Filing Taxes Doesn't Have to be Taxing: How to do Taxes on Your Own
Reading time: 6 Minutes
March 25th, 2022
Your tax dollars are spent on a number of great programs including education, science and technology, energy, transportation, and defense, but understanding taxes can be overwhelming, especially in Hawaii, with a complex income tax system including 12 tax brackets (the most in the United States). However, with a few tools and resources, the process to do your own taxes doesn't have to be so...taxing.
To start, make sure you understand the federal and state income and payroll taxes your employer withholds from your paycheck.
It might seem strange to be unfamiliar with the information on your paycheck, but with the rise of direct deposit in recent decades, many people never see their physical paychecks from month to month. And that means they may also be missing out on another important document: their paystubs.
Paystubs contain critical information that can help you understand your finances, manage your money (including planning a budget or setting up a 401(k) retirement account), and help you prepare for tax time.
Familiarizing yourself with your paystub and learning the basics about how your taxes are calculated will leave you better prepared to tackle this year's tax season in Hawaii.
Here's what you need to know.
How taxes are calculated
In the U.S., federal income taxes are progressive, which means different portions of your income are taxed at progressively higher rates. These portions of income are decided upon through tax brackets. Tax brackets provide the tax rate you will pay for each portion of your income.
For the 2021 tax season (tax returns filed in 2022), those tax brackets are:
So, if you are 'Married Filing Jointly,' 10% is applied to the first $19,900 of your income. Then 12% is taken from the next portion of your income (up to $81,050), and so on, until you reach the top of your taxable income.
Now that you know the 2021 Tax Brackets, you can look for ways to lower your tax rate through Tax Deductions and Tax Credits.
Tax deductions lower your taxable income. One of the most common tax deductions is the standard deduction, an amount predetermined by the IRS based on your filing status. When you file a tax return, you get to choose between the standard deduction and itemizing (deducting your actual expenses for things like home mortgage interest, state and local taxes, charitable contributions, etc). If your available standard deduction is larger than your total itemized deductions, you'll usually opt to claim the standard deduction. For the 2021 tax year, the standard deductions are:
- Single: $12,550
- Married Filing Jointly: $25,100
- Married Filing Separately: $12,550
- Head of Household: $18,800
Tax credits are a dollar-for-dollar reduction in the amount of tax you owe. Some of the most common tax credits are:
- Child Tax Credit for parents of dependent children under age 17
- Earned Income Tax Credit for low-income workers
- American Opportunity Tax Credit to help offset higher education expenses
- Child and Dependent Care Credit to help offset the cost of care for a child (under the age of 13) or disabled adult while you work
So let's look at an example that utilizes what we've learned about progressive tax brackets, using the most common way to lower your tax rate - a standard deduction.
Say you're a single person who earns $50,000 from your job and claims the standard deduction. Assuming no other income or deductions, your taxable income would be your $50,000 salary minus the $12,550 standard deduction, or $37,450. Out of your $37,450 taxable income, $9,950 falls into the first tax bracket, and is taxed at 10%. Your remaining taxable income ($27,500) falls into the 2nd tax bracket, and is taxed at 12%.
Owing taxes vs. getting a refund
The U.S. also has a pay-as-you-go tax system, meaning you must pay tax as you earn income. If you have a job, your employer withholds taxes from your paycheck. If you're self-employed, you're generally required to make estimated tax payments every quarter.
At the end of the year, filing a tax return is a chance to reconcile the tax you paid with the amount you actually owe. If you paid in more than you owe, you get a refund. If you didn't pay enough, you owe more taxes.
How to file taxes: filing options
You have several options for preparing and filing your federal and state income tax returns.
- IRS Free File. If your Adjusted Gross Income (AGI) is $73,000 or below, you qualify for the IRS Free File program, giving you access to free versions of reputable tax software applications.
- IRS Fillable Forms. If your AGI is above $73,000, you can file your federal (but not state) tax returns for free by filling out these IRS forms. These forms can be complicated, so you should only consider this option if you're knowledgeable about taxes and feel comfortable completing IRS forms independently.
- Tax Prep Software. Tax preparation software like TurboTax or H&R Block walks you through a series of questions about your tax situation and fills out the federal and state forms for you.
- Hire a Pro. The most hands-off (and most expensive option) is to outsource your tax filing to a tax professional who will prepare and file the federal and state forms for you.
- Hawaii Department of Taxation. Offers e-filing services for individual income tax returns via the Hawaii Tax Online portal. If you prefer to file a paper return, you can download your tax forms and mail your income tax return to one of the addresses below.
If you expect a refund or don't owe tax:
Hawaii Department of Taxation
P.O Box 3559
Honolulu, HI 96811-3559
If you include payment with your return:
Hawaii Department of Taxation
P.O. Box 1530
Honolulu, HI 96806-1530
If your taxes are pretty simple and you feel confident doing so, you could prepare your own tax returns. Doing so might not be your ideal way to spend a few hours, but it could teach you a lot about your tax situation and may save you some money too.
Want to learn more about how taxes are calculated? Check out the next article in this series, What's the Racket about Tax Brackets? A Look at How Tax Brackets Work.
Legal Disclaimer - Please note, this material has been prepared for informational purposes only, and not intended to provide legal, tax, or accounting advice. Consultation with a legal, tax, or accounting advisor is advised.
You're about to exit BOH.com
Links to other sites are provided as a service to you by Bank of Hawaii. These other sites are neither owned nor maintained by Bank of Hawaii. Bank of Hawaii shall not be responsible for the content and/or accuracy of any information contained in these other sites or for the personal or credit card information you provide to these sites.