The Ultimate Guide to Filing Taxes in the United States
July 30, 2020 - Money Bits
Some things in life are just tedious.
Taking out the trash, replacing worn-out tires on your vehicle, and yeah, filing taxes.
Filing taxes doesn’t have to be that much of a hassle though. It is universally loathed because many people understand very little about the tax code, and obviously are mindful of how much they are giving away from their income to the government.
Now, let’s dissect those two issues; not knowing much, and feeling that you pay too much.
The tax rate is a political hot potato in any country. In America, the tax cuts in 2017 caused controversy and excitement depending on your side of the political divide. One thing that you’ll notice though; the rich, and corporations always seem to get their way.
Yes, the American tax system is a progressive one. This means that the higher your income level, the more taxes you ought to pay. However, tax legislation also provides reliefs and loopholes that enable such corporations and high net worth individuals to significantly cut down their tax obligations.
Knowing such provisions and developments shouldn’t be the preserve of tax attorneys and accountants. An ordinary American, with intermediate education, can learn how to pay their taxes, and even utilize some reliefs available in the law.
2020 was a unique year for American Taxpayers. Besides the recession that Covid-19 brought, the IRS also extended the deadline for tax filing by three months to July.
In regular times, you normally file your taxes on or before April 15. That period allows you to aggregate what you owe from your income in the previous financial year. Filing federal income taxes is important even if you didn’t make much the previous year.
Tax Filing 101
Filing your 1040 returns show how much you owe, or in some instances, how much the IRS owes you.
Form 1040 is the basic tax form through which individuals and businesses file taxes. This form is useful in breaking down your earnings and potential tax obligation.
Besides, you can utilize tax deductions and credits that you are eligible for in deciding how much to pay. To claim such deductions, you will need to file additional forms together with the 1040.
If you have never filed returns before, you might wonder just how it happens that the IRS could owe someone.
For starters, filing taxes is not a lump sum payment for most people. If you have an employer, employee structure, some of your monthly income is withheld (withholding).
To determine how much is withheld, employers typically issue a W-4 Form at the start of your tenure to assess your status. This form captures essential personal information such as expected income for a financial year. The form helps the IRS calculate your tax obligation.
Therefore, you might end up paying more taxes than you should through withholding. If you calculate your tax obligation when filing annual returns and find that you have overpaid, you are due a refund from the IRS. If you have underpaid, you pay the IRS what you owe.
Note that if you have underpaid by too much, or take long to pay what is due, you incur some fees.
The Filing Process Made Simple
The rule of thumb is that any adult below the age of 65, making over $12,400 (the standard deduction), has to file taxes.
The American tax system is progressive and people pay taxes depending on their income level and status such as marriage.
Besides, you should also view tax credits you are eligible for before filing returns. Here are some general guidelines:
- Gather your tax forms- gather documents relevant to tax filing include: the W2 (how much you earned and how much is withheld), 1099 (earnings outside the W2). And any other documents that detail payments you made in the relevant period.
- Determine filing status- there are different tax status depending on your marital status, if you are filing jointly or separately.
- Evaluate your tax bracket- the American system has about seven tax brackets with varying tax rates. The tax bracket is based on income, so that for each amount of dollars within the bracket, you pay the stipulated tax rate.
- Determine what deductions you are eligible for- the main deduction is the standard deduction (which every taxpayer is eligible for). The current standard deduction is about $12,000 for single and $24,000 for married people. Itemized deductions for expenses such as medical, charity, and theft losses are also available. Deductions reduce your taxable income while tax credits directly lower your tax bill. Understanding these two is crucial in reducing your tax obligations.
- Once you have calculated everything then factored deductions and credits, complete the Form 1040 by listing your income then subtracting deductions and credits. You should be able to come with a figure that tells you how much you owe or are entitled in refunds. You can file online, use paper forms by mail, or enlist a professional.
Working the Tax System
Now that you have a simplified guide of how to file your taxes, the next natural question is how to take advantage of the tax code to pay as little as possible.
See, people feel aggrieved when corporations and billionaires pay lower taxes than what you’d perhaps feel is right. However, they simply play within the existing rules to utilize advantages ordinary taxpayers aren’t even aware of. There is much to gain from learning how to maximize deductions to reduce your tax obligations.
Some deductions are not obvious. You could use ingenious methods that have only become recently available to maximize your deductions. One such technique is utilizing Bitcoin mining to cut your taxes.
You may ask, how are Bitcoin and taxes related?
Well, for one, the IRS actually recognizes Bitcoin and taxes it as property.
Bitcoin has become a household name after its rapid appreciation in the last decade. Now, there are plenty of platforms to purchase or mine Bitcoin and potentially profit from it.
Trading Bitcoin is a topic for another day. Let’s focus on how you can utilize Bitcoin to lower taxes. The fact that Bitcoin is classified as property means that Bitcoin mining is a business. These classifications are important in making you eligible for deductions.
Being a business, there are transactions that you have to report. Bitcoin taxable events include payment for goods/services, payment or salary earned in Bitcoins, and Bitcoin mining.
Transactions involving Bitcoin that earn you a profit raise the issue of capital gains. For capital gains, you are liable for capital gains taxes, usually lower than the normal income tax rate. Transactions like trading or the Bitcoin you hold appreciating in value fall under this category.
Now, how does Bitcoin mining help you reduce taxes?
When filing a Form 1040, sole proprietor property taxes fall under Section C. The secret to taking advantage of the tax code is finding deductions that no one else utilizes.
Two deductions that you might find useful:
- The Section 179 deduction- this deduction allows you to use the cost of mining equipment to deduct from your taxable income.
- The Bonus appreciation deduction- allows for the deduction of machinery-related costs.
Bitcoin mining utilizes sophisticated mining equipment. This equipment comes at some cost. The beauty of mining is that once you part with the initial purchase cost, the mining rig continues mining passively and you collect Bitcoin consistently.
When filing your taxes, you add your annual income to the income from Bitcoin mining. Utilize the Section 179 and the Bonus appreciation deductions to reduce your tax liability, besides other deductions you may be eligible for.
You may end up realizing that the IRS owes you a refund if you work in a withholding setup. If you purely a business, the annual tax bill will likely be drastically lower than what you would normally pay.
How to Get Into Bitcoin Mining
Mining Bitcoin may help you utilize these deductions, but it has some logistical challenges. The two fundamental reasons are that Bitcoin mining consumes plenty of power and mining equipment heat up requiring constant cooling.
This is why VBit Technologies is such a great utility. It is an equipment reseller that provides hosting services for prospective miners. Their hosting facilities are excellent data centers with cheap power and natural cooling. In short, VBit Technologies pretty much ticks all the boxes that make Bitcoin mining a logistical success regardless of your location.
Sign up with VBit Technologies today, and cut down on your taxes!