Paying Your Income Taxes - Weebly · term, paying your taxes through an ongoing basis will mean you don’t owe a big tax bill later in the year. Paying taxes means that a part of

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© Take Charge Today –September 2016 – Paying Your Income Taxes – Page 1 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona

Paying Your Income Taxes

Advanced Level Taxes – they’re a part of everyday life. Perhaps you’ve overheard a significant adult in your life talk about taxes, sometimes accompanied by a groan. For many people, the first experience they have with taxes is realizing they earn less in their paycheck due to the fact that taxes are withheld. While this practice may sting in the short term, paying your taxes through an ongoing basis will mean you don’t owe a big tax bill later in the year.

Paying taxes means that a part of what you earn (an income tax) or a part of what you purchase (a sales tax) is paid to the government. As citizens, we derive many benefits from taxes being collected. These benefits include public schools and updated roads and infrastructure; our military defense and police protection, and more. While most people don’t like paying taxes, they are indeed a fact of life and learning about how you pay taxes will help you understand that you are better off being part of a community of tax payers rather than trying to provide for these many benefits on your own.

Where did the idea of income taxes come from?

Did you know that our tax laws are more than 100 years old? In 1862, in order to support the Civil War effort, Congress enacted the nation’s first income tax law. Prior to that the U.S. government was supported by taxes on items such as refined sugar, tobacco, gold, silverware, and even watches. The Act of 1862 was based on progressive taxation (the higher your income, the higher your tax liability) and on withholding income at the source. That meant that employers would deduct money from their employees’ pay and send it directly to the government. In 1913, the 16th Amendment to the Constitution made the income tax a permanent part of the U.S. tax system. The amendment gave Congress legal authority to tax the income of both individuals and companies. The U.S. tax system continues to evolve and change as government officials try to determine the “best” and “most fair” way to determine how much money individuals

and corporations should contribute each year. (http://www.infoplease.com/ipa/A0005921.html)

Why are taxes necessary?

Have you ever looked around your hometown and noticed that local park? That street light? City Hall? Our taxes help pay for many things that benefit all citizens. Notice the road repairs on your local highway? Our taxes help pay for this type of infrastructure. Need a Stafford Loan to help pay for college? You guessed it: that money comes from taxes too. Without taxes, you would be responsible for providing many things for yourself. Paying your income taxes is part of your civic duty, your responsibilities as a citizen. It is something you are expected to do because you live in the United States and are provided with many benefits. The notion that everyone pays taxes is directly related to the principle that you are better off being a member of a community than by yourself. The United States, along with your state, county, and city/town, are all communities. Taxes provide the means for a community to fund the creation of public schools, build libraries, create police and fire departments, provide military protection for national security, fund scientific research to cure diseases, and much more.

Infrastructure: the fundamental facilities and systems serving a country, city, or area, such as transportation and communication

systems, power plants, and schools.

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Without taxes it would be difficult for you to individually produce or purchase many of the benefits that come to you as a member of a community.

Our government needs to collect money in order to provide those benefits to us. They have anticipated Income each year (where money is coming from). The tax revenue that is collected allows the federal government to plan on the Outlays (where money will be spent). Here’s an example of what that looks like.

The government expects you to pay your fair share of taxes; that’s what Tax Day, normally April 15, is all about. It’s the day that the government wants to know what you have paid during the previous calendar year compared to what you were expected to pay based on your income and your filing status. This is called reconciling—comparing what you actually paid with what you should have paid and determining if you paid too much or too little. Even though Albert Einstein said taxes are confusing, once you understand what you are doing, completing your tax forms and filing your income taxes is relatively simple. So let’s get started.

What is a W‐4 Employee’s Withholding Allowance Certificate?

