In the next two months, working Americans will begin to receive their W2s in order to get their tax back. As every citizen is aware of, to fund its budgets and other public programs, governments rely on tax that its citizens pay on goods and services. The United States government through its legislative branch has enacted a series of tax laws enforced by its specialized agency known as the Internal Revenue Service (IRS).
Over the years, U.S. tax code has been subject of fierce debates among politicians and experts and it believed by many experts that the tax code has become too complex and does not foster a competitive economy. One school of thought thinks that Americans are paying too many taxes, which reduces considerably their purchasing power. Other believe that the huge public budget of the government needs enough revenue through tax in order to meet the need of the public consumption.
Following the complexity of the U.S. tax code and various issues surround it, it becomes important at this time of tax return filing for taxpayers to understand important things about the matter. One of the main questions is: who should file the tax return? Should I file my tax return even if I don’t expect to receive a tax refund? What are the consequences of not filling my tax return? What are the main tax benefits I am entitled to? These and many more other legitimate questions constitute the tax related problems the average Americans should be aware of in order to avoid unintended violations and consequences.
First and foremost, the US tax law requires every person who earns income whether it is salary, wages, tips, commissions, bonuses, unemployment benefits, sick pay or unearned income like interest, dividends, business, farm income, rents, royalties, alimony must file the tax return to determine if the government collected enough taxes or if it owes a person a refund for having paid too much tax.
If you are an employee, you would need to fill out the form called W-4 Form from your employer. This form will authorize and allow your employer to withhold certain amount of money from your paycheck. Remember that the more allowances you claim, the less money your employer will withhold for taxes. Also, you have option to request an additional withholding or simply request an exemption from tax withholding. The best advice is to allow your employer to withhold as much money as possible in order to avoid a big balance due at the tax time. Again, if you over pay your taxes, don’t worry because you will be receiving a payment in form of tax refund at the tax time. For instance, if you are a single person with no dependents, you are entitled to one allowance for yourself or you can request an exemption from tax withholding.
Furthermore, the average taxpayer need to know his eligible dependents he or she could claim and the refundable and non-refundable tax credits available for him/her. While the non-refundable tax credits reduce your tax liability up to zero; the refundable credits could reduce your tax liability if there is any tax due, but also and most importantly, you would receive the rest or the whole tax credit depending on your tax liability. The most common refundable credits for average taxpayers include the earned income tax credit, the additional child tax credit, American opportunity tax credit or best known as the education tax credit and the child and dependent care tax credit, also commonly known by the taxpayers as daycare tax credit. (See second part in our next publication)