Why do we have to do taxes

Sitting down to manually file or e-file your taxes might seem intimidating, but you can make the process easier if you collect your important financial and personal information before you start your 1040 form.

Documents Required To File Your Tax Return

To start, you’ll need to provide basic personal information such as the Social Security number or tax ID number and the date of birth for everyone on your return. This will typically include your numbers and birthdate, of course, but also those of your spouse and dependents.

You'll also need your income and investment information. You'll get this information from various forms that should be sent to you before you file your taxes. Your W-2 form shows how much you earned during the previous year and how much of your earnings were withheld for taxes. Your employer must send you this form by February each year.

You'll also need your bank account information showing how much interest you earned on your savings accounts. If you made contributions to an IRA, you'll need Form 5498, provided by the financial institution offering your IRA and one that shows how much you contributed during the previous year.

Form 1098-E is also important. It lists how much interest you paid on student loans. If you have a mortgage, Form 1098 shows how much you paid in interest on that loan. Both forms matter because you might be able to deduct this interest on your taxes.

If you’re self-employed, you'll need your 1099 forms. These forms are sent to you by any client who paid you $600 or more during the previous year. You'll need to report these figures on your tax returns as income. If you received dividend income, you'll need to enter the numbers listed on Form 1099-DIV. And if you received any money or benefits from the government, this income will be listed on Form 1099-G.

Tax Return Filing Status

You’ll also have to determine your filing status. This is important because it helps determine how much in income tax you'll pay. You can file as:

• Single: You'll file as a single taxpayer if you are not married and aren't being claimed as a dependent on someone else's tax returns. Single taxpayers are eligible for a standard deduction of $12,550 for the 2021 tax year.
• Married filing jointly: Most people who are married file in this category. This allows them to file one joint tax return. If you file under this category, your standard deduction for the 2021 tax year is $25,100.
• Married filing separately: Married couples can also each file their own tax returns, reporting only their personal income, deductions and credits. The standard deduction for taxpayers who file this way is $12,550 for the 2021 tax year.

Tax Deductions

Tax deductions are valuable. You deduct these from your adjustable gross income for the year, meaning they help you lower your taxable income. The more deductions you claim on your tax return, the lower your taxable income and the taxes you'll pay. Just make sure you only claim deductions that you are legally entitled to.

The most common deduction is the standard deduction. This is the amount of money that you can deduct from your taxes if you don't itemize other deductions. If you file as a single taxpayer, the standard deduction is $12,550 for the 2021 tax year. If you’re married and filing jointly, your standard deduction for the 2021 tax year is $25,100. This means you can deduct that much money from the taxes you owe.

It makes sense to claim the standard deduction if this amount is greater than the total amount of other deductions you'd be able to claim. For example, some deductions you can claim are:

• Interest paid on your mortgage
• Interest paid on student loans
• Charitable donations you made
• Contributions to IRAs and health savings accounts
• Self-employment expenses

If your filing status is single and these other deductions total more than $12,550, it makes sense to forgo the standard deduction and itemize your deductions on your tax returns. If these deductions equal less than $12,550, it makes more sense to go with the standard deduction.

Tax Credits

The third section of your tax return focuses on tax credits. These differ from deductions in an important way: While deductions reduce your taxable income, credits are subtracted directly from your total tax bill.

If you owed $12,000 in taxes and qualified for a $5,000 tax credit, your tax bill would fall to $7,000.

There are several different tax credits. For instance, if you adopted a child, you might qualify for the adoption tax credit. This credit can run up to $14,400 for every child adopted during 2021.

If you have a dependent child, you might qualify for the child tax credit. According to the American Rescue Plan, all working families who make up to $150,000 as a couple or $112,500 as a single parent can receive $3,000 per child 6 – 17 years old, and $3,600 per child under 6 years old. Visit the White House website to learn more about the updated child tax credit and how to qualify.

Finally, it’s time to submit your return. You can file your tax return in many ways. You could, of course, choose to mail them to the IRS and your state government.

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