Taxes are a part of life. While I don’t mind paying my share of taxes, I have a problem with the tax system’s complexity.
This is made worse because I am also a small business owner which adds another layer of paperwork and administration.
Taxes can also be incredibly complicated to figure out on your own, leading many people to seek help from tax professionals or tax filing software.
Tax filers often get bogged down in the jargon of taxes and trying to keep up with all tax credits, deductions, tracking expenses, and managing the various tax forms.
That’s why we created this extensive tax guide—so you can learn about the basics of tax filing and see how you can get the most benefits and fewest headaches out of filing your taxes.
What’s Changed for 2022
During the last quarter of every year, the IRS announces rates and inflation adjustments affecting federal taxes for the coming year, including tax brackets, standard deductions, and more.
Here are some of the important changes for 2022. As always, these are informational only, and you should rely on guidance from your tax professional to confirm these changes and how they’ll impact you.
Table of Contents
- What’s Changed for 2022
- 2022 Tax Brackets
- Employer-Sponsored Retirement Contribution Limits
- Income Limits for Roth IRA Contributions Rise
- Health Savings Account Contribution Limits Rise
- Estate Tax Exemption and Gift Tax Limits Rise
- Capital Gains Tax Thresholds Go Up
- Increased Allowances for Fringe Benefits and Medical Spending Accounts
- Economic Impact Payments and the Recovery Rebate Credit
- Child Tax Credit Reverts to Pre-2021 Form
- Earned Income Tax Credit
- Who Needs to File a Tax Return?
- Tax Filing Status
- 2022 Federal Tax Rates, Standard Deductions, & Capital Gains
- 2022 Federal Income Tax Brackets
- 2021 and 2022 Standard Deductions
- 2022 Long-Term Capital Gains
- Tax Credits and Deductions
- Comparing Tax Credits and Tax Deductions
- Common Tax Credits
- Common Tax Deductions
- Tax Deductions – Should You Take the Standard Deduction or Itemize?
- Common Tax Considerations
- Tax Tips
- How to File Your Taxes
- How to Organize Your Tax Documents
- When to File Your Taxes
- How to File an Amended Tax Return
- What Happens If You Miss the Tax Deadline?
- What Happens If You Don’t File Your Tax Return?
- How to Pay Your Taxes
- What if You Can’t Pay Your Taxes?
- How to File a Tax Extension
- How to File your Tax Extension By Mail:
- Military Members and Overseas Citizens May Have Longer Extensions
- Tax Refund FAQS
- How long does it take to process a tax return?
- How long does it take to get a tax refund?
- Are there any known tax refund delays?
- When will my refund be in my bank account?
- What day of the week does the IRS deposit refunds?
- What day of the week does the IRS mail paper checks?
- Year-End Tax Tips
2022 Tax Brackets
The IRS did not change federal tax brackets for 2022. They are still 10%, 12%, 22%, 24%, 32%, 35%, and a top bracket of 37%.
However, the income thresholds for all tax brackets increased to reflect the inflation rise. Here are the minimum income levels for the top tax brackets for each filing status in 2022:
- Single: $539,901 (up from $523,601 in 2021)
- Head of Household: $539,901 (up from $523,601 in 2021)
- Married Filing Jointly: $647,851 (up from $628,301 in 2021)
- Married Filing Separately: $332,926 (up from $314,151 in 2021)
Employer-Sponsored Retirement Contribution Limits
The contribution limit for elective deferrals to 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increases to $20,500 for 2022. The total amount that you and your employer can contribute to a plan rises to $61,500 from $58,000 in 2021.
The catch-up contribution for taxpayers aged 50 and older remains at $6,500.
Income Limits for Roth IRA Contributions Rise
For single filers in 2022, your maximum contribution is reduced when your modified adjusted gross income is $129,000 (up from $125,000 in 2021) and eliminated at $144,000 (up from $140,000).
For joint filers, your maximum contribution is reduced when your modified adjusted gross income is $204,000 (up from $198,000) and eliminated at $214,000 (up from $208,000).
Standard Deduction Rises for All Filing Statuses
The 2022 standard deductions for all filing statuses are:
- Single: $12,950 (up from $12,550 in 2021)
- Head of Household: $19,400 (up from $18,800)
- Married Filing Jointly: $25,900 (up from $25,100)
- Married Filing Separately: $12,950 (up from $12,550)
Personal exemptions remain at zero, just like in 2021.
Health Savings Account Contribution Limits Rise
In 2022, the amount you can put away increases to $3,650 for self-only coverage (up from $3,600 in 2021) and $7,300 for taxpayers with family coverage (up from $7,200).
