The Ultimate State and Federal Tax Submission FAQ

Answers to Common Federal and State Tax Filings

A number of questions come up every year from taxpayers as they reacquaint themselves with the annual tax return filing process for both federal and state taxes. While the tax laws may change from year to year, the process of filing is generally the same. One of the biggest changes, however, has been the ability to electronically file returns, speeding up the process considerably. As your knowledge leader in tax expertise, eSmart Tax by Liberty Tax Service offers some answers to the more common questions in our ultimate state and federal tax submission FAQ.

Do I have to file a tax return?

Technically if you have earned any money in the calendar year, either actively or passively through an investment, a tax return is due for that year. However, even those who earn nothing should still file a return to avoid any questions about status. Often times folks who have filed for years stop filing once retired, and the sudden change can trigger a followup by a tax agency.

Why should I pay federal or state taxes?

Regardless of politics, the matter isn’t up for debate; paying taxes on earned income is required by both federal and state laws. Failure to do so can trigger civil and possibly criminal penalties and even jail time in extreme cases.

Taxes are also a civic duty.  They help pay for federal programs like Medicare and federally-funded education. On a local or state level, they may help pay for things that directly impact you like roads and public safety.

What's the difference between federal and state tax returns?

The difference is that federal tax returns are filed with the federal government and the Internal Revenue Service for any federal income taxes due as well as credits and refunds. State income tax returns are filed with a given state tax agency for state taxes and to receive any state tax refund. Most people who receive a paycheck want to file returns correctly so they can get back payroll tax withholding that exceeded taxes owed for the year.

Do you file federal tax before state tax?

It’s not necessary to file a federal tax return before a state tax return but it’s a smart idea. Most states now draw down tax data from the IRS before processing a state tax return to make sure the state return is consistent. So they will wait until a federal return is filed by an individual before processing the state forms. Tax preparation software works the same way, so getting the federal version done first, even if not filed, is a good idea.

Which is bigger, federal or state tax returns?

Depending on one’s earnings, federal tax return taxes and refunds generally tend to be bigger because the rate of taxes and withholding are bigger than state versions. That said, in some case due to federal law, state taxes could be more, but this is rare.

Which is better, a standard tax deduction or itemizing?

That depends on a person’s situation. For a simple tax return without a lot of issues or for a person who just has one job, no family and rents, a standard deduction is probably better. An itemized deduction process allows people to claim more specific tax deductions such as mortgage interest paid, real estate property taxes paid, and a number of other choices. Each one has to be documented though, and some require calculations. As a result, there is a higher risk of review and audit with itemizing. That said, for those who are eligible, itemizing often provides a bigger tax refund or lower tax liability.

Who controls capital gains taxing, the Feds or a state?

A capital gains tax is a type of income tax that both federal and state tax agencies can collect. So neither side has a complete control over the given tax.

What should I do if I made a mistake on my federal return that I have already filed?

If the return is still being processed, wait for the response. If the return is finished and the taxes were paid or a refund provided, then follow up with a return amendment on an IRS Tax Form 1040X with the correction, an explanation, and a payment for any monies owed. The IRS will then review, make any adjustments, and send a written response if the matter is closed or additional steps are needed.

I have a small business as part of my return, should I claim a home office as well?

Doing so depends on the nature of the small business and if use of the home room as an office can be fully documented. The home office deduction has a big reputation for being a potential audit risk with the IRS, but it should be claimed if a filer does in fact use his home for business. The IRS is implementing a simplified deduction value for this item in 2013, which reduces a lot of paperwork for the tax filer.

Should I be preparing my own income taxes or should I use a tax preparer?

With today’s tax preparation software, the average person can actually do a very good job preparing a personal tax return. Where things get complicated is usually in tax returns that involve a home business, lots of tax deductions, or very unique tax situations such as a family death and estate settlement, inheritance, a lottery winning, or a divorce. Sometimes a tax preparer can spot things that a personal preparation may miss due to a lack of regular experience working with tax forms. It’s probably not a bad idea to use a preparer at least once every few years to double-check assumptions as well as identify any past issues that need a tax filing amendment.