Tax Basics: Things You Need to Know
The clock is ticking, dearest twenty-somethings — it’s tax time! The time has come to file your taxes by the quickly approaching April 15th IRS deadline. Here is a quick overview of the tax basics that you need to know about.
When you first start your job, you get to fill out paperwork, some of which involves your income tax rate. By filling out a W-4, you and your employer will determine at what rate you should have taxes withheld from your paycheck. Throughout the year, you will pay a little bit towards your taxes with each paycheck. To make life easier, here are some basics about filing taxes and what they really mean.
Some tax facts:
- All federal taxes are due by April 15th of each year, commonly known as “Tax Day.”
- Most state and local taxes are due around the same time. However, some dates do vary so be sure to check (and file early) to be safe. You can find your state tax due dates here.
- You should receive a W-2 from every place you worked the previous year by January 31st of the following year. In other words, by January 31st, 2013, you should have received a W-2 in the mail from every single place you worked in 2012.
1. Tax brackets: To determine your tax bracket, you need to know your taxable income. You can find this by using this equation:
adjusted gross income (AGI) – deductions (either standard or itemized)
You also need to know your filing status: single, head of household, married filing jointly/qualifying widow(er) or married filing separately. Tax brackets are apart of a progressive income tax system in which your taxes increase as your income increases up to your last dollar. In other words, as you move up through the tax brackets, you pay different tax rates on the parts of your income that fall in each bracket.
2. Deductions: There are two types of deductions: standard and itemized. The standard deduction is a fixed amount that lowers your taxable income based on your filing status. Most taxpayers are best off using the standard deduction. However, in some cases, an itemized deduction will increase your deductions and leave you with a lower taxable income than the standard deduction. You can read more about what goes into itemized deductions here.
3. Refund: If at the end of the year, you have over paid based on your income, you will get what is called a tax refund. However, if you have not paid enough, you will have to pay the remaining balance (also to be done by the April 15th deadline).
4. Exemptions: A tax exemption is something that helps reduce the amount of taxes you have to pay. There are several different types: personal exemptions, dependent exemptions, tax-exempt organizations and state and local exemptions. An exemption is similar to a deduction; however, exemptions have less stringent criteria in order to claim them. For example, to claim a personal exemption, you only need to not be claimed as a dependent on someone else’s tax return.
5. Dependents: Not to be confused with exemptions, your dependents (simply: those who rely on you as their caretaker) help you get tax exemptions. But – you have to meet all of the criteria in order to receive the exemption. For example, you can only claim your biological child if they live at home more than 50% of the time.
But wait… what are all those forms?!
There are a lot of different forms involved in the U.S. tax system. Even after you have years of experience filing your taxes, things are going to get confusing as you start to increase the amount of things in your life (ahem: marriage, children, starting your own business, investing, buying property, etc.). Here are some basic forms and their descriptions to help get you started:
1. 1040A: US Individual Tax Return
- You use this form if you meet certain requirements and your taxable income is under $50,000 dollars.
2. 1040-EZ: Income Tax Return for Single and Joint Filers with No Dependents
- You use this form if you are filing as single or married filing jointly, your taxable income is under $100,000 dollars and you meet the other requirements.
3. 1040: US Individual Tax Return
- If you don’t meet the requirements for 1040A or 1040-EZ, you use this form.
- The 1040 also has a variety of other forms you will need to fill out called Schedules. The Schedules cover itemized deductions, interest/dividend income, profit/loss from business, capital gains and losses, supplemental income, profit/loss form farming, household employment taxes, elderly and disability credit, farm income averaging and self-employment tax.
4. W-2: Wage and Tax Statement
- This is the form you get from your employer that reports your total income for the year, as well as the social security and Medicare withheld from your paycheck.
5. W-4: Employee’s Withholding Allowance Certificate
- As mentioned above, this is the form you fill out for your employer that determines how much tax you will have withheld from each paycheck.
Okay, so now how do I file?
When filing your taxes, there are a few options available. Of course you can print and mail all of your tax forms to the IRS but a much simpler way is to e-file. You can also use an online free file company, such as TurboTax, that will help guide you through the process, help you pay anything you owe easily or get your refund deposited directly into your bank account.
If you don’t feel comfortable preparing your taxes yourself, you can make an appointment with a tax specialist at somewhere like H&R Block. Be aware of these tax services, though. While you can file your federal taxes for free, most companies charge you to file your state and local taxes.
We know filing your taxes can be overwhelming, but don’t panic! There are plenty of resources to help you out, including the IRS website. Pro-tip: file early to avoid getting hit with a late fee. Happy filing!
Disclaimer: We are not offering you tax advice, but rather simply trying to help you gain a better understanding of the system.