Browse Tag: Income tax returns

How Income Taxes Work

Paying taxes is on everyone’s mind, rarely in a good way. Knowing some pithy facts about our tax system and how you fit in may not make you feel any better. But, it could even help you plan.

  1. The IRS receives over 140 million individual tax returns and collects over $950 billion in taxes.
  2. The biggest tax deductions are those for taxes paid to state and local governments. Next biggest are for interest, especially on home mortgages.
  3. The average tax refund is almost $3,000, $2,953 to be exact. In all, over $325 billion in tax refunds are paid out.
  4. Want to aim really high and try to crack the $10 million mark? More than 11,000 individual tax returns reported adjusted gross income above $10 million.
  5. As a percentage of adjusted gross income, people earning $100,000 to $200,000 pay an average federal tax rate of only 12%. Those earning $200,000 to $500,000 pay 19.6%. Don’t confuse marginal rates with average rates. The former is what you pay on your very last dollar.

 

The income tax process is fairly straight forward. The tax process starts with income & usually most income which is received is taxable. Income from work, interest, pensions, and investments as well as other sources are included in a taxpayer’s gross income. The income from all these sources are added together to arrive at the taxpayer’s gross income.

What is not considered as income?
Gifts, worker’s compensation benefits, child support payments, inheritances, cash rebate from a dealer or manufacture or inheritances?

Adjustments are subtracted from gross income. They might include retirement plan contribution, alimony, half of self-employment & moving expenses, among other items. This results to adjusted gross income.

Deductions are subtracted from adjusted gross income. Tax payers have two choices regarding deductions: The standard or itemized deductions, whichever is greater. The standard deductions vary based on filing status:

 

Filing status Married filing jointly Married filing separately Single filers Head of household
Standard deduction amounts  

$12,700

 

$6,350

 

$6,350

 

 

Itemized deductions could include state and local taxes, certain unreimbursed job expenses, charitable contributions, interest on a home mortgage & the cost of having your taxes prepared, among other things.

The personal exemption is subtracted once the deductions have been subtracted. For the tax year 2017, personal exemption amount is $4,050 regardless of filing status. The result here is taxable income which leads to gross tax liability.

The IRS reports that about 40% of the taxpayers use tax preparation software. Source: IRS, 2017

But, it’s not over yet.

The tax credits are subtracted from gross tax liability. Tax payers might receive credits from variety of items, including energy-saving improvements. This results to the taxpayers Net Tax.

Understanding tax process is one thing and the work is another. Remember this material is not intended as tax or legal advice. Please do consult a tax professional for information regarding your individual situation.

Estimated Tax Payments

If you earn income which is not subject to withholding, such as interest, dividends, income from self-employment, rent, alimony, investment gains, awards and prices then you may have to pay estimated tax payments.

You might also have to pay estimated taxes if your income tax withholding on pension, salary, or other income which is not enough, or if you had a tax liability for the prior year.

Please do consult a tax expertise regarding your individual situation.

 

HOW TO FIGURE ESTIMATED TAXES

You must include your expected adjusted gross income, taxable income, taxes, deductions, and credit for the year to calculate your estimated tax.
Consider using your prior year’s federal tax return as a guide.

HOW TO PAY ESTIMATED TAXES

You may pay estimated taxes online, by phone or even through the mail.
If you are filing as a partner, a sole proprietor, S corporation shareholder or a self-employed individual & expect to owe tax of $1.000 or more when you file a return, you should use Form 1040-ES, estimated tax for individuals, to calculate and pay your estimated tax

The year is divided into four payment periods for estimated tax purposes each with a specific payment due date. If at all you fail to pay taxes by the due date of each payment periods, you would be charged a penalty, even if you are due a refund when you file your income tax return.

Most tax payers would generally avoid the penalty if at all they owe less than $1,000 in taxes after subtracting their withholdings and credits, or if they at least paid 90% of tax for current year, or 1000% of tax shown on return for the prior year, whichever is smaller.

Accurate, up-to-date financial records and consultations with your tax guru can also help you make timely estimate.

 

Is Your Adhaar Card Ready?

aadhar-card

The Central boards of Direct Taxes vide its Press Release dated 05.04.2017 have made it mandatory to quote your Aadhaar card for PAN Applications & Filing Return of Income.

Section 139AA of the Income-tax Act, 1961 as introduced by the Finance Act, 2017 provides for mandatory quoting of Aadhaar / Enrolment ID of Aadhaar application form, for filing of return of income and for making an application for allotment of Permanent Account Number with effect from 1st July, 2017.

It is clarified that such mandatory quoting of Aadhaar or Enrolment ID shall apply only to a person who is eligible to obtain Aadhaar number. As per the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016, only a resident individual is entitled to obtain Aadhaar. Resident as per the said Act means an individual who has resided in India for a period or periods amounting in all to one hundred and eighty-two days or more in the twelve months immediately preceding the date of application for enrolment.

Accordingly, the requirement to quote Aadhaar as per section 139AA of the Income-tax Act shall not apply to an individual who is not a resident as per the Aadhaar Act, 2016.

 

Why link Aadhaar and PAN?

  • The government can keep a tab on the taxable transactions of a particular individual or entity, whose identity and address will be verified by his Aadhaar Card.
  • By linking the two, entities will no longer have to submit their Income Tax acknowledgement to the I-T department.

 

How to Link Aadhaar and PAN?

  • The first step towards linking Aadhaar with PAN to register on Income tax e-filing portal.
  • On logging in to the site, a pop up window will appear prompting you to link your PAN card with Aadhaar card.
  • You can input your Aadhaar number enter ‘captcha’ code and click on ‘link now’.
  • In case you have decided to link Aadhaar with PAN later click on ‘later’ button.
  • On logging, if no pop up window appear, go to Profile setting and click on ‘link Aadhaar’.
  • Enter your Aadhaar number enter captcha code and click on ‘link Aadhaar’.
  • The system will match your name, date of birth and gender with PAN card and Aadhaar database, if detail matches, you will get the message “Aadhaar – PAN linking is completed successfully.”

 

Your name in Aadhaar and PAN doesn’t match ? Don’t worry !!

In case you are unable to link PAN with Aadhaar because of discrepancy in name, log in to the Aadhaar website (http://www.uidai.gov.in), request for a name change and upload a scanned copy of PAN card as supported proof. In this case, your registered mobile number has to be functional .

The tax department is also planning to introduce an option on the e-filing portal through which taxpayers can choose to link the Aadhaar without changing the name by opting for a One-Time Password (OTP), provided that the year of birth of the person matches in both documents.

 

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