Estate Tax Exemption and Gift Tax Limits Rise
In 2022, the federal estate tax exemption rises to $12.06 million from $11.7 million in 2021. The gift tax annual exclusion, which is the amount you can give each person before you use up some of the estate tax exemption (or owe gift taxes), increases to $16,000 from $15,000.
Capital Gains Tax Thresholds Go Up
Although the capital gains tax rates for long-term investments (those you’ve held for at least a year) remain the same in 2022, the income thresholds have increased.
Increased Allowances for Fringe Benefits and Medical Spending Accounts
The monthly limit for qualified transportation and parking fringe benefits is $280 for 2022. The maximum salary reduction for contributions to health flexible spending accounts (FSAs) is $2,850 for 2022.
The maximum carryover of unused amounts for cafeteria plans is $570 for 2022.
The thresholds and ceilings for participants in medical savings accounts (MSAs)are from:
- $2,450 to $3,700 with a maximum out-of-pocket expense of $4,950 for self-coverage in 2022
- $4,950 to $7,400 with a maximum out-of-pocket expense of $9,050 for family coverage in 2022.
Economic Impact Payments and the Recovery Rebate Credit
Individuals who didn’t qualify for the third economic impact payment or did not receive the full amount may be eligible for a recovery rebate credit based on their 2021 tax information. You must file a 2021 tax return to claim the credit.
Individuals will need the amount of their third economic impact payment and any plus-up payments received to calculate a correct 2021 recovery rebate credit amount when filing a tax return.
Child Tax Credit Reverts to Pre-2021 Form
Major changes were made to the child tax credit for 2021, but they were only temporary. The credit amount increased, the credit was made fully refundable, children up to 17 years of age qualified, and half the credit amount was paid in advance through monthly payments from July to December last year.
The child tax credit reverts to its pre-2021 form in 2022. The 2022 credit amount drops back to $2,000 per child ($3,000 for children 6 to 17 years of age and $3,600 for children 5 years old and younger for the 2021 tax year).
Children 17 years old don’t qualify for the credit this year because the former age limit (16 years old) returns.
Earned Income Tax Credit
More workers without qualifying children could claim the earned income tax credit (EITC) on their 2021 tax return. Without the 2021 provisions, the minimum age for a childless worker to claim the EITC rises back to 25 for 2022 (19 in 2021).
The maximum age limit (65 years old), which was eliminated for the 2021 tax year, is also back in play for 2022
Who Needs to File a Tax Return?
The IRS lists the following requirements to help you determine whether or not you are required to file taxes.
If you meet any one of the following criteria, you will need to file:
- Self-employed individuals who made $400 or more.
- All freelance income, side hustles, and gigs apply as well.
- Individuals with household employment taxes.
- Individuals with owed Social Security and Medicare taxes for unreported tip income.
- Individuals who took a distribution from a Medical Savings Account (MSA) or a Health Savings Account (HSA).
- Individuals with advance payment on the Premium Tax Credit.
- Those who will qualify for the Earned Income Tax Credit (EIC).
- Those who wish to claim education credits under the American Opportunity Credit.
- Those wishing to claim a refundable Health Coverage Tax Credit.
- Adoptive parents interested in claiming the Adoption Tax Credit.
- Individuals who earned $108.28 or more from a church/qualified church-controlled organization are exempt from employer Social Security and Medicare tax.
Tax Filing Status
The IRS has five basic tax filing statuses:
- Married filing jointly: Comes with lower tax brackets and a high standard deduction. You must have been married by December 31 of the tax year to qualify.
- Married filing separately: While this status comes with more tax liability, it can be beneficial when one spouse makes significantly less than their partner or has more deductible itemized expenses.
- Head of household: This status pertains to single taxpayers who are separated or did not live with their spouse the last half of the tax year, who have a dependent child they paid at least half of the support for during separation.
- Single: If you’re single (meaning neither married nor separated) as of December 31, this is your tax filing status.
- Qualifying Widower: Widowers with a dependent child enjoy the same benefits as married couples filing the year of their spouse’s passing and the next year jointly.
2022 Federal Tax Rates, Standard Deductions, & Capital Gains
How your income is taxed varies based on how much income you have, how you earned it, and other factors.
While a flat tax has been talked about for years, the current U.S. tax system is a graduated scale where one who earns more pays more.
There are also standard deductions you can take when filing your taxes. These standard deductions can reduce the amount of income taxes you owe.
The United States uses a marginal tax system or a gradual tax system. The marginal tax rate means each additional dollar you earn is taxed at the rate which falls within your income tax bracket.
The tax code has operated like this for decades, even though the rates have changed several times, and has had many other one-time changes, like an economic stimulus check when the economy was doing poorly in 2008.
Finally, the government may tax capital gains differently than earned income. Capital gains are investment gains. Let’s look at these to see how they impact your tax obligations.
