Paying:Taxes

Paying Taxes
As the saying goes, “the only sure things in life are death and taxes”. Oh joy.

For many people, calling this section “dry” would be an understatement. You may want to drink a double espresso before reading.

Tax Information for First-Time Filers
That first paycheck from your employer may be a bit of an “eye opener” when you notice the amount of payroll deductions from your net pay. In addition to payroll deductions for benefits, income will be withheld for federal and state taxes.

F.I.C.A. stands for the Federal Insurance Contributions Act and is better known as Social Security. F.I.C.A. deductions are payroll taxes that provide retirement, disability, and death benefits to workers. The employer pays half the premium and the worker pays the other half. Employers are required to report wages to the Internal Revenue Service (IRS). The IRS will use your social security number or taxpayer ID number (for non-US citizens or foreign nationals filing taxes in the U.S.) to process your tax payments.

After you file your tax return, you may be entitled to a refund of overpaid taxes if it turns out you paid more taxes through payroll deductions than you actually owe. Most Americans have too much tax withholding taken from their paychecks each year. By reducing your tax withholding your net income will increase. But don’t withhold too little or you’ll owe the IRS money when you file.

Read about withholding at:

http://www.kiplinger.com/taxes

You will find a withholding calculator on this site. Review the section on “Tax Prep & Filing” and look for articles written for first-time taxpayers. Use a W-4 Form (which your employer uses to set exemptions and withholding) from the IRS website to adjust the withholding from your paycheck.

Getting a tax refund from Uncle Sam each year is a nice windfall. Adding all or part of it to your savings account is a smart way to build your savings.

The deadline for filing your taxes is on or about April 15th. Start preparing to file your taxes on or before March 1st. By then important tax documents should have come in the mail, such as a W-2 form from your employer or 1099 forms if you did freelance work. A W-2 is a federal tax form issued by employers that states how much money you made in one calendar year from wages, salaries, and tips. A 1099 form is used to report nonemployee compensation such as income paid to an independent contractor. If you don’t receive your forms be sure to follow-up and make sure you get them. Go online to irs.gov to find the federal forms you need to file and pay your taxes. The 1040EZ is the simplest form and has no supplementary forms. If your taxes are more complicated you may need to file a Form 1040.

http://www.irs.gov/newsroom/article/0,,id=251988,00.html

Use this link to check your eligibility to use the 1040EZ form.

You can use a 1040EZ if:

•	Your taxable income is below $100,000

•	Your filing status is single or married filing jointly

•	You are not claiming any dependents

•	Your interest income is $1,500 or less

Do a search on the IRS.gov site for links to state government websites where you can get forms to file your state taxes. To become proficient at the tax code takes time, so don’t procrastinate. To get started, learn the difference between income, adjusted gross income, and taxable income.

•	Income – Money you make in a calendar year including earned income and passive income.

•	Adjusted gross income – The income you report on your tax form that is reduced by allowable deductions (including but not limited to: IRA contributions, interest on student loans, tuition and fees).

•	Taxable income – This is adjusted gross income less additional tax exemptions and deductions or the “standard deduction” which is a set amount that everyone can take.

Next, understand the difference between a tax exemption, a tax deduction, and a tax credit. When you file your taxes you can use tax exemptions, deductions, and credits to adjust your tax liability and determine whether you owe additional taxes for the year, or whether you are due a refund.

•	Tax exemption – Exemptions are used to calculate your taxable income and are based on the number of people in your household who file taxes together. You are legally entitled to a personal exemption for yourself and anyone that qualifies as a dependent (a person that depends on your for the majority of their financial support). Exemptions are claimed when you file your taxes, and when your employer has you fill out a W-4 form. Exemptions determine the amount of your withholding or the amount of each paycheck that is set aside to pay your annual taxes due.

•	Tax deduction – or itemized deductions - are specific expenses you paid throughout the year that are subtracted from your income to calculate your adjusted gross income. Use the standard deduction that everyone can take unless your tax deductions are greater than the standard deduction. Deductions lower the amount of income that is subject to taxes.

•	Tax credit – A tax credit is even more beneficial than a tax exemption or tax deduction in that is a direct reduction in your tax bill rather than a reduction in your income. Every one dollar you get in a tax credit reduces your tax liability by one dollar. Examples of credits that might be allowed include education expenses, installing energy efficient appliances, or caring for a dependent.

To itemize or not to itemize, that is the question. This refers to your deductions; basically two-thirds of all taxpayers claim a standard deduction rather than itemizing allowable deductions, and the percentage is probably higher for younger workers.

Use the following link to learn about the basic itemized deductions:

http://www.irs.gov/taxtopics/tc500.html

Student loan interest: If you (or your parents) paid student loan interest, check the tax code to see if you can write off all or part of that expense.

Self employment: If you are self-employed and earn $400 or more, you have to pay the self-employment tax, but you will also receive a deduction which will lower income taxes owed. Review the tax rules related to self-employment income so that you know the rules and keep records.

