Every spring, tens of millions of Americans file a tax return (or an extension) with their state and the federal government. You may have some questions around the whole process – aren’t taxes taken out ahead of time from your paycheck? Why do some people get refunds, and others have to give more money to the Internal Revenue Service (IRS)? What do people mean when they refer to “writing something off” their taxes?
The Internal Revenue code is a hefty document, and it may feel like you need an advanced degree to figure out paying taxes. Fortunately, you don’t need to be a CPA! Online resources (such as this one) and tax preparation software make it doable for most people to tackle on their own. 93.8% of individual tax returns were filed electronically for the 2022 fiscal year.
Whether it’s your first time paying taxes or you’re looking to refresh your knowledge, keep reading as we’ll cover the basics of the process of filing income taxes in the United States.
Why Should You Care to Understand Taxes?
As Benjamin Franklin said, the only thing certain is death and taxes! No matter your personal view on taxes, understanding income taxes is crucial to be an informed resident of a country. It empowers you to navigate your financial responsibilities, make informed decisions, and contribute meaningfully to the collective well-being. When you know the tax principles, that makes it easier to handle your own tax filing process, and vote for policies that reflect your values and local community’s needs at the broader level!
Key Concepts of Paying Taxes
To understand the process of paying taxes, it’s helpful to go into it knowing the lingo and what those terms really mean. If you’re looking for definitions of key tax terminology, check out our blog where we cover what common tax terms mean, then dive back into this one! In this blog, we’ll cover the process of finding your taxable income, then walk you through the filing process, calling out helpful considerations along the way.
The Consumer Financial Protection Bureau defines taxes as, “required payments of money to governments, which use the funds to provide public goods and services for the benefit of the community as a whole.” There are multiple types of taxes, such as on business or personal income, the sale of goods, payroll, and property. For this blog, we’re focusing on filing income taxes for individuals, but the other types of taxes are helpful to know since they often play a role in the federal income tax process.
Taxable Income
The first key concept is taxable income. Not all of your income is taxed the same! You’re likely already aware that income can come from various sources, like a traditional job (W-2 employment) or freelance work (1099 contract, where you’re considered self-employed). The government collects taxes from these income sources differently. For W-2 jobs, your employer withholds taxes from your paycheck, and you file a tax return at the end of the year to reconcile between what you already paid and what you owe (more on that later). For self-employment work, taxes aren’t automatically withheld, so you need to set aside money to cover these taxes. Some self-employed people must pay estimated taxes quarterly throughout the year.
The government taxes on what they consider your “taxable income” which is the amount left over after you subtract certain expenses, deductions, or receive credits.
Tax Brackets
Income tax brackets in the United States determine the percentage of your income that you owe in federal income taxes. The U.S. tax system is progressive, due to its graduated tax brackets. It’s a common misconception that the more money you make, it all gets taxed at a higher rate. Fortunately, that’s not true! Otherwise, you would get penalized for making more money, which would be counterintuitive to economic development. Each tax bracket must be filled before you enter the next higher tax bracket.
Here are the 2024 tax brackets for someone filing as Single:
| Taxable Income | Tax Rate |
| $0 – $11,600 | 10% |
| $11,601 – $47,149 | 12% |
| $47,150 – $100,524 | 22% |
| $100,525 – $191,949 | 24% |
| $191,950 – $243,724 | 32% |
| $243,725 and above | 35% |
Here are the 2024 tax brackets for a married couple filing jointly:
| Taxable Income Range | Tax Rate |
| $0 – $23,200 | 10% |
| $23,201 – $94,299 | 12% |
| $94,300 – $201,049 | 22% |
| $201,050 – $383,899 | 24% |
| $383,900 – $487,449 | 32% |
| $487,450 and above | 35% |
Here’s an example of how much a fictional family (Let’s call them the Lees), a married couple filing jointly with a combined taxable income of $230,000, would owe in federal income taxes using the 2024 tax brackets.
| Lee Family Taxable Income within the Bracket | Tax Rate | Tax owed in this bracket |
| $23,200 | 10% | $2,320.00 |
| $71,098 | 12% | $8,531.76 |
| $106,749 | 22% | $23,484.78 |
| $28,950 | 24% | $6,948.00 |
| Not applicable | 32% | $0 |
| Not applicable | 35% | $0 |
The Lee family would add up the tax owed in each bracket to find their tax liability, for a total of $41,284.54. The Lee family’s marginal tax rate is 24% – the tax rate for their last or highest dollar of taxable income. Though their marginal tax rate is in the 24% tax bracket, their whole income is not taxed at 24%. The percentage of tax you owe from your total income is called your effective tax rate. For the Lee family, the effective tax rate is 17.95%, which represents $41,284.54 divided by $230,000, their taxable income.
Deductions
Deductions are a – dare we say “exciting”? – part of taxes because they reduce your taxable income. There are a few types of deductions. Above-the-line deductions are things you can do to reduce your taxable income without having to itemize expenses on your taxes. These include things like contributing to a pre-tax retirement account such as a Traditional IRA or a 401(k) account. The other category is below-the-line deductions which are deductions that you must itemize to claim, and commonly include mortgage interest, charitable contributions, or unreimbursed medical and dental expenses that exceed a certain amount of your income.
You can choose between taking the standard deduction which is a flat amount taken off your total income. In 2024, that amount is $29,200 for married couples filing jointly, $14,600 for single filers, or $21,900 for heads of households.
Or you can itemize. Yahoo! Finance reports you’re most likely to benefit from itemizing if:
- “You had large uninsured medical or dental expenses: You can deduct any amount over 7.5% of your income.
