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A Beginner’s Guide to Taxes: How To File Taxes
This beginner’s guide will walk you through the key areas of taxes: how to file taxes, small business taxes, stock market taxes, and crypto taxes. Whether you’re filing for the first time or looking to brush up, this guide has you covered.
How to File Taxes
Filing your taxes starts with preparation. Follow these steps to make the process as smooth as possible:
1. Know If You Need to File
Most people who earn money in the U.S. need to file taxes. Here’s when filing is required:
- Earned income: If your income exceeds the IRS minimum for your filing status (e.g., single, married, head of household).
- Self-employment: If you earned $400 or more from freelancing or self-employment. Even if you’re not required to file, doing so can help you claim tax credits or refunds.
Here’s a summary based on Filing Status, Age, and Income on whether you need to file a tax return for the 2024 tax year (returns due by April 15, 2025):
Example: If you’re 30 years old and single, you must file a tax return if your gross income is $14,600 or more.
2. Gather the Necessary Documents
Collecting all relevant documents before you start will simplify the filing process. Common documents include:
- W-2 Forms: Report wages and taxes withheld from employment.
- 1099 Forms: Report various types of income, such as freelance earnings (1099-NEC), interest (1099-INT), or dividends (1099-DIV).
- Form 1098: Reports mortgage interest paid, potentially deductible.
- Form 1098-E: Reports student loan interest paid, which may be deductible.
- Receipts: For deductible expenses like charitable donations or medical expenses.
- Social Security Numbers: For yourself, your spouse, and any dependents.
Example: If you did freelance work, expect a 1099-NEC from each client who paid you $600 or more.
3. Choose How to File
- Tax Software: TurboTax is a great software that’s easy to use and guides you step-by-step through the entire tax filing.
- Tax Professional: Great option for complex tax situations.
- Free File Programs: A free alternative, use IRS Free File if your income is $79,000 or less.
4. Choose Your Filing Status
Your filing status affects your tax rates and eligibility for certain deductions and credits. The five statuses are:
- Single: Unmarried or legally separated individuals.
- Married Filing Jointly: Married couples who combine their income on one return.
- Married Filing Separately: Married individuals who file separate returns.
- Head of Household: Unmarried individuals who pay more than half the cost of maintaining a home for a qualifying person.
- Qualifying Widow(er): Individuals whose spouse died within the last two years and have a dependent child.
Example: If you’re unmarried and support a dependent child, you might qualify as Head of Household, which offers a higher standard deduction than Single.
5. Decide Between Standard and Itemized Deductions
Deductions reduce your taxable income. You can choose the standard deduction or itemize deductions, depending on which benefits you more.
Standard Deduction: A fixed amount based on your filing status.
Itemized Deductions: Total of eligible expenses such as mortgage interest, property taxes, medical expenses, and charitable contributions.
Example: If you’re single with $16,000 in itemizable deductions, itemizing saves more than taking the $14,600 standard deduction.
6. Understanding Tax Credits
Tax credits directly reduce the amount of tax you owe and can increase your refund. Some common credits include:
- Earned Income Tax Credit (EITC): For low to moderate-income workers; the amount varies based on income and number of dependents.
- Child Tax Credit: Up to $2,000 per qualifying child under age 17.
- Child and Dependent Care Credit: Up to $3,000 per dependent for eligible childcare expenses.
- Residential Energy Credits: Credits for energy-efficient home improvements like solar panels or heat pumps.
- Saver’s Credit: Encourages retirement savings contributions.
- Education Credits: Such as the American Opportunity Credit (up to $2,500 per eligible student) and the Lifetime Learning Credit (up to $2,000 per tax return).
Example: A single parent with two children and an income of $40,000 may qualify for the EITC, reducing their tax liability and potentially resulting in a refund.
7. File by the Deadline
- Tax Filing Deadline: Typically April 15. For the 2024 tax year, it’s April 15, 2025.
- Extension Deadline: If you file for an extension, the deadline moves to October 15, but any taxes owed are still due by April 15 to avoid penalties.
Example: If you need more time to prepare your return, submit Form 4868 by April 15 to extend your filing deadline to October 15.
8. Avoid Common Tax Mistakes
Avoid these errors to make tax filing stress free:
- Missing Deadlines: File on time to avoid late fees and interest.
- Incorrect Information: Double-check Social Security numbers and bank details.
- Overlooking Deductions/Credits: Don’t miss out on savings opportunities.