When you get hired at a job, your employer will often have new hire paperwork for you to complete. One form you will most likely be asked to complete and sign is the IRS Form W‐4 Employee’s Withholding Allowance Certificate. This lets your new employer know your tax filing status, how many allowances you are claiming, and how much money to withhold from each paycheck and send to the IRS. Many states have similar forms for state income taxes. As a new employee, you will complete the information in boxes 1‐7 by following the instructions that accompany the W‐4. You will also sign and date the form. Your employer will complete the information in boxes 8‐10.

What are three benefits you have received today because of

tax dollars?

Tax revenue: government income due to taxation;

income available to the government to spend on the citizens and

programs

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Accurately completing your W‐4 will benefit you, especially at tax time. It can prevent you from overpaying taxes (allowing you to keep more money in each paycheck), and it can ensure you don’t have a big balance due at tax time. The W‐4 is based on the idea of allowances – the more allowances you claim (the higher the number) the less money your employer will withhold for taxes. You get one allowance for yourself, one for your spouse, and one for each dependent you include on your tax return, such as your child. You can adjust this number higher or lower to account for additional income you may make or for itemized deductions you expect to claim on your tax return. You may also use the W‐4 to declare yourself exempt from withholding. (See Box 7 on the W‐4 form.) This means that your employer will not deduct federal income taxes from your salary. You can claim an exemption from withholding if you had no income tax liability in the prior year and don’t expect to owe any taxes in the current year. When you first move out of your parent’s house and are supporting yourself, the exempt status may apply to you. The IRS recommends that you complete a new W‐4 every time a major life event occurs, such as marriage, the birth of a child, or a spouse gaining or losing a job. These things can have a direct effect on the amount of tax you owe. The Internal Revenue Service (IRS) provides employers with a tax guide every year which shows how much money should be withheld from employees’ pay. Once hired, your employer will look at the number of allowances you have selected on your W‐4, look at the Income Tax Withholding Table, and determine how much income tax to withhold from your paycheck to help ensure you are meeting your annual tax liability.

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Here is what an Income Tax Withholding Table looks like. So if José Santiago is single, claims 2 allowances on his W‐4 when he is hired, and his weekly pay is $663.00, his employer would withhold $61.00 for income taxes.

Throughout the year, your employer is sending income tax to the IRS that has been withheld from your paychecks. You can find the per pay period amount and the year‐to‐date amount on your paycheck stub.

What is a W‐2 Wage and Tax Statement?

The IRS requires employers to report wage and salary information for employees on Form W‐2. The form also reports the amount of federal, state, and other taxes withheld from your paycheck. Employers are required to send a W‐2 to you no later than January 31 following the close of the tax year so that you have the information necessary to file your personal tax return by the deadline of April 15 each year.

You should only receive a W‐2 if you are an employee. If you are an independent contractor or if you are self‐employed, the work you do may be the same as an employee, but your earnings will be reported on Form 1099 rather than on a W‐2. Some typical occupations where you might be considered an independent contractor are

Weekly

pay is

$663

Number of

allowances is

2

Current

amount

Year‐to‐date

amount

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a graphic designer, web developer, cleaning service, freelance writer, or landscaper. In this case, you will be responsible for making your own income tax payments to the IRS.

Understanding a W‐2

The W‐2 form is divided into boxes that report various Items relating to you, your employer, and your income.

Box 1 identifies the amount you received for your annual wage

and salary payments. Box 2 identifies the amount of federal

income tax withheld from your annual wages

Boxes 3‐7 identify

information related

to the amount of

social security and

Medicare taxes you

had withheld

during the year.

The boxes labeled a

and e list information

related to your

identity. When you

receive your W‐2,

make sure your name

and social security

number are correct. If

they are wrong, you

should immediately

report this to your

employer to correct.

Boxes 8‐14 identify

other income

adjustments related

to specific benefits

or program you

participated in

during the year,

such as a retirement

plan, dependent

care, or purchasing

employer‐required

uniforms.

The boxes labeled b, c,

and box 15 relate to

your employer.

Boxes 16‐20 identify wages and income taxes

specific to your state and city. You will need

this information when you file state income

taxes (if required by your state).