2022 Federal Income Tax Brackets
Here are the current tax rates.
Understanding your current tax bracket is useful for tax planning and long-term planning.
If you know your current income tax rate, you can use this information to decide if now is a good time to convert a Traditional IRA to a Roth IRA, sell investments for short-term or long-term capital gains, make tax-deductible charitable contributions, or take other actions that can impact your tax return.
|2022 Marginal |
Taxable Income Above
|Married Filing Jointly or|
Taxable Income Above
|Head of Household|
Taxable Income Above
2021 and 2022 Standard Deductions
The Standard Deduction is the amount taxpayers can deduct from their income before paying income taxes.
Taxpayers can choose between using the Standard Deduction or itemizing their deductions when filing their taxes (itemizing taxes can include deductions such as state and local taxes, property taxes, charitable contributions, and more).
However, the Tax Cuts and Jobs Act significantly increased the Standard Deduction amount while limiting certain deductions, such as the SALT Taxes (state and local taxes). This change means more people will take the standard deduction when filing their tax returns.
Here are the current Standard Deductions:
|Filing Status||Standard Deduction|
Tax Year - 2021
Tax Year - 2022
|Married Filing Separately||$12,550||$12,950|
|Married Filing Jointly||$25,100||$25,900|
|Head of Household||$18,800||$19,400|
2022 Long-Term Capital Gains
Long-term capital gains are taxes paid when you sell an investment that you held for longer than a year. Short-term capital gains occur when you sell an investment that you held for less than a year.
Short-term capital gains are considered income and are taxed at your marginal income tax bracket.
Long-term capital gains are taxed at the following schedule:
|2022 Long-Term Capital |
Gains Tax Rate
|Single Filers||$0 - $41,675||$41,675 - $459,750||Over $459,750|
|Married Filing |
|$0 - $83,350||$83,351 - $517,200||Over $517,200|
|Head of |
|$0 - $55,800||$55,801 - $488,500||Over $488,500|
|Married Filing |
|$0 - $41,675||$40,401-$258,600||Over $258,600|
|Trusts & Estates||$0 - $2,800||$2,801 - $13,700||Over $13,700|
Some investments, such as gold or collectibles, are not taxed by the capital gains guidelines.
Applying Federal Tax Rates to Your Situation
As you can see from the above federal tax bracket table, there are tax brackets for income ranges.
To determine how much you will pay in taxes, you can start by taking your total income, then deducting all tax deductions and credits from this amount. This includes either the Standard Deduction or your itemized tax deductions.
Then you apply your income to the income tax brackets from above. For example, a married couple will pay the following taxes:
- 10% federal income tax on the first $20,550 of income;
- 12% federal income tax on income from $20,551 – $83,550;
- 22% federal income tax on income from $83,551 – $178,150;
- 24% federal income tax on income from $178,151 – $340,100;
and so on.
Because the U.S. has a marginal tax system, you only pay the tax rate for your income within each bracket. This does not mean that earning one dollar above the income tax bracket level will increase your entire tax bill by that rate.
For example, receiving a raise from $83,550 to $83,551 will not subject all of your income to the 22% tax bracket. It will only apply to income earned within that specific tax bracket.
Adding the taxes you paid and dividing by your total income results in your effective tax rate.
Tax Credits and Deductions
Comparing Tax Credits and Tax Deductions
Some taxpayers mistakenly use the terms tax credit and tax deduction the same way. While they both result in a lower tax bill, they do it differently.
- A Tax Credit is a dollar-for-dollar reduction of your income tax liability.
- A Tax Deduction decreases your taxable income.
The tax credit reduces your tax bill by the amount of the credit. The tax deduction decreases your tax bill by an amount equal to the percentage of your highest marginal tax bracket.Here is an example:
- $1,000 Tax Credit: A $1,000 tax credit directly reduces the amount of taxes you owe by $1,000.
- $1,000 Tax Deduction: Assuming you are in the 22% tax bracket, a $1,000 tax deduction reduces your taxes by $220 (22% of $1,000).
Common Tax Credits
Here are a few common tax credits and how you may qualify for them.
Note: some of these are Refundable Tax Credits, meaning you will receive the full amount of the tax credit, even if you don’t owe any federal taxes.
- Adoption Credit – A nonrefundable tax credit for qualified adoption expenses paid to adopt an eligible child.
- Child and Dependent Care Tax Credit – A tax credit for the costs of care for a qualifying individual to allow you to work or look for work.
- Child Tax Credit – A tax credit for having one or more qualifying children and income within a certain range. It can be both nonrefundable and refundable.
- Earned Income Tax Credit (EITC) – Benefits low-income, working families. The EITC is a refundable tax credit.
