The federal income tax is one of the most complicated innovations in human history. But we’re going to try and simplify the whole enchilada with this handy federal income tax guide. Use it as a reference to help you prepare your tax return.
It’s a “high altitude look” at dozens of tax issues, just to keep you on track. You’ll need to do a deep dive to get more information if anything about your tax situation is the least bit unusual.
Do You Need to File a Tax Return?
If you don’t know if you’re required to file an income tax return, you can use the IRS Do I Need to File a Return tool. But here are the general requirements.
You are required to file if your income exceeds the following limits for 2017:
- Single, under 65 – $10,400
- Single, 65 or older – $11,950
- Married filing jointly, both spouses under 65 – $20,800
- You're Married filing jointly, one spouse 65 or older – $22,050
- Married filing jointly, both spouses 65 or older – $23,300
- Married filing separately, any age – $4,050
- Head of household, under 65 – $13,400
- Head of household, 65 or older – $14,950
- Qualifying widow(er) with dependent child, under 65 – $16,750
- Qualifying widow(er) with dependent child, 65 or older – $18,000
You will still need to file a tax return if any of the following apply:
- You have at least $400 in self-employment income
- Received unemployment income
- You owe household employment taxes
- Social Security and Medicare taxes are 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
How to Determine Your Tax Filing Status
There are five basic tax filing statuses:
Married filing jointly (MFJ): This is generally the most beneficial filing status since it offers lower tax brackets and a higher standard deduction. You’re eligible if you’re married as of December 31 of the tax year.
Married filing separately (MFS): This will usually result in a higher tax liability. But there are times when it makes sense. This can happen when one partner is self-employed and makes much less money than the other. It can also make sense if one partner has a much higher level of deductible itemized expenses. You may also want to file separately if you lived apart during the year.
Head of household (HOH): You can claim this status when you are a single taxpayer, legally separated, or when your spouse didn’t live with you during the second half of the tax year. But here is the determining factor: you must have a qualifying child or dependent, for which you paid at least half of their support.
You don’t qualify for this status if you are otherwise married, or your spouse spent even one night in the same residence with you. You may need to provide specific documentation to prove the status (separation agreement, evidence of separate residences, documentation that you provided more than half of the dependence support).
Single: This is your tax status if you are not married – or legally separated – as of December 31 of the tax year.
Qualifying Widow(er): You must have a qualifying dependent to be eligible for the status. It enables you to have the same tax benefits as if you are married filing jointly. You are only eligible for this status in the year in which your spouse died, and the following year.
DIY Tax Preparation
Millions of people are now preparing and filing their own tax returns. This is easier to do than ever since there are so many very affordable tax preparation software packages. Even if you don’t know much (or anything) about preparing taxes, most are incredibly user-friendly. All you need to do is gather your information, and put the required numbers in the boxes that appear in sequence.
TurboTax can accommodate some of the most complicated tax situations.
You don’t need experience either. The software is intuitive, and has informational resources to answer any question you have. They’re now even offering live assistance from either a CPA or an enrolled agent.
CPA vs. Enrolled Agent (EA)
If you still don’t feel comfortable preparing your own taxes, or if you’re tax situation is incredibly complicated, you can use a tax professional. The two most reliable preparers are certified public accountants (CPA) and enrolled agents (EA).
A CPA is a professionally licensed accountant who works in public accounting, and usually prepares income taxes. To get the license, you have to pass a rigorous multi-day examination, and meet certain state issued education and experience levels. CPAs are best used by people who have the most complicated tax returns.
EAs aren’t accountants (or CPAs), but they are licensed to prepare taxes, as well as represent their clients before the IRS. They generally charge lower preparation fees then CPAs.
A Checklist to be Ready to File
No matter how you decide to prepare your taxes, you’ll need to assemble all the documents needed. Having them available will make the entire preparation process much easier.
The most basic information you need to have available includes:
- Social Security numbers for each member of your household
- Complete copies of the prior year’s income tax returns (you’ll need these to provide any carryforward information)
- Income information for your dependent children
- Home office information (if you plan to take the deduction) – square footage of your office, and of your home
- Your ex-spouse’s Social Security number if you receive or pay alimony or child support
- Marketplace exemption certificate, if you received an exemption from your state’s health insurance exchange
Income documentation includes the following:
- W-2s from any employment sources
- 1099-MISC for additional income for which income taxes were not withheld (like contract 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 (you should also have records proving gambling expenses)
- Documentation of alimony received, including the social security number of the payee
- If you’re self-employed, a complete accounting of all your business income
- Evidence of rental income received, if you own investment property
A Documentation Checklist for Tax-deductible Expenses
Potentially tax-deductible expenses are reported on the following documents:
- 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.