Example

of Form

1099

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The identifying information on a W‐2 allows the IRS to track your income. If the income you report on your taxes does not match the information on your W‐2, the IRS will want to know why. But most importantly, since the IRS

receives a copy of your W‐2 from your employer, it already knows whether you owe taxes, and it may contact you if you fail to file a return.

Reconciling Your Income Taxes

So it’s February 1st, you’ve received your W‐2 from your employer, and you are ready to reconcile your income taxes. What do you need to do? Step 1: Gather your documents. In addition to your W‐2, you will need your social security number, and any other paperwork related to income you received during the year. This includes interest you made on money in your savings account.

Step 2: Decide which tax form to use. There are generally three different tax forms for your Federal Income Tax. Each is designated for a specific type of tax filer.

Form 1040 is the most complex of the 3 major individual tax forms – and it offers tax breaks that aren’t available on the simpler Form 1040EZ or Form 1040A. You can report all types of income, expenses, and credits on a 1040.

1. Your filing status is single or married filing jointly 2. You claim no dependents 3. You, and your spouse if filing a joint return, were under age 65 and not blind 4. Your taxable income is less than $100,000 5. You had only wages, salaries, tips, taxable scholarship and fellowship grants,

unemployment compensation, and your taxable interest was not over $1,500 6. Your earned tips, if any, are included in boxes 5 and 7 of your Form W‐2

The total amount of money

earned in the year

The total amount

of federal income

taxes withheld

The total amount

of state income

taxes withheld

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1. Your income is only from wages, salaries, tips, interest, ordinary dividends, capital gain distributions, taxable scholarships and fellowship grants, pensions, annuities, IRAs, unemployment compensation, and taxable social security or railroad retirement benefits

2. Your only adjustments to income are the IRA deduction, the student loan interest deduction, the educator expenses deduction, and the tuition and fees deduction

3. You do not itemize deductions 4. Your taxable income is less than $100,000 5. The only credits you are claiming are the credit for child and dependent care

expenses, the credit for the elderly or the disabled, education credits, the retirement savings contributions credit, the child tax credit, the additional child tax credit, the earned income credit, and/or the premium tax credit.

Step 3: Fill out the form. The IRS provides line‐by‐line instructions on how to complete each tax form. Follow the instructions and you will successfully complete the required paperwork. The first part is easy. Just enter your name, social security number, and address. In the Income section, you will enter information from your W‐2. If you received income from your bank (interest on a bank account) or unemployment compensation, you will have received paperwork regarding those payments. Enter your income information; then follow the directions to add and subtract your numbers. In the Payments, Credit, and Tax section, you will show how much money you paid during the year for your Federal Income taxes. The amount of Federal Income Tax withheld (line 7) was included in Box 2 of your W‐2. When you get to line 10 where you see the word Tax in bold, you will need to use the information from the IRS Tax Tables for the year to determine how much taxes you should have paid during the year. Again, follow the directions to add your numbers. This is what a tax table looks like. It is updated every year. Use it to locate the range where your taxable income fits. Look for your filing status. The place where those two numbers meet is the amount of taxes you are responsible for paying during the year. That number goes on line 10.

Step 4: Now you will reconcile your income taxes for the year. Remember this means you will compare what you actually paid with what you should have paid. If you paid too much, you will receive a refund (line 13a). If you paid too little, you will need to submit a check for the amount of money you owe (line 14). You will see the sections to report this on your tax form.

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Step 5: Sign your tax form. It is important that you sign and date your tax form and provide information where the IRS can contact you if there are problems with your tax form. If you are married, your spouse needs to complete his/her section as well.

Step 6: Submit your tax form. You will send your completed tax form along with any money you owe to the IRS. The deadline for submitting your taxes is normally April 15. This date sometimes varies depending on holidays and weekends. You can always submit your paperwork earlier, but April 15 is the last day. If you owe taxes and don’t submit on time, you will be charged interest on what you owe.

