Getting your tax affairs in order is just a simple fact of life. But that doesn’t mean it’s easy or pain free.
There is a lot to know when it comes to filing taxes. Our complete guide for the 2021 tax year should help. (Ibuprofen sold separately.)
- 1 How Much Do You Have to Make to File Taxes?
- 2 How Are Your Taxes Calculated?
- 3 How to File Your Taxes
- 4 Common Tax Mistakes — And How to Avoid Them
How Much Do You Have to Make to File Taxes?
Making more money is, in almost every way, a good thing. But it’s also true that the more money you make, the more taxes you’re required to pay — at least up to a point.
On the opposite end of the spectrum, you may be exempt from filing a federal income tax return if you don’t meet the IRS income threshold, which can change.
2021 Tax Year
You need to file a 2021 federal tax return by April 18, 2022, if your income exceeded the amounts listed below. (Residents of Massachusetts and Maine have until April 19.) In the last few years, we’ve enjoyed lengthy tax filing extensions because of the ongoing pandemic, but this year, the tax deadline is much closer to the typical April 15 deadline.
Single tax filers or married filing separate tax returns
- $12,550 if you’re under 65.
- $14,250 if you’re 65 or older.
Married filing jointly
- $25,100 if both spouses are younger than 65.
- $26,450 if one spouse is younger than 65 and the other spouse is 65 or older.
- $27,800 if both spouses are 65 or older.
Head of household
- $18,800 if you’re under 65.
- $20,500 if you’re 65 or older.
Qualifying widow or widower with a dependent child:
- $25,100 if you’re under 65.
- $26,450 if you’re 65 or older.
The best way to determine whether or not you need to file a tax return is to use the IRS’s free online tool, which takes about 12 minutes to get a definitive answer.
How Are Your Taxes Calculated?
All right, so you’ve successfully determined whether you’re required to file a federal tax return.
Now for the real fun: figuring out exactly how much you owe — or are owed.
Your taxes are calculated based on a range of personal details, like how much money you made in a given tax year, how much you’ve already paid in taxes, your marital status and how many dependents you have.
Your federal income tax is determined according to income brackets, which scale up in percentage as your overall income increases. For 2021 (filing in 2022) and 2022 (filing in 2023), there are seven federal income tax brackets, ranging from 10% to 37% of your income. Unmarried and married individuals (and heads of household) have different levels of taxable income that determine their tax brackets.
Along with federal income taxes and your contributions to Social Security and Medicare, you’ll also be responsible for state and local taxes. Each year, you must file a state tax return, unless you live in one of the nine states that don’t levy them. Those states are:
- New Hampshire*
- South Dakota
*New Hampshire does not have traditional income taxes on W-2 wages, but the state does assess a small tax on dividends and interest, though this is set to phase out in 2027.
The other states’ rates run from as much as 13% to almost nothing and may vary by income or be assessed at a flat rate.
Note: States without income tax typically make up for it in higher sales tax rates, especially for items like tobacco and alcohol. Tennessee charges the most with a statewide 7% sales tax.
Depending on where you live, you might also have to contend with local taxes and even school district taxes. Some cities only have one, but some homeowners might find they are double-taxed: once by their town and once by their school district, even if they don’t have kids attending.
Deductions and Credits
You may be eligible for certain tax deductions, such as student loan interest payments. Tax deductions can add up and cut a nice chunk off of what you’d otherwise owe to the IRS, sometimes substantially increasing your refund by reducing your total taxable income.
This is especially true if you’re a freelancer, in which case you may be able to take a home office deduction.
Note: With more people working at home because of the pandemic, there may be heightened interest in this. Check with a tax advisor but know that if you are employed and received a W-2 but are working from home, you probably can’t claim a deduction. The home office deduction is generally reserved for self-employed or gig workers.
You could also deduct the interest paid on your mortgage, charitable donations and more. Or, it may be in your best interest to take the standard deduction, which, for 2021, is a pretty generous $12,550 for single filers ($18,800 for heads of household or $25,100 for those married and filing jointly).
There are also certain tax credits you may be eligible for, such as the American Opportunity Credit, which offers eligible students up to $2,500 per year to offset college expenses, or the Child Care Credit, which offers eligible guardians up to $2,000 apiece to offset the expense of supporting a dependent.