- Education Tax Credits – Lifetime Learning Credit and American Opportunity Tax Credit. Available to certain taxpayers with college tuition expenses.
- Savers Tax Credit – A retirement savings credit for low- and moderate-income workers
Each of these credits has unique qualifying factors that may be based on your income, Adjusted Gross Income (AGI), number of qualified dependents, and other activities, such as paying for college education, contributing to retirement accounts, certain business activities, and more.
Most tax software programs have automated systems to help you identify which tax credits and deductions you may be eligible to claim when you file your taxes.
Common Tax Deductions
There are many different tax deductions. Some of them are available to everyone, while others can only be claimed if you itemize your taxes.
Some deductions may also be based on your Adjusted Gross Income (AGI) or whether or not your tax return is subjected to the Alternative Minimum Tax (AMT).
Common tax deductions include:
- SALT Taxes (State & Local Taxes) –
- Taxpayers can deduct their real estate property taxes and either their state and local income taxes or state and local sales taxes.
- SALT deductions are capped at $10,000 per year.
- Charitable Gifts & Contributions
- Educator Expenses
- Health Savings Account (HSA) contributions
- Home Mortgage Interest
- Real Estate Property Taxes
- Retirement Account Contributions (to Traditional retirement accounts)
- Student Loan Interest
- Unreimbursed Medical Expenses exceeding 10% of your Adjusted Gross Income
Qualifying for various tax deductions: Like tax credits, many of these deductions have strict eligibility requirements based on your AGI and other factors.
Most taxpayers find it easier to use a tax product such as H&R Block to calculate their tax deductions instead of doing it by hand.
Tax Deductions – Should You Take the Standard Deduction or Itemize?
Taxpayers have the option of itemizing their deductions on their tax return or simply claiming the Standard Deduction (explained above).
You can only choose one or the other. The best way to decide is to complete your taxes, add up your deductions and take the one that offers you the best overall deduction.
Due to recent changes in the tax laws, the Standard Deduction has been increased, and certain deductions have been decreased. So for many people, the Standard Deduction will offer a better option.
However, you may wish to itemize your deductions if you live in a state with high taxes or can otherwise claim a lot of tax deductions. Again, this sounds complicated, but most tax preparation programs will do the heavy lifting for you.
The software will walk you through your tax situation and add up your deductions as you go. Then it will recommend the option that is best for your situation.
Common Tax Considerations
The U.S. tax system is a “pay as you go” tax system. While you only file taxes once a year, you are technically supposed to pay taxes on your income as you receive it.
Most people do this through payroll deductions. However, there are times when you do not have taxes withheld from your income.
In these cases, you should pay Estimated Taxes. Some examples of when you may be required to pay estimated taxes include when you receive a large lump sum of money, self-employment income, investment income, or other times when you receive a large amount of money that hasn’t had taxes withheld.
You must pay the estimated tax if both of the following apply:
- You expect to owe more than $1,000 when you file your tax return.
- You expect your withholding and credits will be lower than the lesser of;
- 90% of your current year’s tax liability, or
- 100% of the tax shown on your previous year’s tax return.
In other words, you need to ensure your withholdings and credits are at 90% of your current tax year obligation, or at least 100% of what you owed last year (110% for high-income earners). If your withholdings are less than the lesser of these two amounts, then you should pay estimated taxes.
Who Does Not Have To Pay Estimated Tax?
You shouldn’t have to pay estimated taxes if you owe less than $1,000 in taxes this year, or if your employer has withheld enough money from your payroll. One way to avoid paying estimated taxes is to withhold additional funds from your paycheck using the IRS Form W-4.
How Much Estimated Tax to Pay?
The IRS provides estimated tax worksheets (IRS Form 1040-ES) that you can use to help determine your tax withholding requirements to avoid estimated tax penalties. You can also use tax preparation software to help run the numbers.
Taxpayers with irregular income may have a more difficult time determining how much they may owe in estimated taxes, especially if their income is greater at the end of the year.
Thankfully, a safe harbor rule allows taxpayers to avoid estimated tax penalties as long as they pay at least 100% of their previous year’s total tax liability through a combination of tax withholdings and estimated tax payments.
Estimated Tax Deadlines
Estimated taxes are paid four times throughout the year on the following dates (or the first business day following the date, if it falls on a weekend or holiday).
- April 15th
- June 15th
- September 15th
- January 15th
Estimated taxes are due by the deadline, even if you have requested a tax deadline extension.
How to File and Pay Your Estimated Taxes
The IRA allows taxpayers to pay estimated taxes by mail or electronically.
- Pay by mail. Use IRS Form 1040-ES (download pdf here) to calculate your estimated taxes. Then fill out a voucher on the form to send along with your estimated tax payment.