Here’s what a completed 1040EZ might look like.

1040EZ Single or Joint Filers With No Dependents Tax Year 20xx

Your first name and initial

Julian

Last name

Reynolds Your social security number

123 45 9999

If a joint return, spouse’s first name and initial

Last name Spouse’s social security number

Home address (number and street) Apt no.

212 Sesame Street

City, town or post office, state, and ZIP code

Tempe, AZ 85282

Income Attach Form(s) W‐2 here Enclose, but do not attach, any payments.

1 Wages, salaries, and tips. This should be shown in box 1 of your Form(s) W‐2 1 15,312 17 2 Taxable interest. If the total is over $1,500, you cannot use Form 1040EZ. 2 23 12 3 Unemployment compensation and Alaska Permanent Fund dividends (see instructions) 3 4 Add lines 1, 2, and 3. This is your adjusted gross income. 4 15,335 29 5 If someone can claim you (or your spouse if a joint return) as a dependent, check the

applicable box(es) below and enter the amount from the worksheet on back. You Spouse If no one can claim you (or your spouse if a joint return), enter $10,150 if single;

$20,300 if married filing jointly.

5 10,150 00

6 Subtract line 5 from line 4. If line 5 is larger than line 4, enter ‐0‐. This is your taxable income.

6 5,185 29

Payments, credits, and tax

7 Federal income tax withheld from Form(s) W‐2 and 1099. 7 525 00 8a Earned income credit (EIC) 8a b Nontaxable combat pay election. 8b | . 9 Add lines 7 and 8a. These are your total payments and credits. 9 525 00 10 Tax. Use the amout on line 6 above to find your tax in the tax table. Then, enter the

tax from the table on this line. 10 518 00

11 Health care: individual responsibility (see instructions) 11 12 Add lines 10 and 11. This is your total tax. 12 518 00

Refund Have it directly deposited!

13a If line 9 is larger than line 12, subtract line 12 from line 9. This is your refund. 13a 7 00 b Routing number c Type Checking Savings

d Account number

Amount You Owe

14 If line 12 is larger than line 9, subtract line 9 from line 12. This is the amount you owe. 14

Sign Here Keep a copy for your records.

Under penalty of perjury, I declare that I have examined this return and, to the best of my knowledge and belief, it is true, correct, and accurately lists all amounts and sources of income I have received during the tax year.

Your signature

Julian Reynolds Date

3/17/2016

Your occupation

Student Daytime phone number

480-555-9119

Spouse’s signature. If a joint return, both must sign.

Date Spouse’s occupation

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Preparing Your Income Taxes

If you watch what’s happening in your town between January and April, you will probably notice lots of advertising from tax preparation services like Liberty Tax and H&R Block. These companies will help you complete your income tax paperwork and meet the April 15 deadline. You will need to make an appointment and bring the paperwork required to show your income, deductible expenses, and contributions from the year. They will complete the appropriate tax form and send the required paperwork to the IRS for you. So why should you prepare your own tax return instead of using a company like this? First of all, you can save money. These companies normally charge a fee to prepare your paperwork. The IRS does not charge you to file your taxes, and they provide online fillable tax forms through their website. The IRS also provides free tax filing software for taxpayers with income under $60,000 if you prefer to file electronically instead of using paper tax forms. Most importantly, even when a tax preparer completes your paperwork, you, the taxpayer, are ultimately responsible for ensuring the paperwork is correct. If your life is relatively simple ‐‐ no dependents, investments, significate assets, or charitable contributions, and you don’t own a business ‐‐ completing the required tax paperwork is also simple. You just need to have time and patience to complete the paperwork. And if you like to have control over your money, this may be the best option for you.

Documents

Paying Your Income Taxes - Weebly · term, paying your taxes through an ongoing basis will mean you don’t owe a big tax bill later in the year. Paying taxes means that a part of