There are a lot of situations involving tax-deductible expenses, that are not neatly reported on a government form from third-party sources. You may need documentation for any the following expenses:
- Documentation of all self-employment expenses
- Expenses for rental property
- Documentation for the purchase of depreciable assets for business or investment activity
- 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)
- Indirect expenses related to investment activity
- Documentation of alimony paid
- Receipts from the purchase of energy efficient equipment installed in your home
- 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)
- 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
- Moving or job hunting expenses
- Cost of preparation of last year’s income tax returns
- Sales tax paid on major purchases
Federal Income Tax Rates for 2017
Here are the federal income tax brackets for 2017. But be aware that major changes will apply to the rates for 2018.
- $0 to $9,325 – 10%
- $9,325 to $37,950 – 15%
- $37,950 to $91,900 – 25%
- $91,900 to $191,650 – 28%
- $191,650 to $416,700 – 33%
- $416,700 to $418,400 – 35%
- Over $418,400 – 39.6%
Married Filing Jointly or Qualified Widow(er):
- $0 to $18,650 – 10%
- $18,650 to $75,900 – 15%
- $75,900 to $153,100 – 25%
- $153,100 to $233,350 – 28%
- $233,350 to $416,700 – 33%
- $416,700 to $470,700 – 35%
- $Over $470,700 – 39.6%
Married Filing Separately:
- $0 to $9,325 – 10%
- $9,325 to $37,950 – 15%
- $37,950 to $76,550 – 25%
- $76,550 to $116,675 – 28%
- $116,675 to $208,350 – 33%
- $208,350 to $235,350 – 35%
- Over $35,350 – 39.6%
Heads of Household:
- $0 to $13,350 – 10%
- $13,350 to $50,800 – 15%
- $50,800 to $131,200 – 25%
- $131,200 to $212,500 – 28%
- $212,500 to $416,700 – 33%
- $416,700 to $444,550 – 35%
- Over $444,550 – 39.6%
2017 Tax Law Changes
What with the Trump reform plan working its way in, there haven’t been a large number of changes for 2017.
There has been a change in the way that medical deductions are calculated. Up until 2016, taxpayers 65 and older could deduct medical expenses that exceeded 7.5% of adjusted gross income. But for 2017, the 10% threshold applies to all age groups.
As is the case every year, mileage allowances have changed a bit since 2016. The mileage allowances for 2017 are as follows:
- Business mileage – 53.5 cents per mile
- Charitable mileage – 14 cents per mile
- Medical and moving mileage – 19 cents per mile
How to Lower Your Tax Bill This Year
For the calendar year just past (2017), your options here are limited.
There are two you can make, however, as long as you act prior to April 17:
- Make an IRA contribution, if it will be tax-deductible. You’re eligible to make this contribution right up until the tax filing deadline.
- Make a contribution to a health savings account (HSA).
For the current tax year (2018) you have a lot more options.
- Increase your tax withholding, or your estimated tax payments.
- Pay any allowable deductible expenses before the current year end (expenses that could be paid in either December or January).
- Maximize contributions to retirement plans.
- Make an IRA contribution, if it is deductible under IRS income limits.
- Purchase energy efficient equipment for your home and get a tax credit.
- Sell losing investment positions just before year-end, to offset gains.
- Purchase a hybrid or electric car. You can get a tax credit of up to $7,500.
- Take advantage of any available education tax credits.
Tax Deductions and Credits
The personal exemption is $4,050 per person for 2017. The standard deductions for the 2017 tax year are as follows:
- Married filing jointly and surviving spouses – $12,700
- Heads of household – $9,350
- Single, or married filing separately – $6,350
You can itemize your deductions if they exceed the limits above.
Itemized deductions include medical expenses (in excess of 10% of your AGI), taxes (state, local, real estate and sales taxes), mortgage interest, charitable donations, and certain expenses related to your job.
In addition to standard deductions and itemized deductions, the IRS has dozens of credits that directly reduce your tax liability.
Some of the more popular tax credits include:
Earned income tax credit (EIC). This credit is generally available for low income taxpayers. It’s based on adjusted gross income, earned income and investment income.
American Opportunity Tax credit. You’re eligible for a credit of up to $2,500 for the cost of qualified tuition and course materials. You must be enrolled at least half-time, and meet income guidelines to qualify.
