Tax filing is mandatory for every employee irrespective of what bracket you will fit into for tax preparation. The knowledge of tax preparation is important to feel familiar with the tax process as tax preparation is rather a daunting procedure for many. Annual tax returns should be submitted by mid of April to avoid late fees and penalties. Tax season is the busiest time for accounting individuals to see that paperwork is done perfectly for the clients and employees to get maximum returns. Filing taxes early will free you from the stress over last-minute submissions. It gives you a flexible schedule to gather related documents and receipts for tax filing.
The taxes paid to the government are used for funding government schemes and services. There are lots of online software programs that have come to the aid of taxpayers in filing for tax returns. Here are some interesting and intriguing facts that are hard to believe about tax preparation.
Unbelievably long tax code
The tax preparation process seems complicated and working individuals cannot comprehend it fully without seeking help. The interesting fact linked to this tax preparation is that the code of Tax is long. It is about 70000 pages long with more than 4million words in it. It takes 50 full days to read the entire tax code even for super-fast readers. The tax code was not this long in the past. About a century ago, tax code was just 400 pages long but it got updated with new rules and laws in the passing years.
Ideally, tax filing professionals or auditors have a good understanding of tax preparation. They offer a detailed overview of tax forms that apply to a certain individual. Without a professional, you will often spend a lot of time, effort and money to file your tax returns.
Ever-changing tax code
The most crucial factor while preparing for tax filing is to check under which criteria you fall for tax filing. The tax code changes every year and margins of tax rate change depending on how you file (single, with a spouse or without a spouse, etc). The deduction amount changes every tax year and exemptions also change. There are more than 4500 changes in tax code from the past 2 decades. New credits get introduced every year and some of them work in favor of the taxpayers.
Not every income you get is taxable
When it comes to tax preparation, tax filing does not apply to all income sources. Knowing about exemptions and deductions in tax preparation is crucial for financial planning. Some of the disability insurance payments are non-taxable if they are purchased from an employer with money paid with after-tax dollars. The compensation a worker gets from work-related injury also falls under non-taxable income. The health savings accounts do not fall under taxable income.
The life insurance amount that comes with the loss of a loved one is not taxable. Some of the states in the US like Alaska, Florida, and Nevada, etc do not levy income tax on their residents. Some other tax deductions include gift money, inheritance money, political donations and charity donations. Tax deductions are encouraged by the IRS to promote certain actions in the country for the well being of other people or the benefit of the country. Citizens should have a basic understanding of taxable and non-taxable incomes to reduce the liability of paying tax. Alimony payments and child support payments can be shown for tax deductions.
Refund is valid for collection till 3 years
IRS offers plenty of time to collect the tax refund. Tax code allows IRS 3 years of duration to audit the tax returns. If the tax filing is completed in the given deadline, tax refunds can be collected up to 3 years after which it becomes void. The duration becomes 2 years if taxes are paid after the due date of filing. Also, the taxpayer can claim for additional refunds before the 3-year statutory limitation expires for amended returns. Some of the taxpayers that might have suffered from valueless securities and bad debt have 7 years to claim for refund.
For some unknown reason, if you have missed collecting your refund before the 3-year expiry date, the amount remains with the IRS. It will be called excess collection fund and the taxpayer cannot tap into that money for future payments. The deadline for filing taxes is considered as the actual date even if you have filed taxes earlier. So 3 years from the deadline date is the duration provided by the IRS to collect your refund amount. Similarly, IRS has 10-year duration to collect the total amount with penalties and interest after which the taxpayer is free from those charges if uncollected.
Tax penalties get costly than paying taxes
Evading tax payments and filing for tax returns late will trigger unwelcomed penalties with interest. Deciphering the notices of the IRS tax penalty is impractical as there is no statute of limitations on tax payment failure. The penalties and interest levied on the taxpayer for filing a wrong tax return are greater with passing time. The penalties start from as low as 5% for the first month and increase to over 25% if it is late for the next 5months. These are applicable for late filing penalties. For the late payment penalty, the penalty is 0.5 % of the tax to be paid for each month. Penalties should be paid until the tax amount is paid completely.
While filing for taxes online, keep an eye out to prevent a fraudulent invasion of your private information. With growing online fraud, precautions need to be taken by choosing secure software, using strong passwords and private networks to risk anyone from snooping into your online account and activities. Understand the basics of tax preparation or use a professional tax filing accountant to file your tax returns properly. Tax deduction varies from individual to individual and hence a single approach does not work similarly for all.
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