- You paid mortgage interest: The TCJA reduced the deduction from $1 million, but you can still deduct on mortgages up to $750,000.
- You paid property taxes: The TCJA capped the amount of property taxes you can deduct, but you can still write off up to $10,000.
- You had large uninsured theft or casualty losses from a federally declared disaster: You might be able to deduct the entire loss.”
Another consideration is if you made substantial charitable donations.
These individually or in combination can result in a larger itemized deduction than the standard deduction. If in doubt it is best to complete your return using both deductions and compare, obviously using the most beneficial deduction.
You can choose either the standard deduction or to itemize – most will take the option that allows them to pay less tax.
After deductions, your taxable income determines how much tax you owe by using the brackets we just covered.
Here is an example: Danielle is unmarried with no dependents and her job pays $80,000 per year. She contributes $5,000 to a 401(k) account, and she takes the Single standard deduction of $14,600. She does not qualify for any tax credits (more on that next). Her taxable income would be $80,000 – $5,000 – $14,600 for a sum of $60,400.
Tax Credits
Tax credits, also sometimes called tax breaks, are another way to reduce the amount you owe in taxes. Deductions reduce your taxable income, while tax credits provide a dollar-for-dollar reduction in the actual tax liability. Here are some common tax credits:
- Earned Income Tax Credit
- Child Tax Credit
- American Opportunity Credit or the Lifetime Learning Credit for education
- Child and Dependent Care Credit
- Residential Energy Efficient Property Credit
Filing Income Taxes
Now that we’re all caught up on the core tenets of income taxes, we’re ready to dive into the process of filing them. Let’s break it down:
Step 1: Gather Your Documents
Grab your W-2 form (either a paper copy mailed to you, or a digital copy from your employer’s payroll system), which shows your earnings and tax withholdings. If you did freelance work or received any 1099s, collect those too. Don’t forget other relevant forms like 1098-E for student loan interest or 1098 for mortgage interest. If you’ll be itemizing your taxes or trying to claim special tax credits, gather the necessary documents to showcase your eligibility.
Step 2: Choose How to File
Next, you’ll choose how to file your 1040 form, which is the federal income tax return.
Most people file their taxes electronically, which simplifies the process. You can use a software from a tax preparation company, which often comes with a cost, or file federal income taxes for free directly with the IRS. Using the software from the IRS trusted partners is free for those with an Adjusted Gross Income of $79,000 or less for the 2023 tax year.
Or, you can go old-school and file a paper return. For anyone at any income level, you can file on paper by mail for free (but you’ll need to pay postage). You can use the fillable forms for free to help prepare your document.
Step 3: Provide Personal Information
Start by entering your personal information: name, Social Security number, filing status (like single or married), address, and any dependents you may have.
Step 4: Report Your Income
Starting in the Income section, you’ll input your earnings. If you have a traditional job, use your W-2. If you did gig work or freelanced, add up those 1099s.
Make sure to include interest or investment income as well. If you’re filing by paper, you may need to attach and fill out another form to report those types of income. Check out Schedule B and Schedule C.
Step 5: Claim Your Deductions
You’ll move on to claiming deductions. This is where you get to subtract some of your expenses from your income, reducing the amount you’re taxed on. Remember, common deductions include student loan interest, charitable contributions, and mortgage interest. Here, you’ll also choose whether you’re taking the standard deduction or itemizing. If you’re using a preparation tax software, it will likely calculate for you and determine which is the best route for you.
Step 6: Payments and Credits
Next, you’ll enter any federal income taxes you’ve already paid on your earnings through withholding, or any estimated taxes paid through the year plus any credits for which you qualify.
Step 7: Calculate
It’s the moment of truth: will you get a refund, and if so, how much? After you’ve inputted your earnings, deductions, credits, and amount of taxes you’ve already paid, the software (or you) will calculate to determine if you overpaid for your tax obligation and are due a refund, or if you owe money to the IRS to fulfill your tax obligation. About 75% of taxpayers get a refund on their federal income tax.
Step 8: Review and File
Double-check everything. Make sure you haven’t missed any deductions or credits. Once you’re confident, hit that submit button. If you’re doing a paper tax return, run the calculations again when you have a fresh brain, then drop your paper forms in the mail.
Step 9: Pay or Get a Refund
If you’re getting a refund, celebrate! Whether you file electronically or by mail, you can choose whether the IRS will send you a check or deposit the money directly into your bank account. If you file electronically and are due a tax refund, you can expect in three weeks, compared to six to eight weeks for paper filing.
If you are due a refund, you can also choose to have it applied to next year’s taxes. Who might choose this? Self-employed individuals who must pay estimated taxes throughout the year or investors who don’t have taxes withheld from interest or investment income may find this option helpful to get ahead of their tax obligation.
If you owe money, you’ll pay online or mail a check to the IRS. Keep in mind that the normal due date for filing your 2023 tax return is Monday, April 15.
Conclusion
We hope this guide makes paying income taxes easier! Remember, if you’re unsure about anything, you can reach out to a tax professional for specific help about your tax situation! Filing taxes might seem intimidating at first, or as your financial situation grows more complex, but millions of people do it every year, and you can too! Just take it step by step, and you’ll be a tax-filing pro in no time.
If you’re looking for a place to save that tax refund, check out Milli! We’ve got a highly competitive annual percentage yield, plus helpful spending insights, automated savings features, and customizable Jars – all designed to help you save more for the things that matter most. Download Milli from the App Store or Google Play and sign up today.
Keep reading on the Milli blog:
Make the Most of Your Tax Refund with a High Yield Savings Account
How Much Money Do Americans Have?
Loud Budgeting: Bringing Transparency to Everyday Money
