Whether you’re a first-time tax filer or an old hand, tax season can feel overwhelming when you’re getting hit with forms, due dates and tax jargon left and right. That’s why we’ve put together this guide to help make the tax preparation process a little less intimidating and confusing, especially if you’re taking the DIY route on your personal return this year. If you’re getting an assist from a tax professional, you should be in good hands, as the pros know the drill well.
So what’s in this guide?
Scintillating topics like the federal income tax brackets, tax deductions versus credits, audits and more. Don’t worry, we explain everything in plain English to help you get a better understanding of your taxes.
Tax season can be a stressful time.
Below are some key federal tax dates to keep in mind for 2021. We put these deadlines up top so that you can plan accordingly and avoid any surprises. Starting your taxes early can save you from the stress of having to scramble at the last minute and the risk of having to pay penalties for missing deadlines.
Estimated tax payments for the 2021 tax year are typically due quarterly on the following dates: April 15, 2021; June 15, 2021; September 15, 2021; January 15, 2022.
Note: Generally, estimated tax payments are required for individuals who do not pay income taxes for the year through withholding — for example, those who are self-employed or earn income that isn’t from an employer (e.g., investments, alimony, etc.). Consult the IRS for more details on who has to pay estimated taxes.
2020 individual tax returns due
2020 individual tax return extension forms due 2020 individual taxes due
Last day to make a 2020 contribution to IRAs
**Important: On March 17, 2021, the IRS announced that the federal income tax ling deadline for the 2020 tax year has been extended from April 15, 2021, to May 17, 2021. This extension applies to individual taxpayers (including those who pay self-employment tax). Please visit the IRS for official guidance.
For more due dates for other specific forms, payments and requirements, see IRS Publication 509 (Tax Calendars)
Keep in mind that tax deadlines are always subject to change, and the IRS is the official source for the most up-to-date information.
During tax season, you’ll likely hear terms like “tax brackets,” “deductions” and “credits.” And it’s because all three affect your tax liability – in other words, the amount of taxes you owe to the federal government in a given tax year.
At some point in your life, you might be asked which tax bracket you’re in. Your tax bracket, also known as your “marginal tax rate,” is based on your income and ling status (e.g., single, married ling jointly, etc.). It helps to determine the amount of taxes you owe each year.
For the 2020 tax year, there are seven federal tax brackets, or rates, 10%, 12%, 22%, 24%, 32%, 35%, 37%. The amount of your tax bill is calculated, in part, by applying these rates to your annual taxable income.
US federal tax rates are progressive. That means the higher your taxable income, the higher your tax rates will be.
To figure out which bracket you’re in, consult the IRS 2020 federal income tax update. For example, a single filer with a taxable income of $32,000 in 2020 is in the 12% bracket.
But just because a taxpayer falls into the 12% bracket doesn’t mean that their entire taxable income is taxed at 12%. This is a common misunderstanding. Many people don’t realize that different portions of your taxable income are taxed at different rates based on the federal tax bracket table.
Heads up, we’re about to do some math.
So sticking with the single-filer with $32,000 example. For the 2020 tax year, the first $9,875 of that taxable income would be taxed at 10%. The remaining $22,125 ($32,000 - $9,875 = $22,125) would be taxed at 12%.
Many people don’t realize that different portions of your taxable income are taxed at different rates based on the federal tax bracket table.
See, that wasn’t so bad.
The IRS typically adjusts the federal tax brackets each year for inflation. See our 2020-2021 Federal Tax Brackets comparison table.
Now you understand how taxable income can affect your tax rates. You might be wondering if there are ways to lower your taxable income and your overall tax bill.
This is where tax deductions and credits come into play. Since they could both help reduce the amount of taxes you pay, it can be easy to mix up the two. But a deduction and credit work differently to lower your tax bill.
A tax deduction could lower your overall tax bill by reducing your taxable income. You may already be familiar with the standard deduction. That’s because when you’re doing your personal taxes, you need to decide between taking the standard deduction or itemizing your deductions.
Other common deductions include the charitable contribution deduction, IRA contribution deduction, and mortgage interest deduction.
A tax credit, on the other hand, directly lowers your tax bill, dollar-for-dollar. So if you’re eligible to claim a $500 credit on your tax return and you owe $1,500 in taxes, that credit could reduce your tax bill to $1,000 ($1,500 - $500).
Bear in mind that the full list of available deductions and credits is long. And their amounts vary across the board. It’s unlikely that you’re going to be eligible for every deduction and credit that’s out there – they typically come with specific qualification rules. So it’s a good idea to confirm eligibility details with the IRS or a tax professional before going on a deduction/credit-hunting spree on your tax return.
With some of the most important tax terms and concepts nailed down, don’t you already feel a little bit better and maybe even energized about doing your taxes this year?
No? Fair enough, because you still have to go through the paperwork, assemble your documents and actually ll out the necessary tax forms. We admit that this is no fun at all. But you don’t have to tackle it all in one sitting if you start ahead of time.
If your taxes are complex or if your organization system is nothing more than receipts and statements crammed into a shoebox (no matter how fancy), you may want to budget a little extra time. For reference, you may also want to bookmark this IRS tax information webpage for individuals ling a return.
Regardless of your situation, tax preparation generally involves four key steps:
If you’re getting a refund this year, hooray! Because not everyone gets a refund from the government.
Sure, you could buy yourself something nice with that extra cash. But how about really treating yourself (and future self) by putting that money away in your savings or retirement accounts? We have some ideas on how to put that money to work:
The IRS usually issues refunds in less than 21 days. But just remember: The refund process could take longer for a number of reasons – for instance, if the return was incomplete or contained significant errors.
If you’re hankering for a status update though, you can use the IRS refund tracker. To use the tool, you need your Social Security number (or individual taxpayer identification number), ling status and exact refund amount.
While you’re waiting for your refund, it’s a good time to reorganize the tax documents and forms you’ve used for the tax season. We joked about the shoebox ling system earlier, but if this is you, there’s no time like the present to start a new organization system.
No matter which organization method you use, the goal is to be able to nd the documents you need quickly and easily. This is in case you ever need to:
Another important thing to keep in mind is to store your records in a safe and secure place.
As you’re putting your tax documents away, you might realize you made a mistake on your return. Don’t panic.
Generally, if you need to go back and claim a credit or refund, you have up to three years from the original ling date to make any necessary corrections by submitting an amended tax return. US tax laws are complicated, so mistakes can totally happen (and they do!). So don’t beat yourself over it.
First, use the IRS Interactive Tax Assistant tool to see if you even need to file an amendment. That’s because if it’s a simple math error, you probably won’t need to le an amended return. The IRS usually corrects minor mathematical and clerical errors for you.
That said, here are some common reasons why you may need to file an amended return: Changes or corrections to your ling status, income, credits, deductions or number of dependents. If you do need to le an amended return, ll out and submit IRS Form 1040X.
IRS audits are the bogeymen of tax season. The dread is understandable given how audits are typically depicted in popular culture. Take a deep breath. Here are the most important things you need to know about audits:
Congratulations! You’ve reached the end of our article. Hopefully at this point, tax talk no longer sounds like a completely foreign language. Our ultimate goal is to equip you with some basic tax knowledge, so that you can get your bearings and start the tax season with confidence.
Bear in mind that taxes are complicated, and the laws are always subject to change. Your best source of information on the latest tax rules is the IRS or a certified tax professional.
United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization.
The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. GS PFM does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances. Please contact your financial adviser with questions about your specific needs and circumstances.
Information and opinions expressed by individuals other than GS PFM employees do not necessarily reflect the view of GS PFM. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.