In the lead up to April, most Americans start to think about their taxes, and for the rest of the year, very little thought is given to them.

In reality, the taxation process is happening throughout the year, and April is just when we balance the books.

Beginner’s Guide to Taxation in the U.S.

Tax begins when you start a job, and you agree on a yearly or hourly wage with your employer. Money that you earn through your salary makes up your pre-tax income and will define the amount of tax you pay at the end of the financial year. A W-4 form is then filled in by the employee, which acts as a survey to help provide more information on your circumstances that may change how much you’re taxed.

W-4 Form

Information like your marital status, the number of children you have, and your spouse’s work are added to the form and will define what allowances you qualify for.

Filling in your W-4 form is vital, as it estimates the amount of tax that you pay each month, and the more accurate it is, the less chance that you’ll have to pay additional money back in April when you do your tax return. Some people enjoy getting a tax return in April, but all this means is that your W-4 wasn’t accurate.

It may be necessary for people with less disposable income to have this money throughout the year, rather than in a lump sum. The money could have been invested, rather than the IRS borrowing, just to return it without any interest.

Filing Your Income Tax

In April, you’ll need to file your income tax, which is when you take the amount taken from you in tax and work out if there are any discrepancies. You’re essentially balancing the books for the year with the IRS. If you’ve overpaid, you’ll get a refund, and if you’ve underpaid, you’ll need to pay the extra.

You can then take away any adjustments, such as alimony, moving expenses, and deposits into retirement plans, which leaves you with your adjusted gross income. With this revised amount clarified, you need to take away any deductions applicable to you.

This includes charitable donations, medical expenses, or interest on a mortgage. There are also personal exemptions that allow you to deduct a standard amount of $3,900 for your spouse and any dependent.

After this process, you’ll be left with the final rate your federal income tax is calculated. The US uses a progressive taxation model, meaning that the more you earn, the higher your earnings are taxed.

Scaling Model

A scaling model is used, with any money you make in one bracket taxed at that defined percentage. If you move into a higher bracket, only earnings above this amount are taxed at a higher rate. For a simple calculator that tells you your tax bracket, click here.

The final number after working out your tax bracket is your net tax, and if it’s higher than what you’ve paid, you’ll need to pay the extra. If you’ve paid over the amount on your tax, you’ll be due a refund.