Top Frequently Asked Tax Questions - Answered!
Updated: Mar 20
The tax code is constantly changing and is very confusing. We've compiled our top 10 questions with answers to help guide you through the 2019 tax season. Reach out to us if this article doesn't address anything you would like to know more about!
1) When are taxes due?
For the 2019 tax year, returns are due July 15, 2020. If chosen to file an extension, extended returns are due October 15, 2020.
2) Why do I owe taxes in the first place?
You may not like it, but there’s no fighting it. The first income tax in the United States was authorized by Congress in 1861 to help pay for the Civil War. However, taxes have existed nearly as long as civilization itself. Tax records have been found that date back to 6,000 B.C. in the area that is now known at Iraq. Ancient Greek, Egyptian, and Chinese cultures all had their own versions of income tax. Although many Americans disagree with and have attempted to argue against paying taxes, the IRS has successfully upheld the system of taxation.
3) What if I'm not ready to file by the deadline?
If you’ve procrastinated and filing your federal return by July 15 looks unlikely, you should file for an extension. This does not get you out of paying any taxes you may owe at the July 15 deadline, but provides an extra 3 months to file. Filing an extension will avoid the late-filing penalty of 5% of the unpaid taxes for each month you’re late, up to 25%. That’s in addition to the late-payment penalty of 0.5% of the unpaid taxes for each month PLUS interest. If you expect a refund, you have an incentive to file your return as soon as possible to get that money back in your pocket. Don’t forget about state taxes, though. States have different options for filing an extension. If you owe taxes and file late for a state, you will suffer penalties for unpaid taxes in addition to the federal penalties. As you can see, it is for your benefit to file an extension if necessary.
4) What filing status should I choose?
Your filing status is an important choice when filing. The status affects your tax rate, standard deduction, and eligibility for various other deductions and credits. There are five filing statuses to choose from: single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child. The IRS provides an interactive tool to help taxpayers choose their status. You can find the tool here.
5) What's the difference between a tax credit and a tax deduction?
Both are good things and can reduce the amount of tax you pay. A credit is a dollar-for-dollar reduction in the amount of tax you owe. A deduction reduces the amount of income you are taxed on. Using a 20% tax rate, here’s an illustration of the difference between a $2,500 tax deduction and a $2,500 tax credit:
- Contributions to individual retirement arrangements (ie. IRA, 401(k), SEP-IRA)
- Student loan interest up to $2,500
- Higher education tuition and fees up to $4,000
- Health savings account contributions made with personal funds
- 50% self-employment taxes
- Earned income tax credit (for lower-income Americans)
- Child tax credit (credit of $2,000 per qualifying child)
- American opportunity tax credit (qualifying educational expenses paid for eligible students)
- Lifetime learning credit (maximum of $2,000 per year for postsecondary educational costs)
6) Should I take the standard deduction or itemize?
As a tax filer, you do have the choice between taking a standard deduction or itemizing your deductions. As illustrated above, deductions reduce taxable income. Itemizing reduces taxable income by the value of certain expenses allowed under U.S. tax law. A common example of an itemized expense is mortgage interest paid during the tax year. You can only deduct mortgage expense if you choose to itemize, which waives taking the standard deduction. To decide which route to take, compare the standard deduction versus the total value of itemized deductions. Because of recent tax reform, the standard deduction has significantly increased. Most will find their itemized deductions do not exceed the standard deduction.
Tax year 2019 standard deductions if you are under the age of 65:
- Single: $12,200
- Married filing separately: $12,200
- Head of household: $18,350
- Married filing jointly: $24,400
- Qualifying widow(er): $24,400
Tax year 2019 standard deductions if you are 65 or older:
- Single: $13,850
- Married filing separately: $13,850
- Head of household: $20,000
- Married filing jointly (only one person 65 or older): $25,700
- Married filing jointly (both 65 or older):$27,000
- Qualifying widow(er): $25,700
7) How much do I have to make in a year to file taxes?
There are various thresholds, including your filing status, age, and the type of income, that determine the need to file taxes.
In general, you must file a tax return if your total self-employment income is at least $400.
Single: If you are single and under the age of 65, gross income during the year of $12,200 requires you to file. If you’re 65 or older and single, then the minimum is $13,850.
Married filing jointly: If both spouses are under 65, the minimum combined gross income required to file is $24,400. If both spouses are 65 or older, then $27,000. If only one spouse is 65 or older, then $25,700.
Qualifying Widow(er) (spouse died during the tax year, with a dependent child): You are able to file as married filing jointly. Minimum gross income of $24,400 if under 65. $25,700 if 65 or older.
Married filing separately: Interestingly, a minimum gross income of $5 requires you to file a tax return.
Head of household: Minimum gross income of $18,350 if under the age of 65. If 65 or older, then $20,000.
Are you a dependent?: You may still have to file a tax return even if you’re being claimed as a dependent (ie. You are a dependent on you parent’s tax return). There are a number of factors to consider filing to be necessary. The following is to help understand the most common dependent scenario, but your scenario may differ. If you are a single dependent under the age of 65 and not blind, you will need to file a tax return if:
- you made more than $1,100 in unearned income (ie. income earned from investments rather than labor)
- you made more than $12,200 in earned income (ie. income earned from labor rather than investments)
- your gross income was more than the larger of either $1,100 of your earned income up to $11,850 plus $350
With the above being said, there are still years when you might not be required to file a tax return but may want to. If you have federal taxes withheld from your paycheck, the only way you can receive a tax refund when too much is withheld is if you file a return. The IRS does not automatically issue refunds without a tax return. As an example, if you are a single taxpayer who earned $3,000 during the year, with $350 withheld for federal taxes, you are entitled to a refund of the entire $350 since you earned less than the standard deduction.
8) How long should tax records be kept?
The IRS states you should hold on to your tax documents for three years. This is generally considered the look-back period the IRS is allowed to cover in audits. If the IRS suspects fraud or underpayment of income tax, among other things, they can request up to seven years of prior tax records. It’s important to keep documents like receipts that justify business expenses, charitable donations, etc. Its also important to use a tax professional if you get lost navigating the tax laws.
9) What if I can't afford the taxes I owe?
If you can’t afford to pay your taxes, there are multiple payment options provided by the IRS and states. You can find the IRS payment options here, which includes installment payments. It is important that you still file a tax return and make arrangements to pay what you owe. Failing to do so will only lead to more penalties, costing you more money.
10) How long does it take to get my refund back?
It seems that every year, the answer is “longer than usual.” A hot topic for the IRS lately has been combating tax fraud by taking extra time to review filing information. There are new identity theft and refund fraud safeguards put in place by the IRS and many states. This may mean your returns and possible refunds face additional review. The standard window for receiving a refund tends to be around 21 days from the time the IRS or state receives your tax return.
The bottom line
While these answers to some of the top asked tax questions may be helpful getting you started, you may still have questions in fulfilling your tax obligations. Contact Walsch Tax and Financial Services, LLC today to get help with all your tax needs!