ZH CPA video 1 : How Does the US tax system work for Beginnners

In today's video, we'll be diving deep into How Does the US tax system work for beginners. So, without further, let's jump right in!

The United States tax system is an essential aspect of modern society, providing the government with the necessary funds to fund public services and programs. As a beginner, navigating the complexities of the U.S. tax system may seem overwhelming at first. However, with a clear understanding of the fundamental concepts, you can gain confidence in managing your taxes effectively. In this comprehensive guide, we'll break down the key components of the U.S. tax system, explaining the various types of taxes, filing requirements, deductions, credits, and more.

1: Types of Taxes

Income Tax

Income tax is one of the most common types of taxes in the United States. It is levied on individuals and businesses based on their earnings, including wages, salaries, tips, and self-employment income. The tax rate for income tax is progressive, meaning that higher-income individuals pay a higher percentage of their income in taxes.

let's provide an example to illustrate how the U.S. income tax system works for Beginners:

10% on income up to $9,950

12% on income between $9,951 and $40,525

22% on income between $40,526 and $86,375

24% on income between $86,376 and $164,925

32% on income between $164,926 and $209,425

35% on income between $209,426 and $523,600

37% on income over $523,600

F I C A Tax

The Federal Insurance Contributions Act (FICA) tax is a payroll tax that funds Social Security and Medicare programs. FICA tax is divided into two parts: Social Security tax and Medicare tax. It is automatically withheld from employees' paychecks and also applies to self-employed individuals.

The Social Security tax rate is 6.2%, and the Medicare tax rate is 1.45%. For self-employed individuals, they are responsible for paying both the employer and employee portions of these taxes, resulting in a combined rate of 15.3%.

2:. Filing Status and Tax Forms

Filing Status

Your filing status determines the tax rates and deductions you are eligible for. The five main filing statuses are Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) with Dependent Child.

Single: This status applies to individuals who are unmarried or legally separated.

Married Filing Jointly: Married couples can choose to file a joint return, which often provides more favorable tax rates and benefits.

Married Filing Separately: Some married couples choose to file separate returns, but this status may result in higher tax rates and fewer tax benefits.

Head of Household: This status is available to unmarried individuals who financially support a qualifying dependent, such as a child or elderly parent, and pay more than half the cost of keeping up a home for the dependent.

Qualifying Widow(er) with Dependent Child: This status applies to surviving spouses who have a dependent child and meet certain other criteria.

Tax Forms

The primary individual tax form is Form 1040, which comes in various versions depending on your situation. While the simpler 1040EZ and 1040A have been discontinued, you can use Form 1040 or Form 1040-SR if you are a senior taxpayer.

Form 1040 is more comprehensive and allows you to report various types of income, claim deductions and credits, and calculate your tax liability accurately. Form 1040-SR is a simplified version designed for seniors aged 65 and older, featuring larger print and a more straightforward layout.

3: Deductions and Credits

Deductions

Deductions reduce your taxable income, lowering the overall amount of taxes you owe. Common deductions include:

Standard Deduction: The standard deduction is a set amount that reduces your taxable income based on your filing status. It simplifies the process for many taxpayers who do not have enough itemized deductions to exceed the standard deduction amount. The Tax Cuts and Jobs Act (TCJA) nearly doubled the standard deduction amounts, making it a more attractive option for many taxpayers.

In 2021, the standard deduction amounts were as follows:

Single or Married Filing Separately: $12,550

Married Filing Jointly or Qualifying Widow(er): $25,100

Head of Household: $18,800

Itemized Deductions: If your total itemized deductions exceed the standard deduction amount, you can choose to itemize deductions instead. Common itemized deductions include mortgage interest, state, and local taxes, medical expenses (above a certain threshold), charitable contributions, and certain job-related expenses.

Credits

Tax credits are more valuable than deductions since they directly reduce the amount of tax you owe. Some popular tax credits include:

Child Tax Credit: This credit provides up to $2,000 per qualifying child under the age of 17. The credit phases out for higher-income taxpayers.

Earned Income Tax Credit (EITC): The EITC is a refundable credit designed to help low to moderate-income working individuals and families. The credit amount depends on your income, filing status, and the number of qualifying children.

Education Credits: There are two education credits available: the American Opportunity Credit and the Lifetime Learning Credit. These credits can help offset the cost of higher education expenses for eligible students and their families.

4: Tax Brackets

The U.S. has a progressive tax system, which means that as your income increases, so does your tax rate. Tax rates are divided into brackets, with each bracket representing a specific income range and corresponding tax rate.

It's essential to understand how tax brackets work to calculate your tax liability accurately. Contrary to a common misconception, being pushed into a higher tax bracket does not result in all your income being taxed at a higher rate. Instead, only the portion of your income that falls within that bracket is subject to the higher rate.

5: Filing Deadlines and Extensions

The tax year in the U.S. runs from January 1 to December 31. The deadline to file your federal income tax return is typically April 15th. However, if the 15th falls on a weekend or holiday, the deadline is extended to the next business day. You can request a filing extension to get more time to submit your return, but any taxes owed must still be paid by the original deadline.

Filing an extension gives you an additional six months, pushing the deadline to October 15th. To request an extension, you must submit Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, by the original due date.

It's crucial to file your taxes on time, even if you can't pay the full amount owed. Failing to file your tax return can lead to penalties and interest on unpaid taxes while filing an extension only extends the time to file the return, not the time to pay taxes owed.

6: Paying Taxes

If you are an employee, your employer will withhold taxes from your paycheck based on your Form W-4. The Form W-4 determines the amount of federal income tax withheld from your pay, and you can adjust it if needed. When you start a new job or experience significant life changes (e.g., marriage, having a child), it's essential to update your Form W-4 to reflect your current situation accurately.

If you are self-employed or have other income without automatic withholding, you may need to make quarterly estimated tax payments. Self-employed individuals typically pay estimated taxes on their income, self-employment tax, and any other taxes owed on a quarterly basis. Estimated tax payments are due in April, June, September, and January.

Conclusion

As a beginner, understanding the basics of the U.S. tax system is crucial for managing your finances and meeting your tax obligations. By learning about different types of taxes, filing requirements, deductions, credits, and common mistakes to avoid, you can navigate the U.S. tax system with ease and peace of mind.

Remember to keep accurate records, explore available deductions and credits, and file your taxes on time. If you feel overwhelmed or unsure about your tax situation, consider seeking help from a tax professional to ensure compliance and make the most of available tax benefits. By gaining confidence in managing your taxes, you can take control of your financial future and make informed decisions to optimize your tax situation.

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