Child and Dependent Care credit. This credit applies to dependents under age 13. It’s also available for the care of a spouse or dependent of any age who is incapable of taking care of themselves. It provides a credit of up to 35% of the qualifying expenses, based on adjusted gross income.
Savers Tax credit. This credit applies if you make contributions to a retirement plan. The credit can be as high as $1,000 for single filers, and $2,000 if you’re married filing jointly. The income thresholds are fairly low, but it’s worth applying for if you make a retirement contribution and you have a moderate income.
Paying Taxes on Earned Income
If you’re paid by salary, taxes will be withheld and paid to the IRS for you.
But if you’re self-employed, or a contractor, you’ll need to set up estimated tax payments.
To do that, you’ll first have to make a reasonable estimate of the income you expect to receive during the course of the year. You will also have to make a good estimate of the expenses incurred to produce that income. You will then have to calculate your income tax liability based on your net profit.
You’ll also have to pay self-employment tax, which is the self-employed equivalent of the FICA tax. It’s equal to 15.3% of your net profit. That’s in addition to federal income tax.
Estimated taxes are due on four dates each year:
- April 15
- June 15
- September 15
- January 15 of the following year
You can make the payments either by completing form IRS 1040-ES, Estimated Tax and mailing it with a check to the United States Treasury, or by making your payment online from your bank account through IRS Direct Pay.
Paying Federal Income Tax on Retirement or Bonus Income
What can you do if you receive bonus, one large enough to impact your tax situation? Or, how do you handle the tax liability on retirement income?
You can avoid the tax liability at filing time by making additional tax payments.
There are three ways that you can do this:
- If the bonus comes early in the year, contact your payroll department and have your withholding tax increased.
- If it occurs later in the year, make estimated tax payment directly to the IRS. Using IRS Direct Pay you can make a payment using a credit card or directly from your bank account.
- Ask your retirement plan trustee to withhold income taxes on your distributions, similar to federal withholding on your payroll.
How to Pay Your Taxes Online (with a Credit Card)
You can pay your taxes online directly to the IRS, using either a credit or debit card. There is a small fee, of $2 to $2.59 if you pay by debit card, and just under 2% of the amount paid if you use a credit card.
You can use online payments to pay your remaining tax bill, your estimated taxes, or any other tax that’s due to the IRS.
How to Get Your Tax Refund As Soon As Possible
So if you’re in a hurry, e-file.
To get the refund even quicker, set up direct deposit. You can do that on page 2 of your tax return. It will enable the IRS to get your refund in your bank account, without the delay caused by mailing a check.
You’ll probably want to avoid instant tax refund offers. This is where tax preparers offer to provide your refund upon the completion of your return.
But it’s actually what’s known as a refund anticipation loan, not the actual receipt of your refund. You will pay interest and fees on the loan, which will reduce the size of your refund. Exactly how much depends on the tax preparer.
What Out for Income Tax Refund Fraud!
Tax refund fraud is one of the fastest-growing forms of identity theft.
A thief steals your identity, then uses it to file a bogus tax return with the IRS. The return includes a very generous refund, which is paid to the thief. The thief files the return early in the year, before you have a chance to do so. The refund is sent directly to the thief.
Once the fraud occurs, you’re prevented from filing your tax return. You’re notified that it’s already been filed.
It’s a messy situation, but fortunately it can be resolved cleanly. The IRS is aware of the problem, and works with taxpayers to get it resolved.
You need to file IRS form 14039, Identity Theft Affidavit, and attach any necessary documentation. You may be asked to supply your state issued ID card or driver’s license.
The process can take up to six months, but once it’s completed, your tax situation will be corrected. That will include the proper tax refund or liability, based on your actual return.
Tax Deductions and Credits for Small Business Owners
Generally speaking, any expense that’s used in the production of self-employment income is tax-deductible.
The most typical self-employed business expense deductions include:
- The cost of inventory sold
- Expenses connected with the rent, ownership and operating of business property
- Business use of your home, if any
- The costs and expenses for vehicles purchased by and for your business
- Costs and expenses of equipment purchased for your business (Note: you can deduct up to $1 million paid for business equipment under Section 179 depreciation in the year of purchase
- Expenses related to the business use of a personal vehicle
- Sales, marketing and advertising costs
- Legal and professional fees
- Business related education costs
- Start-up costs (usually amortized or depreciated over several years)
- Business insurance premiums paid
- Interest on business-related loan