Income Tax: How It Works

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Income Tax

It can be confusing for many Americans to work out what forms they need to fill out when filing their taxes, from the 1040s to 1099s. The forms can be confusing for a first timer with a code that’s over 5,000 pages long. Fortunately, most filers only need to know the basics.

The Tax Process

The entire tax process will begin when you start a new job. You will need to sit down with your employer to work out your compensation, which could come in the form of an hourly wage, or an annual salary. 

From here, a worker will need to fill out a W-4 form. This is considered like a miniature income tax survey, which will determine certain factors about your household, and some of your expenses and other household incomes. 

State And Federal Income Tax

The USA has a multi-level tax system, which means that the rate you’ll pay will depend on the state you live in and how it pertains to federal income tax rates. Make sure you learn about the difference between state and federal income tax and how it affects you.

With this information, you can then calculate the income you’ll need to pay in your state and how it is affected by federal rates. 

When you understand the rates in your area, you can consider whether or not you are paying an exceptionally high rate, and if you could consider relocating to a new region to reduce your tax payments. 

Filing Income Taxes

When it comes to April, you will need to file your income tax reports with the IRS. Of course, you will have been paying taxes throughout the year, but in April you will work with the IRS to help determine if you’ve been paying the right amount. 

If you have paid too little, then you will need to cover the costs. However, if you’ve paid too much, you will be eligible for a refund.

Earned Income Tax Credit

The United States federal earned income tax credit, also known as EITC or EIC, is essentially a refundable tax credit available for low to moderate-income working individuals and couples. If you have children, then you’re more likely to qualify. There will be factors that can alter the requirements and increase the amount. Such factors include your relationship status, age, and shared residency status.

You may have heard more about earned income tax credits in recent years. Mainly, you may have heard about them through political debates when it nears election season. That’s because both parties will argue over raising the EITC or minimum wage, with both having their benefits.

Don’t be surprised if we see the credit phase change in the next few years as the debate rages on within politics. For now, it will benefit you to learn how you can calculate your earned income tax credit. You can do this through a tax service, which offers a range of tools to work out your credits, from using a stimulus calculator to estate tax liability.