Tax credits differ from deductions: While a tax deduction reduces your income subject to taxes, a tax credit reduces what you owe the government, dollar for dollar.
Doing the Math
If you’re a first-time tax filer, chances are your situation won’t be too complex. You’ll likely be able to get away with the simplest version of IRS Form 1040.
This document uses information about your income, withheld taxes, marital status and dependents to determine whether you’ll be writing or receiving a check.
Most people will fill this out using their W-2 as a guideline, which is a document issued by your employer.
Your W-2 lists your total earned wages and withholdings, including federal income tax, Medicare and Social Security. It’s distributed by employers no later than Jan. 31, and these days, the documents are often sent digitally.
The self-employed person’s equivalent of a W-2 is a 1099, although these documents don’t include information on tax withholding — because independent contractors are responsible for doing that themselves. Contractors should be paying quarterly estimated taxes to Uncle Sam to avoid any fines come tax season. More on this below.
The more complicated your financial landscape is, the more complicated your filing will be, and the more forms you’ll need to add to your pile.
For example, if you have additional sources of income through capital gains, unemployment compensation, gambling or prizes, you’ll need to file a Schedule 1 along with your 1040.
There are also additional forms for those who owe self-employment tax or can claim a refundable credit. (The IRS helpfully lists some of the most common additional-filing scenarios, and the necessary documents, on its “About Form 1040” page.)
Of course, dragging out your calculator and working out your tax burden longhand is only simple in theory, even under the most straightforward circumstances — which is why many people turn to tax filing software or professional services to help make taxes less of a chore. These costs range from a few bucks on a digital filing upgrade to putting an accountant on retainer.
If you are worried about making mistakes while filing or if your tax situation is any more complicated than a basic W-2, we highly recommend using tax software like TurboTax. And if your scenario is exceedingly complex for even tax preparation software, consider an actual accountant, who can help not just with your federal tax return but also your state and local tax returns.
How to File Your Taxes
Now that you’ve got the hard part out of the way, it’s time to put away the calculator and actually file your income tax return. You’ve got a number of options, some of which are more convenient (and costly) than others.
E-File Using the IRS Free File Tool
The Free File tool is a good option for those with relatively straightforward taxes, especially if your adjusted gross income is less than $73,000. (Those with an adjusted gross income of more than $73,000 can still use the Free File tool, but the free tax software only does basic math for you, and state tax prep is not available.) If your adjusted gross income is higher than the cut off, we recommend foregoing Free File and instead opting for tax software like TurboTax or an actual accountant.
You can use the IRS Free File option online with guided tax preparation, or you can use Free File at an IRS partner site (TurboTax and H&R Block famously dropped out of the program in 2020). Note that you cannot begin the Free File process on an IRS partner site; begin the process at IRS.gov to qualify. You can also try Free File at home, with pen and paper, using the Free File Fillable Forms (say that five times fast).
You cannot use Free File to complete a prior year tax return.
E-File Using a Private Tax Preparation Software
Some of the most common tax filing software options include TurboTax, TaxAct, and H&R Block. Most of these tax preparation services offer a free file option (though TurboTax and H&R Block no longer participate in the IRS Free File program), and they make the process super simple: Just fill out some forms, click some buttons, and your tax is sent.
The free file service goes for basic federal and state taxes. This makes it more comprehensive than the IRS tool, but if you have to file a local tax return, you’re still on your own for that. And if your financial situation is more complex — for example, income including mortgage interest or rental property profit — you may have to move into a paid tier. Be prepared to pay extra as well if you’d like tax advice from an actual professional.
A caveat: Most customers begin using a service like TurboTax after hearing it’s free, but TurboTax and similar tax software are only truly free for a handful of customers with very basic tax returns. The moment you introduce some complexity into your federal tax return, these tax preparation services will start adding dollar signs to your total.
Old-School Using Paper Tax Filing
That’s right: You can still send actual, hand-filled-out paper forms to the IRS in the mail. Paper tax filing is pretty cheap, of course, but it’s also an easy way to make errors on your return if you’re not a tax wizard. But if you’re confident in your calculator-fu, here’s the full list of IRS mailing addresses by state.
