factor that can impact the amount of income tax on an individual. The new Tax Cuts and Jobs Act affects taxation according to age, depending on whether you are in your 20s, 50s, 60s, or 70s.
When you file your returns, you should check which age bracket you fall under to reduce your federal income tax liability and increase your IRS refunds.
Declaring the number of dependents in your household can also have a significant bearing on how much tax you pay. If you qualify for the head-of-household (HOH) filing status, you will be eligible for some tax credits.
Certain itemized tax deductions, such as medical expenses or tuition fees, increase with the number of dependents that you add.
Some of the tax credits based on the dependents you declare are:
If you are self-employed, you can contribute to a solo 401(k) plan rather than putting your money in a taxable account.
Although 401(k) is not mandatory, including it in your returns can help you save on taxes. This tax-sheltered account also enables you to put away enough money for a comfortable retirement in the future.
The precondition of 401(k) contributions for self-employed persons is that they should have no full-time employees, but a spouse can be included in the plan.
IRA contributions are a vital part of the income tax filing process, and could even result in some tax breaks for your business. First, you will need to specify whether you have a traditional or Roth IRA, as the tax treatment to each category differs.
With a traditional IRA, you get tax-deferred retirement savings. Thus, your contributions are tax-deductible, and your investment can grow without incurring capital gains tax or dividend tax. The taxes are deferred until the time you withdraw your money and would then be taxed as ordinary taxable income.
Roth IRAs are a tax-free savings vehicle. But Roth IRAs don’t give you an immediate tax break – your qualifying withdrawals will not attract income tax. Like traditional IRAs, Roth IRAs also do not incur dividend or capital gains tax.
As we mentioned above, you may qualify for standard or itemized deductions. If you don’t qualify for itemized deduction, you will have to file for a standard deduction, which is predetermined by the IRS.
If, however, your standard deduction amount is less than your itemized deductions, you should then choose itemized deductions. Here again, your income tax calculator will help you compute the numbers.
The federal government considers capital gains as a part of the taxpayer's income. Therefore, if the value of your assets increases, or if you make a profit upon selling your assets or investments, you are liable to pay a tax on it.
Consider the example of Jamal, a man who ran a modest service station and car wash on property that he owned. He earned about $70,000 annually. When he passed on, his wife and son inherited the business.
But unbeknownst to Jamal's family, the land on which the service station stood grew in value to $1.7 million. Eventually, they had to sell the service station because they could not pay the estate tax on the property.
The final stage in your income tax filing process is payment. You would do well to pay on time and avoid a late fee. Even if you cannot pay the full amount, try making a partial payment and inform the IRS. You may opt to pay your tax amount in installments - but keep in mind that you will end up paying some interest.
Although the final amount you pay to the IRS will be the amount reflected in your tax calculator, different modes of payment will attract some extra charges.
Three payment processors, PayUSAtax, OfficialPayments, and Pay1040, are authorized by the IRS to collect payments. But all of them collect about 2% extra on each transaction.
The cheapest way of paying your income tax is through a check or IRS Direct Pay. In either of these payment modes, the amount is debited directly from your savings or checking bank account.
Online income tax calculators let you quickly figure out your tax burden for the year. With an accurate and reliable tool, you minimize your chances of underpaying or overpaying your taxes and save precious time and money.
However, if you want to get the best output from these free online tools, hiring a professional bookkeeping service is equally important.
Fincent is established by creative entrepreneurs for servicing creative self-employed individuals. We offer a fast, seamless, and modern bookkeeping experience that will keep all your bookkeeping up-to-date and in control.
Why not hand over your bookkeeping to Fincent and concentrate on growing your business instead?
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