Most countries have a tax system in place to pay for national needs and government services, but the methods and rules vary greatly from country to country. The United States handles income taxes in a very specific way—one that might be unfamiliar to those who are not used to the U.S. tax system. In this blog, we hope to provide some general information on how income tax preparation works in the United States.
Income taxes in the United States are imposed by the federal government and most state governments. They are determined by applying a tax rate to certain (taxable) income. Taxable income is gross income less certain allowable deductions. Some taxes are required to be paid in advance in the form of tax withholding or estimated payments. Regardless of advance tax payments, most people who earn U.S. income are required to file tax returns. Individuals who are U.S. citizens or residents for tax purposes are required to report their worldwide income.
A tax return is a report filed with the Internal Revenue Service (IRS). Most states and local jurisdictions require a tax return as well. These returns are prepared using forms provided by the IRS or other applicable taxing authorities. The deadline for individual (personal) tax returns for the previous year is April 15 (unless April 15 falls on a weekend or a national holiday). For example, your 2018 tax return would be due by April 15, 2019. A completed tax return will show if you paid more income taxes than you needed to, which would result in a refund. If it turns out that you did not pay enough taxes throughout the year, you might owe the IRS money.
In the United States, the federal rate at which income is taxed is graduated. In other words, the higher your income is, the higher percentage of your income will be taxed. The tax rates also differ depending on what status you use to file. There are five filing statuses: single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child. There are specific rules for each filing status, and depending on your situation, one might me more advantageous than another.
The U.S. government does not tell you how much you owe in taxes or automatically deduct or credit you the correct amount. Instead, individuals who are required to file a tax return must do so themselves or work with an accountant who will prepare the return. Some individuals file their taxes themselves by mailing a paper return; others use tax preparation software to help walk them through the tax preparation process.
Another option is to work with a Certified Public Accountant (CPA) who will use your tax documents to prepare your return for you. CPAs are not government employees; they are licensed professionals who you can hire to provide accounting services. When your tax situation is complex, (for example, if you are non-resident alien or you have foreign accounts and income) a specially trained CPA can help ensure you are filing your taxes correctly and minimizing the amount of taxes you owe.
This is a very general overview of how personal income taxes work in the United States. There are many different types of income as well as deductions and credits. There are also other taxes imposed, such as social security and Medicare taxes. The rules are complex, and the IRS can impose fees and penalties when tax returns are not filed correctly or in a timely manner. If you have further questions about the U.S. tax system and tax return preparation, please do not hesitate to contact us.
By Jennifer Cremerius