State forms: After you complete your federal tax form, you will need to file your state tax return or perhaps multiple state forms if you moved during the year. The forms can be found online by searching for state government websites.

Preparing to File Your Taxes
Don’t wait till the last minute to prepare your taxes. Get started by March 1st at the latest. You may need extra time to get missing tax documents, correct mistakes, or contact a tax professional. Professionals get very busy close to filing time (April 15th) and may not have time to talk to you.

You can file an extension until October 15 without penalty but you must file a request for this extension.

From the IRS website:

''“If you are not able to file your federal individual income tax return by the due date, you may be able to get an automatic 6-month extension of time to file. To do so, you must file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return by the due date for filing your calendar year return (usually April 15) or fiscal year return.”''

Organize Documents: You should receive all your tax documents by the first week in February since companies are required to post mark most tax related documents by January 31st. These documents can include W-2s, 1099s, Interest & Dividend reports, etc… Follow up if you do not have everything you need by mid-February. To tell if you are missing important tax documents, keep a tax file throughout the year with paystubs, copies of checks for work you might have done as an independent contractor, statements showing sources of dividend and interest income, records to verify tax credits, exemptions, deductions, and so on. Remember, you need documentation and forms to account for any expenses you wish to deduct.

Be aware of changes in the tax code that impact you: The tax code changes every year. Check out the Tax Section at www.Kiplinger.com and read about the following topics and more:

•	Tax Prep & Filing

•	Tax Changes

•	Tax Breaks

•	Tax Planning

•	Easy-to-Use Withholding Calculator

•	Tax Glossary

•	Deductions

Use the IRS website to research tax issues. Or call the IRS with questions.

http://www.irs.gov

IRS telephone Assistance for Individuals:

Toll-Free, 1-800-829-1040

Understanding deductions can help you fatten your refund. But deductions that are way off base raise “red flags” and invite an audit.

Read the information for students from the IRS website:

http://www.irs.gov/individuals/students/article

Consider working with a tax professional. If you cannot get the information you need directly from the IRS, you may need to consult a tax professional such as a Certified Public Accountant (CPA). Ask your friends and family for referrals. Or ask at school; many colleges have resources for students with questions about their taxes. Be sure to ask about the charge for tax services rendered. This could be money well spent in that a tax professional’s fee may be offset by a lower tax bill.

You can get tax help online. Tax software or websites like Turbo Tax are worth looking into.

https://qtwu1.qprd.turbotaxonline.intuit.com/

TurboTax has a FREE Online Edition.

Additional resources: http://www.usa.gov

The tax section on the website for the federal government is full of information. Search “File Your Taxes”.

Here’s a tax primer to highlight main points:

1. File. Don’t give Uncle Sam your refund. If you've had money withheld from paychecks, you've probably got a refund coming.

2. Start early and give yourself time to gather paperwork, do research, and file. Seriously! Go online and download state and federal forms so you can PREPARE. Don’t wait until the end of March to get started unless you plan to file a request for an extension.

3. '''Know the credits and deductions you qualify for and take them. The tax code is complicated. ''' You’ll need to do a fair amount of research to understand tax rules and benefits that apply to you. You’ll need to research tax credits and deductions for students as tax laws change.

4. Don't automatically take the EZ route. The 1040EZ form automatically assumes you will claim yourself as a dependent. But if your parents make the same claim, both of you will get letters from the IRS. (If your parents are paying more than 50 percent of your expenses, they are entitled to list you as a dependent on their taxes which lowers their tax liability.) If you've already filed when you learn your parents plan to claim you as a dependent and use your education credits, file a corrected return. 

6. Determine where you live. Sounds simple doesn’t it? Not when it comes to taxes. If you're going to college in one state and spending summers at home in another state, you may need to file state tax forms in two states. The qualifications for residency depend on the state.

7. Nail down your tuition money's origin. It could make a difference in your taxes. For instance, if any of your tuition bill was paid with money from a 529 account or Coverdell education savings account, you can't count those expenses in your total education debt when you try to recoup an education credit or deduction. Since Coverdell and 529 money accumulate tax-free, the government has already given you a tax break on those funds.

8. Watch your income. If you rely on need-based grants or loans, keep an eye on your income throughout the year to be sure you don’t lose eligibility.

9. Be careful with work-study arrangements.

These programs are taxable. Many colleges and universities issue students checks and take the proper withholdings. If you're not getting a check, make sure that you're putting some money aside for tax filing. And if your school simply gives you a break on tuition in exchange for your work, this is considered income and is taxable. Talk to the director of the program for details.

10. Be careful with summer jobs

•	Complete a W-4 (Employee Withholding Allowance Certificate) when you start a new job. This is the form used to determine your exemptions and how much tax will be taken out of your paycheck.

•	If you receive tips during the course of your job don’t forget they are considered taxable income.

•	Odd jobs such as babysitting or lawn care may generate cash but this cash is taxable income if you make over $400.00. When you do your taxes you will have to pay self-employment tax which goes towards Social Security and Medicare benefits in the future.