Ch9. Tax Intro — Tax Filing in Practice

The Basic Principle of US Tax Filing

The US tax system operates on voluntary compliance — taxpayers calculate their own tax liability, file a return, and pay what they owe. The IRS reviews and audits returns after the fact.

Voluntary compliance consequences:
- Failure to file → failure-to-file penalty (5% per month, max 25%)
- Underreporting → accuracy-related penalty (20%)
- Late payment → failure-to-pay penalty (0.5% per month) + interest

IRS Free File and Tax Software

The IRS provides free filing options for eligible taxpayers:

IRS Free File

Go to IRS.gov/freefile
Choose a Free File partner (income limits apply — typically AGI under $79,000)
Create an account and log in
Import prior-year AGI for identity verification

Key Filing Methods

IRS filing options:
├── IRS Free File (guided software, income limits apply)
├── IRS Free Fillable Forms (any income level, self-directed)
├── Tax software (TurboTax, H&R Block, TaxAct, FreeTaxUSA, etc.)
└── Tax professional (CPA, enrolled agent, tax preparer)

Individual Income Tax Filing (April 15)

Who Must File

Form 1040 is due April 15 each year for the prior tax year. Most individuals with income above the standard deduction must file:

Generally must file if you have:
- Wage income (W-2) with any federal income tax withheld
- Self-employment income of $400 or more
- Rental income
- Investment income (interest, dividends, capital gains)
- Other income above the filing threshold
  (e.g., 2024: $14,600 single; $29,200 married filing jointly)

Filing Steps (Form 1040)

Gather income documents (W-2s, 1099s, K-1s)
Choose filing status (single, MFJ, MFS, HOH, QSS)
Report all income sources
Claim above-the-line deductions (IRA contributions, student loan interest, HSA, etc.)
Choose standard deduction vs. itemized deductions
Apply tax credits (child tax credit, education credits, earned income credit, etc.)
Calculate tax owed vs. amount already withheld
Pay balance due or receive refund

Reporting Methods by Business Type

Type	Filing Method	Notes
W-2 employee	Form 1040 + W-2	Employer withholds tax throughout year
Self-employed / freelancer	Schedule C	Deduct ordinary and necessary business expenses
Partner / S-corp owner	Schedule E	Pass-through income from K-1

Estimated Tax Payments (Quarterly)

Quarterly Schedule

For self-employed individuals, investors, and anyone without sufficient withholding:

Period Covered	Due Date
Jan 1 – Mar 31	April 15
Apr 1 – May 31	June 15
Jun 1 – Aug 31	September 15
Sep 1 – Dec 31	January 15 (following year)

Safe Harbor Rules

Avoid underpayment penalty if:
- You pay at least 100% of prior year's tax liability
  (110% if prior-year AGI > $150,000)
- OR you pay at least 90% of current year's tax liability

How to Pay

IRS Direct Pay (IRS.gov/directpay) — free bank transfer
EFTPS (Electronic Federal Tax Payment System) — recommended for businesses
IRS2Go app — mobile payment option
Check or money order payable to “United States Treasury”

W-2 Withholding and Year-End Reconciliation

How W-2 Withholding Works

Employers withhold federal (and often state) income tax from each paycheck based on the employee’s Form W-4 election.

Year-end reconciliation:
1. Employer withholds estimated tax throughout the year
2. January: employer sends Form W-2 showing total wages and withholding
3. By April 15: employee files Form 1040
4. Result: refund (overwithholding) or tax due (underwithholding)

Key Above-the-Line Deductions (Adjustments to Income)

Deduction	Limit
Traditional IRA contribution	$7,000 / year ($ 8,000 if age 50+)
Health Savings Account (HSA)	$4,150 single /$ 8,300 family (2024)
Student loan interest	Up to $2,500
Self-employment tax deduction	50% of SE tax paid
Self-employed health insurance	100% of premiums

Key Tax Credits

Credit	Amount / Rate
Child Tax Credit	$2,000 per qualifying child (under 17)
Child & Dependent Care Credit	Up to $1,050 per child (20–35% of expenses)
Retirement Savings Credit	10–50% of IRA/401(k) contributions (income limits)
American Opportunity Credit	Up to $2,500 per year (first 4 years of college)
Earned Income Tax Credit	Up to $7,830 (3+ children, 2024)
Residential Clean Energy Credit	30% of qualified solar, wind, battery installations

Recordkeeping for Self-Employed Individuals

Simple Bookkeeping

For small self-employed taxpayers, a simple income and expense log is sufficient:

Simple bookkeeping thresholds (no formal bookkeeping required, but recommended):
- Gross receipts under $25,000: basic log acceptable
- Gross receipts $25,000+: detailed records strongly recommended
- $1M+: accrual method generally required

Double-Entry Bookkeeping (Accrual)

For larger businesses, standard GAAP accounting is expected. The IRS reconciles book income to taxable income on Schedule M-1 (Form 1120) or M-3 for large corporations.

How to Pay Your Tax Bill

IRS Payment Options

Direct Pay from bank account (free, via IRS.gov)
Credit/debit card (processing fee applies ~1.85–1.98%)
IRS installment agreement (Form 9465) — for amounts you cannot pay immediately
Offer in Compromise — settle for less than owed (strict eligibility criteria)

State Taxes

After filing your federal return, most states also require a separate state income tax return. Use your state’s tax agency website or your tax software to file simultaneously.

Important Tax Documents

Documents the IRS Generates / You Can Access at IRS.gov

Document	Purpose
Tax transcripts	Verify filed returns, income, and withholding
CP notices	IRS notices about changes, balances due, audits
IP PIN	Identity protection PIN for fraud prevention
Online Account	View balance due, payment history, transcripts

Top 5 Common Filing Mistakes

Missing the deadline: April 15 is firm. File Form 4868 for an automatic 6-month extension (but payment is still due April 15)
Forgetting 1099 income: Freelance, gig economy, and investment income reported on 1099s must be included — the IRS receives copies too
Not claiming all deductions and credits: HSA contributions, student loan interest, retirement savings credit, and education credits are frequently missed
Math errors or typos: Use software to avoid arithmetic mistakes; verify your SSN and bank routing numbers
Not keeping records: Keep receipts and records for at least 3 years (6 years if you underreport income by 25%+; indefinitely if fraudulent)

DIY vs. Tax Professional

Situation	Recommended Approach
W-2 only, simple return	IRS Free File or basic tax software
Freelance / side income	Schedule C via software or enrolled agent
Rental property	Tax software or CPA (depreciation, passive activity rules)
Business owner / complex	CPA or tax attorney — strongly recommended

Key Filing Summary

Tax	Deadline	Form	Platform
Individual income tax	April 15	1040	IRS Free File / software
Estimated taxes (Q1)	April 15	1040-ES	IRS Direct Pay
Estimated taxes (Q2)	June 15	1040-ES	IRS Direct Pay
Estimated taxes (Q3)	Sep 15	1040-ES	IRS Direct Pay
Self-employment tax	April 15	Schedule SE	Filed with Form 1040
Corporate income tax	April 15	1120	IRS e-file

The most important thing in tax filing is meeting the deadline. Set calendar reminders for April 15, June 15, September 15, and January 15 — and file even if you can’t pay in full. An extension to file is not an extension to pay.

OIYO Editorial