- Pay electronically. If you prefer to pay your taxes electronically, you can sign up for the Electronic Federal Tax Payment System (EFTPS) to pay your estimated taxes online. It can take up to 2 weeks to receive your PIN in the mail, so plan accordingly.
Alternative Minimum Tax – AMT
Estimated taxes aren’t the only unexpected tax situation you might encounter. The AMT is an alternative method of figuring your tax.
Congress created the Alternative Minimum Tax in the 1960s to prevent high-income households from receiving too many tax deductions and credits, thus avoiding paying their “fair share” of taxes.
The AMT rules require high-income households to prepare their taxes using two methods – the usual way and using the AMT rules. Thankfully, most tax filing software will help you do this automatically.
You must fill out IRS Form 6251 to determine if you need to pay the AMT.
You will then compare the outcomes after completing your tax normal tax return and your return using AMT rules.
- AMT Calculation less than your regular tax return: pay your taxes as usual.
- AMT Calculation more than your regular tax return: pay the AMT amount, which will equal the regular tax, PLUS the difference between the two.
AMT rules prohibit certain tax credits and deductions, including the standard deductions and credits, state and local taxes, and property taxes up to a certain amount.
Taxpayers who live in a high-tax state and have children are more likely to pay additional taxes under the Alternative Minimum Tax Rules than a single person or a family in one of the lower-tax states.
You can read this article for more information on Alternative Minimum Tax rules.
Tax Withholding Adjustments
The ideal tax refund is somewhere close to zero – that means you had the ideal amount withheld from your paycheck. However, sometimes you may discover that you either owe the IRS money, or you have a larger than expected refund so you may decide to change the amount the IRS withholds from your paycheck.
This can help you avoid big surprises.
You can easily change your tax withholding using the Personal Allowances Worksheet on IRS Form W-4.
Note: Make small adjustments
If you had six allowances last year, you probably shouldn’t reduce it to 0 this year. Doing so may have unintended consequences. Make small changes based on your current tax situation.
When to Adjust Your Tax Withholding
There are times when you want to make a proactive change to your tax withholding. Some of these include:
- Large Tax Liability: When you know you currently or will owe the IRS a large amount of money.
- When You Anticipate a Large Tax Refund: While getting a large refund is nice, it’s generally better to have those funds available to you as you go. For example, receiving a $5,000 refund means you overpaid just over $400 per month to the IRS. I’d rather have that money for saving, investing or paying off debt.
- Significant Life Change: Certain life events, such as getting married, a death in the family, a divorce, or having a baby, can impact your tax situation. You may wish to adjust your withholding if any of these occur during the tax year.
You can use the IRS tax withholding calculator to recalculate your personal allowances each time a new life change happens.
Tax fraud is a growing crime. Discovering you’re a victim of tax fraud often occurs when you try to file your tax return electronically and find out someone has already filed a tax return using your Social Security Number.
When this happens, the IRS will reject your return. At that point, you will need to contact the IRS and open a case with them. Other ways you may discover tax fraud include:
- Receiving a letter from the IRS (never an email or phone call – those are phishing scams trying to get your personal information!)
- Receiving one or more W-2 forms from employers you have never worked for
If you receive a letter from the IRS, it may contain some of the following information:
- That multiple income tax returns were filed for the same year,
- W-2s or 1099s were filed for the tax year in question that didn’t appear on a specific tax return, or
- that there is a discrepancy in the amount of tax that you owe on one or both tax returns.
Contact the IRS via phone, mail, or in person if you discover you are the victim of tax fraud. And you may also wish to start monitoring your credit reports, as it is likely you may soon become a victim of identity theft.
One of the best things you can do to avoid an IRS tax audit is to check your tax return for errors. Additionally, if you fill out your forms incorrectly, you might be red-flagged for an audit.
You could face a tax audit if your forms are sloppy or illegible. This is an excellent reason to use tax software and file your tax return electronically.
Here are a few more red flags that might initiate a tax audit:
- Home Office Tax Deduction: You can only take a home office tax deduction if the space is used just for your business. In my old home, my “office” was also used for storage, which had an impact on how I was able to claim the tax deduction.
- Big Tax Deductions: If you seem to be claiming more charitable deductions, and other deductions, than others at your income level, the IRS might red flag your tax return. Make sure you have all the documentation to back up your donations.
- Cash: Cash transactions over more than $10,000 have to be reported by casinos, banks, and others. If you fudge on these numbers, the IRS could find you out. Businesses that operate using cash are also likely to be red-flagged for an audit.
- Mismatch with 1099s: If what you report is less than what your 1099s and W-2s say, you are likely to be audited. Understand, too, that starting in 2011, PayPal and similar businesses were required to start reporting transactions on the 1099-k form. So keep good records.
