If you earned income in the previous year, you must file a federal tax return to the IRS. Although you do not have to pay tax if you earned less than your personal income exemption, it is still a good idea to file a return. Filing a tax return can help you build contribution room in tax-exempt savings vehicles such as a 401(k) or Individual retirement account. In some cases, the government will owe you money for tax credits.
If you owe the government money, you need to file a return, and pay your income taxes. Otherwise, you could face late payment fees or fines. In addition, if the government owes you money, then you should get your refund as soon as your can. It is important to get your money working for you. If you are receiving a tax refund every year, you should talk to your employer about adjusting your withholding tax. If you are paying too much to the government off each paycheque, you are letting the government use your money, interest free.
You must claim all different types of income. You owe federal taxes on wages or salary earned in the past year. You also have to pay taxes on any profit your business created, or any interest you earned through investment funds. Capital gains will also be subject to taxes. If you made a profit through the sale of stock, investment property or collectibles, you will owe capital gains taxes.
You can also lower the amount of federal tax you pay to the IRS by claiming all of the appropriate deductions, exclusions and credits that are owed to you. Tax credits are especially valuable. These are subtracted directly from the amount of tax you owe. Examples of tax credits include the Child Tax Credit and the Earned Income Tax Credit. There are various deductions you may qualify to use. You can deduct alimony, business expenses, moving expenses and certain medical expenses. You can also claim exemptions for dependents. Certain income is excluded from income tax. This includes the interest from tax-exempt bonds, or payments you employer makes for you towards health insurance.