Taxes for Beginners
Everyone is aware that at some point in time, they will need to file their taxes. But this is not an easy process; especially for first-time filers. It could be very difficult to figure out how to do this correctly.
But don’t worry. If you feel overwhelmed, it's completely normal. This is an intentionally complicated system. But by simplifying that process into basic terms, we hope to make you feel more confident about tax filing this year!
Here’s a quick & easy introduction to Taxes.
How Taxes Are Calculated
Let’s start with understanding some key vocabulary.
- Gross income is all the money you made that year before taxes.
- Adjustments (above-the-line-deductions). Some of the most common above-the-line deductions include retirement contributions, student loan interest, healthcare expenses, and business expenses.
- Gross income - Adjustments = Adjusted Gross Income (AGI)
Your AGI helps to determine how much you’ll be taxed that year. But here are a few other deductions you should know about.
- An exemption is a flat $4,000 reduction in Adjusted Gross Income (AGI) available for each taxpayer for themselves, their spouse & their dependents.
- Deductions depend on the expenses of each taxpayer and can also lower your Adjusted Gross Income (AGI).
- Regular expenses like charity & mortgage payments are examples of Itemized Deductions
- You can also choose to do a Standard Deduction, a flat $6,300, but taking this option means you can’t itemize your deductions.
It’s recommended to calculate your expenses & deductions to see whether the Standard or Itemized deduction will give you the biggest cut (saving you more money).
After you subtract your exemptions & deductions from your AGI, the remaining number is your taxable income.
There are a bunch of different Tax Brackets according to income level. Each bracket is taxed a little differently.
After your taxable income is calculated, you find your corresponding tax bracket. That tax bracket tells you your tax rate.
Let’s say your tax bracket was anywhere between $0 - $9,225, your tax rate will be 10% of your taxable income.
State Taxes tend to be calculated similarly and are almost always lower. These depend on which state you live in.
So, in simplified terms, this is how to calculate your Federal Taxes.
Step 1: Find your Adjusted Gross Income.
Gross income - Adjustments = Adjusted Gross Income (AGI)
Step 2: Calculate Your Taxable Income
Adjusted Gross Income - ( Exemptions + Deductions) = Taxable Income
Step 3: Based on your Taxable Income, find your Tax Bracket & your rate
Step 4: Once you know you’re rate, calculate how much you’ll be taxed.
Example: If my taxable income is $9,225 as a single filer. My rate would be 10%.
10% of $9,225 is $922.5. Therefore I would pay $922.5 in federal taxes.
Do I need to pay federal Taxes?
Depending on your situation, you may not need to pay taxes. But it’s important to be sure before deciding not to file.
If your income exceeds a certain threshold, you will need to file a tax return.
As of 2015, single independent people with a gross income of at least $10,300 must file taxes. This includes Earned income (Wages & Self-employment) as well as Unearned Income (Investments & Interest).
If you earned more than $400 of self-employment income, you also have to file taxes EVEN IF you don’t meet the overall income threshold.
If you are a dependent you must file if you met these criteria
- Earned income of $6,300+, OR
- Unearned income of $1,050+, OR
- Self-employment income of $400+
The IRS Has a “Do I need to file?” tool to help you through this process. Use it if you’re not sure.
You will need to file by April 18th every year.
You can file yourself if you would like to, but as it is a complicated process, it’s generally recommended to have help. You can have a licensed tax preparer or shop around for the best tax-filing software.
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