The IRS may also randomly select individuals for audits. So it’s possible you may be audited even if none of the above issues are present.
Some tax software programs even come with or allow you to purchase audit protection as an add-on feature.
Tax Tips for Parents
- Get your child a social security number: You will need a Social Security Number to claim them on your taxes, as well as apply for medical insurance and other programs.
- Take advantage of the Child Tax Credit: The child tax credit could give you a tax credit of $2,000 each year your child is under 17. This tax credit may not be available to everyone as the credit begins to phase out once your modified adjusted gross income is above a certain amount.
- Update your W-4 with your employer: Your W-4 is the form you file with your employer to let them know how much money they need to withhold from your paycheck to cover your local, state, and federal income taxes. Claiming your child on your taxes as an additional dependent could increase your monthly take-home pay.
- Use pre-tax dollars for childcare: Some employers offer a childcare reimbursement or flexible spending account, which can be used to pay for childcare. These savings are only available through your employer.
- Use the child and dependent care credit. You can claim the child and dependent care credit on your 1040 by attaching Form 2441. For more details on eligible expenses, download IRS Publication 503, Child and Dependent Care Expenses.
- Start a College Fund. Many states offer a 529 College Savings Plan. The added benefit is that earnings grow tax-free and withdrawals can be made tax-free when the funds are used for qualified educational expenses. Coverdell Educational Savings Accounts (ESA) are another educational savings option that may offer you tax benefits.
- Open an IRA for your child. You can only open an IRA for your child if he or she has earned income; interest earned from a savings account doesn’t qualify as earned income.
Tax Tips for Homeowners
- Energy efficiency tax credits: The IRS offers taxpayers a 30% tax credit for home improvements that generate energy, including solar panels, solar water heaters, wind turbines, fuel cells, and geothermal heat pumps. These credits are good through the end of 2021. Green energy tax breaks not only save you money on daily expenses, but they also save you money on your taxes. Combine these federal tax credits with available state tax credits, and rebates and you’ll save even more on your purchases.
- Qualified medical home improvement deductions: The IRS allows homeowners to deduct the cost of home improvements that are deemed necessary for medical reasons (such as a ramp, widening doorways for wheelchair access, adding handrails, and similar home improvements.
- Home Office Deductions: No matter if you run your own business from home or work for someone else, there are qualified home office tax deductions that you can claim when you use any portion of your residence in connection with a trade or business.
- Your Home Office Space: You must use a specific room or identifiable space as your office. The only exception to this “exclusive use” rule is when you use part of your home for business storage purposes or as a daycare facility.
Tip: Most of the top tax software programs will help you identify these deductions when you prepare your tax return.
Tax Considerations for Freelance Workers
Income Tax Payments
Most freelancers work on a 1099 basis instead of as a W2 employee. Employees paid on a W2 basis have their income tax, social security tax, and FICA tax withheld from their paychecks.
However, contractors paid on a 1099 basis typically don’t have anything withheld from their payments. If you receive a check for $500, you receive the full amount.
Nothing is withheld for taxes. This means income taxes are your responsibility. Your income will be reported to the IRS on Form 1099 and it is your responsibility to pay taxes on it.
Many freelancers choose to pay quarterly estimated taxes. This breaks up your tax payments throughout the year and keeps you on the right side of IRS requirements.
You will want to keep detailed records of your income and expenses. It’s also a good idea to categorize your expenses so you have a good idea of how much you are spending in each category (and certain expenses may be classified differently by IRS rules).
It’s much easier to do this as you go, instead of trying to play catch up when your tax return is due.
The business structure you choose, such as an LLC or corporation, may also require you to maintain separate funds in a business checking account or savings account. You may also wish to open a business credit card, which may offer unique rewards programs and itemized spending reports.
How to File Your Taxes
There are three ways to file your tax return:
- DIY: Some individuals file their taxes completely on their own, manually filling out the IRS’s form 1040. Filers can mail in a physical copy of their documents or submit an electronic version.
- Tax software: Alternately, you can file (sometimes for free) with some of the best tax software programs on the market. These services help you to seamlessly import documents, check for errors, and take the confusion out of tax preparation.
- Professional: With a CPA or enrolled agent, you can get expert advice and professionally prepared taxes.
Which is best? This depends on your situation. If you have a simple tax return, the DIY route is a quick and easy way to go.
Of course, you can also use tax software if you have a simple return. And if you have a lower income, you may be eligible to file your taxes free.
It’s only when your tax return becomes more complicated that you need to decide whether to use one of the more advanced tax software programs or hire a professional tax service. Keep in mind there is a big difference between going to a retail tax return office and using a professional CPA or enrolled agent.