- Failing to Report All Income: Include all sources, even side gigs and investments.
Example: If you forget to report a $600 payment from a 1099 client, the IRS will likely notice, leading to penalties.
9. Plan Ahead for Next Year
Proper planning can make tax time easier and more cost-effective:
- Adjust Withholding: Update your W-4 form if you had too much or too little tax withheld.
- Track Expenses Year-Round: Use apps like Mint or Expensify to log deductible costs.
- Contribute to Tax-Advantaged Accounts:
- IRAs: Contribute up to $7,000 ($8,000 if over 50) for 2024.
- HSAs: Max contribution of $4,150 for singles, $8,300 for families.
Example: Contributing $5,000 to a traditional IRA can reduce your taxable income.
How to File Taxes for Small Businesses
Small businesses have unique tax requirements. Whether you’re a freelancer, a sole proprietor, or run a corporation, here’s how to handle your taxes:
1. Understand Your Business Structure
Your business type determines the forms you file and your tax responsibilities:
- Sole Proprietor or Single-Member LLC: File business income and expenses using Schedule C on your personal tax return.
- Partnerships and Multi-Member LLCs: File Form 1065, and each partner reports their share of income on their personal return.
- S-Corporations: File Form 1120S. Owners pay tax on their share of business income.
- C-Corporations: File Form 1120 and pay corporate income taxes.
2. Keep Detailed Records
Accurate bookkeeping is crucial for reporting income and claiming deductions. Be sure to keep track of the following throughout the year:
- Income: Invoices, sales receipts, and bank statements.
- Expenses: Office supplies, advertising, meals, travel costs, and utilities.
- Assets: Purchase records for equipment or property.
Tip: Separate personal and business finances by opening a dedicated business bank account.
3. Pay Estimated Taxes
If you expect to owe $1,000 or more in taxes, you must pay quarterly estimated taxes by:
- April 15
- June 15
- September 15
- January 15 of the following year
Use Form 1040-ES to calculate and submit payments.
Example: If you estimate a $10,000 annual tax bill, pay $2,500 per quarter to avoid underpayment penalties.
4. Claim Business Deductions
Claiming business deductions can significantly lower your taxable income. Common deductions include:
- Home Office:
- Deduct a portion of your rent/mortgage, utilities, and internet if you have a dedicated workspace.
- Simplified option: Deduct $5 per square foot (up to 300 square feet).
- Example: If your office is 200 square feet, you can deduct $1,000.
- Vehicle Expenses:
- Deduct mileage or actual expenses (gas, insurance, maintenance).
- 2024 standard mileage rate: $0.67 per mile.
- Example: Driving 1,000 miles for business equals a $670 deduction.
- Business Meals:
- Deduct 50% of eligible meal costs related to business activities.
- Example: A $100 lunch with a client results in a $50 deduction.
- Equipment and Supplies:
- Deduct purchases like computers, furniture, and office supplies.
- Employee Salaries and Benefits:
- Deduct wages, health insurance premiums, and retirement contributions.
5. Self-Employment Tax
Self-employed individuals must pay self-employment tax (Social Security and Medicare) in addition to regular income tax. The rate is 15.3%:
- Social Security: 12.4% (on the first $168,600 of income for 2024).
- Medicare: 2.9% (no income cap).
Example: If you earn $50,000 in net income, your self-employment tax will be $7,650 (15.3%).
6. File on Time
The tax filing deadlines for businesses are:
- March 15: S-Corporations and Partnerships.
- April 15: Sole Proprietors, Single-Member LLC, and C-corporations.
Missing deadlines can result in costly penalties, so mark your calendar.
Stock Market Taxes
If you invest in the stock market, you’ll need to report your gains and losses on your tax return. Here’s what you need to know:
1. Taxes on Capital Gains
Capital gains are the profits you earn when you sell a stock for more than you paid. These are taxed differently depending on how long you held the stock:
- Short-Term Capital Gains: If you sell a stock after holding it for 1 year or less, the gain is taxed as ordinary income (your regular tax rate).
- Long-Term Capital Gains: If you sell a stock after holding it for more than 1 year, the gain is taxed at lower rates:
- 0%: For single filers with taxable income up to $47,025 or married filers earning up to $94,050.
- 15%: For single filers earning $47,026–$518,900 or married filers earning $94,051–$583,750.
- 20%: For incomes above these thresholds.
