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Answers to the Top 5 U.S. Tax Questions

by
Spencer Wilson
on
7/17/2022
Answers to the Top 5 U.S. Tax Questions

Tax law is complicated, at best, and an impossible puzzle that can’t be cracked at worst. Even if you have a relatively solid understanding of how to file your federal tax return in the United States each year, you might find yourself with questions from time to time. 

That’s where this guide comes in. Below, you’ll find answers to five of America's most frequently asked tax questions. If you haven’t asked yourself these questions before, the odds are good you would have soon – if you hadn’t stumbled upon this guide to nip the issue in the bud, that is! 

As you continue reading, you’ll better understand how to get your biggest tax return year after year and learn more about how a well-established local CPA can make the process as stress-free as possible. 

1. How can I lower my tax bill?

If you got “sticker shock” from looking at your most recent tax bill, you’re not alone. Every year, millions of American taxpayers wonder how they lower their tax bills. Fortunately, the Internal Revenue Service (IRS) offers a variety of options. 

The tax code allows taxpayers to take advantage of credits and deductions that can reduce what they owe by thousands of dollars. However, it can be difficult to know what tax credits you are eligible for and what deductions you can take without the help of an expert. 

Since the tax code is updated every year, it’s smart to work with a qualified CPA like Spencer Wilson – this way, you can rest assured that you’re paying the lowest possible amount of taxes to the federal government. 

Some common tax credits you may have previously heard of include the Earned Income Tax Credit and the Child Tax Credit. There are also often clean energy credits and credits for first-time homeowners. 

2. Do I have to pay taxes on all of my income?

In a post-pandemic world, more of the U.S. workforce than ever before is working remotely. For many people, this has freed up time to take-on side projects, causing the gig economy to boom.

This can, however, lead taxpayers to question whether they need to pay taxes on all of their income – fortunately, the IRS has clear guidelines for what qualifies as taxable income and what doesn’t. 

IRS Publication 525 outlines what is considered taxable income. Although the list is long, it’s important to note that not all taxable income is treated equally. Earned income, like money you earn from an employer, is taxed differently because you are required to pay Social Security tax, Medicare tax, and state and federal income taxes on it.

Unearned income, such as benefits from Social Security, legally can’t have payroll taxes taken out but federal income tax – and state income tax, in certain cases – must be paid. Furthermore, some unearned income categories are taxed at a lower capital gains rate than earned income taxes. 

As for 1099 contractors, taxes must be paid if they earn more than $400 in a year.

3. How do I know what my tax bracket is?

The United States has a progressive tax system, which is described as:

A progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden.

This means that the more you earn, the more money you owe the government in taxes. Keep in mind, though, that your full income is not taxed at your marginal tax rate, the highest tax bracket applicable to your income level. 

There are currently seven tax brackets for most ordinary income in the United States – 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

4. Should I itemize or take the standard deduction?

For many taxpayers, this is one of the most confusing things about the entire U.S. tax code, and it’s an area where a qualified accounting professional can certainly assist. 

In 2022, the standard deduction is $12,950 for single filers and married filing separately, $25,900 for joint filers, and $19,400 for heads of household. Since tax reform laws have significantly increased the standard deduction from what it once was, many filers find that itemizing their deductions actually does not save them money. 

In certain situations, however, such as if you pay a great deal of mortgage interest annually or you regularly give substantial charitable contributions, itemizing may make sense. This is where a CPA can provide you with clear answers based on your personal financial situation. 

5. What happens if I can’t afford my taxes?

If you can’t afford to pay the taxes you owe, even after applying all of the credits and deductions for which you are eligible, it’s it is still your responsibility to file your federal income tax return. 

The IRS offers a number of payment options that can help financially strapped filers, though it is important to be aware of the fact that these arrangements include interest and, in certain cases, possible penalties. 

The costs and fees associated with the Internal Revenue Service’s payment plans' vary based on a number of factors, including whether you file via the United States Postal Service (USPS) or online using the e-file system.

Asking yourself these five questions every year will help you save money on your taxes, ultimately keeping your hard-earned money in your bank account. Remember, the team at Wilson Taxes is here to help you every step of the way.

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Spencer Wilson

Spencer Wilson

Spencer Wilson, EA is a tax preparer based in Long Beach, CA. Spencer Wilson Financial Management Services has been serving the Greater Los Angeles Area and Orange County since 2004. <br /> We began in the heart of Naples in Long Beach and we continue to work hard offering tax preparation and planning, business accounting and bookkeeping and payroll services . <br /> We have helped many different people and businesses succeed financially and take control over their finances.

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