Keep in mind that the IRS has a huge backlog of paper returns due to COVID-19. Many people waited months to get their tax refund in 2020 and 2021, whereas over 90% of returns filed online are processed within 21 days.
Hire a Professional Tax Preparer
Although it’s easily the most expensive move on this list, using a tax preparer is also the least stressful — and if you make enough to cover it without too much budgetary shuffling, it might just be worthwhile. A certified accountant or tax preparer can ensure you get the most generous refund possible (they’ll chase down every tax credit and tax deduction possible) and can offer tax advice along every step of the journey. Should you get audited for a year that you sought professional help, that firm can step in and assist. And best of all, your calculator can stay firmly ensconced in its layer of dust.
Tax preparation fees can vary based on the complexity of your situation (and number and types of forms involved) and on your location; in general, tax preparation fees for basic filing average a little over $200.
If You Owe Money
If you owe taxes, you can pay through the digital system via direct transfer from your bank account or by credit card. You can also mail off a paper check to the correct address for your state.
But let’s keep the glass half full and assume the government owes you money. You can set up direct deposit to your bank account for the fastest refund, but you can also request a paper check in the mail. In recent years, refunds from federal tax returns have been delayed when paid via mail due to the ongoing pandemic; if at all possible, opt for direct deposit.
Common Tax Mistakes — And How to Avoid Them
It’s important that you file your income taxes correctly and on time or else risk penalties. If you think you’re going to be late, you can file for an extension — but never count on it being granted.
Here are some of most common mistakes people make when filing income taxes and our advice for avoiding them:
Mistakes When Calculating
Hey, you’re not a robot. You might know your multiplication tables as well as the next guy, but we’re all human and make mistakes. And you know who doesn’t like mistakes? The IRS.
How to avoid this: Use a calculator when filing your taxes by hand. Better yet, use the IRS Free File option, let a tax preparation service like TurboTax do the calculations for you, or leave it to a tax professional with an even more sophisticated bit of software at their disposal.
Mistakes When Filing
When you file your federal income taxes, you’ll have a couple of key choices to make: 1) standard or itemized deduction and 2) filing status. Married couples in particular need to weigh the pros and cons of filing jointly or separately.
Because there can be major implications (like how and if you can contribute to tax-advantaged retirement accounts or how student loan companies with income-based payment plans will view your income), you need to really think through your filing status.
How to avoid this: A financial advisor or professional tax preparer is your best bet when making these more challenging decisions. Their software should also be able to help you see how much you’ll save with an itemized vs. standard deduction.
Personal Finance Mistakes
Don’t get too scared when you read this, but the decisions you’re making all year long can have major tax implications. Write a check to the Humane Society but forget to get a receipt? Start a new job but choose the wrong withholding status when filling out paperwork? Driving your car for a freelance gig but not correctly capturing the mileage? These are all things that could come back to bite you when you go to file your taxes.
How to avoid this: Be proactive when it comes to personal finance. Remember to keep records of all charitable giving, be aware of your proper withholding status whenever your paycheck changes (due to a new job or a raise) and be diligent about logging expenses if you run your own side gig.
If you juggle a side hustle, have a growing base of freelance clients or run your own business, you have special tax needs that, in most cases, require help from a tax professional. Mistakes for the self-employed can run the gamut, from not paying enough in estimated taxes (or not paying them at all) to not setting aside enough funds to cover what they end up owing — because of the dreaded self-employment tax.
How to avoid this: Find an accountant and ask them to help you calculate your quarterly tax payments. Most tax preparers will print vouchers for your quarterly payments with instructions on how and when to pay them. Make sure you always set aside roughly a third of any freelance income for taxes because, on top of your regular income tax burden as an employee, you’ll also have to cover the employer burden.
Be sure to account for your state taxes, as well, which may need to be shipped to a different address — which you’ll find on your state’s official taxation and revenue department website.
For many filers, all this paperwork does have a silver lining: a tax refund check, just in time for summer. Or at least we hope the IRS is back on track with timely returns after the long delays of 2021.
Timothy Moore covers banks and insurance for The Penny Hoarder. Reporting from Jamie Cattanach is included in this report.