Most tax situations can be handled with tax software. However, you may wish to hire an accountant if you are a small business owner, have multiple rental properties, or otherwise have a complicated tax situation.
How to Organize Your Tax Documents
Organizing your tax documents should be a year-round task. You should keep detailed records of everything related to your tax return. Personally, I recommend scanning everything into your computer and regularly backing it up.
This ensures you have a long-term record and makes filing easier when tax season arrives.
Before you do your taxes, make sure you have everything you need.
This will include:
- Your Social Security Number, and the SSNs of everyone listed on your tax return
- Bank account and routing numbers for electronic payments
- Your EFTPS information if you file electronically
- List of previously paid taxes: self-employment tax, estimated taxes, property taxes, etc.
- W-2s, 1099’s, 1098’s and related tax documents
- Interest paid on a mortgage or student loans
- Charitable donation receipts, statements from donor-advised funds, etc.
- Contributions to tax-deferred retirement accounts
- Homebuyer tax credits
- Child care and education costs
- Medical costs and receipts (if you can deduct them)
- Other related documents
This article provides a more in-depth guide to organizing your tax records.
When to File Your Taxes
Tax returns are generally due on April 15, unless the 15th falls on a weekend or holiday.
If that is the case, the tax return is due on the following business day.
What happens if you don’t file your taxes on time? Filing a tax extension is free, and you can do it anytime. Just be aware that you need to pay any money due by the tax deadline, or you may owe penalties or fees.
How to File an Amended Tax Return
If you think you may want to amend a return, below are five places to start:
- Change in Status
- Math Errors
- Schedule A-Itemized Deductions
- Schedule D-Capital Gains & Losses
- Schedule C-Profit or Loss from Business
You usually have three years to file an amended tax return, dating from when you filed the tax return that needs correction. So if you didn’t take a credit on your most recent tax return, you can file your amended return and possibly get a tax refund.
The proper form for filing an amended tax return is 1040X. This guide provides a complete overview of when to file an amended tax return.
What Happens If You Miss the Tax Deadline?
Some people aren’t required to file a tax refund, especially if they have a lower income. And you don’t technically need to file a tax return if the IRS owes you money.
Of course, you can’t receive your refund if you don’t file your tax return. So it’s a good idea to go ahead and file.
Finally, the longer you take to file your tax return, the longer you wait to receive your refund.
On the other hand, you want to file your tax return if you owe the IRS money. If you are running out of time to file your return, you want to do three things:
- File a tax extension,
- Make estimated payments, then
- File your tax return before the October 15 deadline.
What Happens If You Don’t File Your Tax Return?
OK, you missed the deadline and haven’t filed for an extension.
What happens if you let it slide? If you don’t owe any taxes, nothing happens. Of course, you won’t get a refund if the IRS owes you one.
And some people aren’t required to file a tax return. But you need to file your tax return if you owe money.
What happens if you owe money and don’t file a tax return? You’ll be subject to penalties and interest.
And they aren’t pretty!
Here is a rough outline of the penalties you may owe for failure to file or pay your federal taxes.
- Failure to file or (FTF) penalty assessed at 5% per month or partial month up to a 25% maximum.
- Failure to pay (FTP) penalty assessed at 0.5% per month or partial month up to a 25% maximum.
- If both the FTF and FTP penalties are assessed, the FTF penalty is reduced by the FTP penalty.
The IRS may also assess penalties for underpaying your taxes or not paying estimated taxes.
Underpayment penalties can be assessed at different levels based on whether the IRS determines if there was criminal intent.
How to Pay Your Taxes
You can pay your tax bill by mail with a check or online. Paying online is faster and more secure but may come with a charge if you use your credit card to pay your taxes.
You may consider sending checks by Certified Mail to ensure the check was delivered.
What if You Can’t Pay Your Taxes?
You still need to file your tax return or an extension, even if you cannot pay your taxes. After that, you should contact the IRS to tell them that you know you owe money, but you cannot pay it.
The IRS may allow taxpayers to have an extension to make the payment or to enter into a payment plan.
Note: the IRS may charge penalties or fees for these arrangements, so it’s still a good idea to pay your tax bill as soon as possible.
You can get creative to pay your tax bill if needed. However, I would avoid payday loans and other high-interest short-term loans.
You may try getting a personal loan from a bank, using a peer-to-peer lending company such as Lending Club, or possibly using a credit card.
What if I Don’t Pay My Tax Bill? The IRS can file a Notice of Federal Tax Lien if you don’t pay your taxes. This can hurt your credit score and cause other financial and legal difficulties.
Failure to file your return or to pay your taxes can result in fines, ruined credit, or even jail time.
