What is the difference between a tax deduction and a tax credit?
A tax deduction reduces your taxable income. If you earn $50,000 and have a $2,000 deduction, you pay tax on $48,000. A tax credit directly reduces your tax bill dollar for dollar. A $2,000 tax credit means you pay $2,000 less in taxes. Tax credits are more valuable. Common credits: Child Tax Credit ($2,000 per child), Earned Income Tax Credit (up to $7,430 for low-income workers), American Opportunity Credit ($2,500 for college students).
What happens if I don't file taxes?
Failure to file penalty is 5% of unpaid taxes per month, up to 25% maximum. Failure to pay penalty is 0.5% per month. The IRS also charges interest on unpaid amounts. If you are owed a refund there is no penalty for filing late, but you have 3 years to claim it before it expires. The IRS can file a substitute return on your behalf which is almost always worse for you than filing yourself.
What is the standard deduction for 2025?
For 2025 the standard deduction is $15,000 for single filers, $30,000 for married filing jointly, and $22,500 for head of household. About 90% of Americans take the standard deduction instead of itemizing because it is simpler and usually higher. You should only itemize if your deductions (mortgage interest, charitable donations, state taxes up to $10,000) exceed the standard deduction.
What are the 2025 federal tax brackets?
For single filers in 2025: 10% on income up to $11,925. 12% on $11,925 to $48,475. 22% on $48,475 to $103,350. 24% on $103,350 to $197,300. 32% on $197,300 to $250,525. 35% on $250,525 to $626,350. 37% on income above $626,350. Remember these are marginal rates — you only pay each rate on income within that bracket, not on your entire income.
What is the difference between W-2 and 1099 income?
W-2 income is from an employer who withholds taxes for you. You receive this if you are a regular employee. 1099 income is from freelance, gig work, or self-employment. With 1099 income no taxes are withheld — you must pay them yourself. You also pay self-employment tax of 15.3% on top of regular income tax. Always set aside 25-30% of every 1099 payment for taxes.
How does the Child Tax Credit work?
The Child Tax Credit gives parents up to $2,000 per qualifying child under age 17. Up to $1,700 is refundable meaning you can receive it even if you owe no taxes. To qualify the child must be your dependent, under 17, and have a Social Security Number. The credit phases out for single filers earning above $200,000 and married filers above $400,000.