Example:
- If you bought shares for $1,000 and sold them for $1,500 within 6 months, the $500 profit is a short-term gain and taxed at your income tax rate (e.g., 22% = $110 tax).
- If you held the shares for 18 months, the $500 gain would be taxed at a long-term rate (e.g., 15% = $75 tax).
2. Capital Losses Help Reduce Your Taxes
If you lose money on a stock, you can:
- Deduct up to $3,000 of losses from your income ($1,500 if married filing separately).
- Any capital losses you don’t use in the current year, you can carry those forward to future tax years.
Example: If you had $5,000 in gains and $7,000 in losses, you can offset all $5,000 in gains and deduct $2,000 from other income.
3. Taxes on Dividends
Dividends are payments companies make to shareholders. There are two types, each taxed differently:
- Qualified Dividends:
- Paid by U.S. or certain foreign corporations on stocks held for a specific period.
- Taxed at the lower long-term capital gains rates (0%, 15%, or 20%).
- Ordinary Dividends:
- Dividends that don’t meet the “qualified” criteria.
- Taxed at your ordinary income tax rate.
Example: If you received $1,000 in dividends, $600 might be qualified (taxed at 15%) and $400 ordinary (taxed at your income tax rate, e.g., 22%).
4. Be Aware of Wash Sales
If you sell a stock at a loss and buy it back within 30 days, you can’t deduct the loss. This is called the wash sale rule.
Example:
- You sell 100 shares of Stock A for a $500 loss, then repurchase Stock A within 15 days.
- The $500 loss cannot be claimed on your taxes, but it increases the purchase price of the new shares.
5. Tax Forms You’ll Need
When filing your taxes, ensure you have these forms:
- Form 1099-B: Provided by your brokerage, it summarizes stock sales and capital gains/losses.
- Schedule D (Form 1040): Used to report capital gains and losses.
- Form 8949: Details each stock transaction, including cost basis and gain/loss.
Crypto Taxes
Cryptocurrency adds another layer of complexity to taxes. The IRS treats cryptocurrency as property, not currency. This means crypto is taxed similarly to stocks or other investments.
1. When Do You Owe Taxes on Crypto
The IRS taxes the following crypto transactions:
Selling Crypto for Cash: The difference between the sale price and your purchase price (cost basis) is a taxable gain or loss.
Example: You buy Ethereum for $2,000 and sell it for $3,000. The $1,000 profit is taxable.
Trading Crypto for Another Crypto: Swapping one cryptocurrency for another is considered a taxable event.
Example: Trading Bitcoin for Ethereum triggers a taxable gain or loss based on the value of each at the time of the trade.
Using Crypto to Buy Goods/Services: Spending crypto is treated as a sale, and any gain or loss is taxable.
Example: If you use Bitcoin to buy a $500 laptop, and the Bitcoin you used had increased in value since you acquired it, the difference is a taxable gain.
Earning Crypto: Receiving cryptocurrency as payment for services or mining is taxed as ordinary income at its fair market value when received.
2. When Are Taxes Not Owed on Crypto
Some crypto transactions are not taxed, including:
- Buying Crypto: Simply purchasing and holding cryptocurrency does not trigger a taxable event.
- Transferring Crypto: Moving crypto between your wallets is not taxed.
- Gifting Crypto: Gifts under the annual gift exclusion ($18,000 in 2024) are not taxed.
3. How Crypto is Taxed
Crypto is taxed similarly to stocks:
- Capital Gains: If you sell or trade cryptocurrency for more than you paid, the profit is considered a capital gain.
- Short-Term Gains: Held for 1 year or less, taxed at your ordinary income tax rate.
- Long-Term Gains: Held for more than 1 year, taxed at favorable capital gains rates (0%, 15%, or 20%).
Example: If you bought 1 Bitcoin for $20,000 and sold it for $30,000 after 18 months, the $10,000 profit is taxed at the long-term capital gains rate.
- Capital Losses: If you sell crypto for less than you paid, you incur a capital loss, which can offset gains and reduce your taxable income.
4. Record Keeping Is Essential
Track these details for each crypto transaction:
- Purchase dates and amounts.
- Fair market value when received or sold.
- Sale or exchange dates and values.
- Transaction fees.
5. New Reporting Rules
Starting in 2025, exchanges must report crypto transactions to the IRS using Form 1099-DA. This makes accurate record-keeping even more important.
Even if you don’t receive a tax form, you’re responsible for reporting all taxable crypto transactions. The IRS has increased enforcement in this area, so don’t skip this step.
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