Most Americans feel proud about paying taxes. Don't you? For, it makes us glad to have reached a definite financial level.
The U.S. federal agency, the IRS (Internal Revenue Service) controls and collects taxes in the U.S. It also administers the tax laws in the country. In 2021, the IRS is believed to have processed almost about 253 million tax returns.
Unfortunately, as a taxpayer, doing the taxes may seem complicated. The many jargons, the various terms, the technicalities could make you feel like you are caught in a catch-22 situation. But, a good thing is that there are plenty of tools available today to help you ease your tax calculations.
The amount of tax you owe Uncle Sam depends on factors such as your gross income, your age, your marital status, and so on.
Gross income is the total money you earn from all the sources including your salary, allowances, returns, investment gains, and dividends before deducting any expenses or taxes. However, it does not include tax-exempt sources of income, like most of the alimony pays, child support payments, workers’ compensations, and others.
Adjusted Gross Income (AGI) is your income derived by subtracting certain deductions (Adjustments to income) from your gross income. These deductions include the ones you pay towards student loan interest, alimony payments, child support payments, Educator expenses, contributions to IRA, 401(k), health savings account, and other qualified retirement schemes.
On the other hand, Taxable income is your total income that will be taxed. It is calculated by subtracting your permissible itemized or standard deduction amounts from your AGI (adjusted gross income)
Note that you are not allowed to claim both the standard and itemized deductions. After the tax-reform majority of the taxpayers have been finding it beneficial to opt for the standard deduction on their tax returns rather than claiming itemized deductions.
If you are not a dependent, check out the 2020 filing requirements. Alternatively, you can check out the IRS's interactive tool where you can enter in some basic information about yourself and it will tell you whether or not your gross income falls within the taxable income bracket. Essentially you are also required to file a state tax return if you are filing a federal return. Check out TurboTax’s list of states’ requirements for state filings.
For dependents, the eligibility criteria depend on the earned income, unearned income, gross income, marital status, and if they are blind or not. It’s also important to note that other than filing as a dependent, many special cases may require one to file returns if income is less than the fixed minimum. For instance, you would be required to file taxes even if you are self-employed with an income of just $400 or more.
To figure out what special category of taxpayers you fall into, the IRS offers its own Interactive Tax Assistant tool. This tool lets you know the eligibility criteria based on your responses to a few basic questions.
A doubt that might be running through your mind is whether you need to file tax if your gross income is lesser than the defined tax brackets. Well, the tax law does not require you to pay any money, however, if you file your taxes despite not owning anything, you might qualify for some tax credits and end up with some extra funds from Uncle Sam!
What are tax credits?
Tax credits are defined as the amounts of money you can deduct directly from your payable tax amount. A tax credit lowers the actual amount of tax owed, unlike a deduction, which reduces the amount of total taxable income. The value of tax credit majorly depends on the nature of the credit; a few types of tax credits are offered to individuals or companies only in specific locations or industries. The income tax credit and child tax credit are some of the examples of tax credits available.
It would be a good step to focus on refundable tax credits if you owe little to no taxes. Because you may be qualified to encash them despite their value being more than what you are required to pay. Most types of tax credits are non-refundable. They help reduce the tax amount you owe without paying anything extra. For instance, say your total payable tax amount is $500 and you are eligible for a tax credit worth $800. If the tax credit is refundable, you get paid the difference amount of $200, however, if it’s non-refundable, you would not get even a penny extra.
Earned Income Tax Credit (EITC) is one of the tax credits meant to profit you largely if you have a low to moderate income. Basically, you will be eligible to claim it if you earn an income of a minimum of $1 and your AGI is less than the standard limits, which are influenced by factors like your filing status and the number of children you claim on your tax returns.
Here’s an interesting fact: As per a report by the NCSL (National Conference of State Legislatures), more than 25 million eligible tax filers gained a sum of around $63 billion, the average being $2,476 per taxpayer. It also states that about 20% of eligible taxpayers do not claim the ETC.
Another tax credit salvager that lessens the tax burden is the Child Tax Credit (CTC). It helps save on the costs of raising your kids. For the tax year 2021, each qualifying child below 6 yrs is eligible to get up to $3600 and a child between 6 yrs and 17 yrs.
The American Opportunity Tax Credit (AOTC) is a credit for qualified education costs for students for the first four years of their post-secondary education. An eligible student can get a maximum of $2,500 a year and 40% of it (Up to $1000) can be refunded to you if this credit brings down your payable tax amount to zero.
You’d be able to claim the full credit if your MAGI (Modified Adjusted Gross Income) is $80,000 or less if filing single, or $160,000 or less if you’re married and you are filing jointly. You will be eligible for partial credit if your MAGI is above between $80,000 and $90,000 if filing as single or if it is between $160,000 and $180,000 if married and filing jointly.
Also, to be eligible to claim the AOTC you will require a 1098-T, Tuition declaration from an eligible educational organization.
Is it Mandatory to claim the tax credits?
Absolutely not! Filing taxes and looking for credits that you could claim might seem intimidating. But you can trust us when we say they make it worth your while. These refunds and discounts could help lower your tax bills and save your hard-earned money substantially! So, never miss out on any eligible credit!