How to File a Tax Extension
Some people may discover they need more time to complete their tax returns. This can happen if you have a complex tax situation, something changes in the previous or current tax year, or if you simply procrastinate.
If this describes your situation, you can easily file for a free tax extension.
Note: filing for a tax extension extends the deadline to file by 6 months, but it does not change the date you must pay taxes (if any are due). So it’s a good idea to at least estimate how much taxes you might owe, and send that amount to the IRS before the deadline. Then you can formally wrap up the paperwork after the fact.
Filing a tax extension is easy and free. Simply download IRS Form 4868, fill it out, and mail it to the IRS. Or, you can file an electronic extension through most of the major tax software programs, including TurboTax or H&R Block Online.
E-File your tax extension for free:
How to File your Tax Extension By Mail:
Filing an extension manually is also easy – just download the form and fill it out on your computer or by hand. Be sure to estimate the amount of taxes you think you will owe when you file your extension, and pay that amount before the tax deadline.
These steps will guide you:
- Download Tax Form 4868 from the IRS website.
- Fill it out and send it in via mail.
- Send in the estimated amount you owe. You must send in 90% of your total to avoid late fees or penalties.
Remember – you must request tax extensions. The IRS states tax extensions are automatic but that you must request them by April 15th.
After you request the extension, you have until October 15th to file your return. But remember, any money you owe is due by the tax deadline.
Taxes filed after October 15th are late and may be subjected to additional penalties or fees.
What happens if you don’t file your taxes? Some people aren’t required to file a tax return (generally only if their income is too low).
However, most people are required to file a tax return. If you are due to receive a refund, there is no penalty for not filing a return.
However, if you owe money and don’t file a return, you will be subject to penalties, fees, and possibly even jail time if the government determines your actions were meant to defraud the government.
This article provides more information about what happens if you don’t file your taxes.
Military Members and Overseas Citizens May Have Longer Extensions
Expatriates and some military members may qualify for additional tax extensions. This is especially true for military members who served in tax-free zones in the current or previous year.
This article provides additional information regarding military member tax deadline extensions. American civilians working overseas may also be able to file for a longer extension.
Tax Refund FAQS
How long does it take to process a tax return?
You will receive your tax refund faster if you e-file since the IRA can process returns more quickly and accurately. Filing a paper return can take significantly longer and may result in errors since they must be manually entered into the IRS system.
How long does it take to get a tax refund?
The IRS processes 90% of electronic tax returns within 21 days (their stated goal). Some people receive their tax refunds in as few as eight days, and the majority receive their refunds within 10-14 days.
Some refunds may take longer if there are errors or other problems.
Are there any known tax refund delays?
Federal laws require the IRS to withhold tax refunds until the taxpayer claims either the Earned Income Tax Credits (EITC) or Additional Child Tax Credits (ACTC). Tax refunds that claim these credits are processed as they come in.
The IRS also announces other known delays through press releases.
When will my refund be in my bank account?
You will receive your tax refund more quickly if you elect to deposit it into your bank account directly. Some banks make these funds available immediately, while others may place a hold on the funds.
Paper checks take longer, as they must be mailed, deposited, then cleared by your bank.
What day of the week does the IRS deposit refunds?
ACH transactions are processed each business day during regular office hours.
What day of the week does the IRS mail paper checks?
The IRS mails checks on Fridays.
Year-End Tax Tips
Contribute to your retirement accounts. Most contributions to your defined contribution plans, such as a 401k, 403b, TSP, etc., must be made by December 31st.
Donate to charity. Any donations you make to a qualified charity can be deducted when you file your taxes next year. This includes donations such as tithing or giving to an organization such as Goodwill or the USO.
Pay qualified business expenses. If you have your own business, you can write off certain expenses.
I run a couple of websites, so for me, this would include prepaying for web-hosting, buying a new computer, paying for advertising, or other qualified business expenses.
Additional tips for saving money on your taxes:
- Contribute to a Health Savings Account. Contributions to a Health Savings Account are made with pre-tax income.
- Harvest your losses. You can sell losing investments and offset up to $3,000 of other annual income. Any additional losses can be carried forward to future years.
- Prepay your mortgage and property taxes. You can deduct mortgage interest and property taxes if you itemize your taxes. If you make your January payment in December, you can deduct the interest for the tax year in which the payment is made.
- Prepay other deductible expenses. You can also prepay other deductible expenses such as medical costs, student loans, etc.
- Complete any deductible home improvements. Certain home improvements are tax-deductible if they improve your home’s energy efficiency.
- Avoid mutual funds with high capital gains distributions. Capital gains distributions equal taxes, even if your fund lost money.
- Contribute to a 529 plan for your kids. Many states allow deductions for 529 contributions.
- Have a baby. Babies are great tax deductions!