Income Taxes: How To File

Before you working, fill out a w-4 The W-4 Form gives your employer an overview of your tax status (are you married? Do you have kids? Do you pay a lot for child care?). Using this information, it is determined how much in taxes should be withheld from your paycheck throughout the year. The W-4 is pictured to the right.

Now…go to work. Based on the information on your W4, taxes will be withheld from each of your paychecks for the calendar year. On January 1st, the new tax year begins. People who are not totally truthful on their W4 do not have enough in taxes withheld, and therefore have a big tax bill due in the Spring. Its pay it now or pay it later…but you will pay!

Step 1: Collect all tax documents These documents are sent to you by your employer, your bank, and any other financial institutions. These documents prove how much money you made and whether you spent money that would be deductible. A copy is also sent directly to the IRS, so you cannot lie!

W-2 Form – A QUICK PEEK

Fill out your 1040 by april 15th Depending on how complicated your taxes are, there are many different (often times very complicated) forms you will use. The primary form is called the 1040. The 1040 summarizes your over all tax scenario. Additional forms may be required to prove some of the numbers used on the 1040.

1040 form – it is complicated

Which form to use? Tax law changes and your finances change, so year to year may require different forms. We will do some practice on a 1040EZ form. My advice when you are adults: if you are not a tax expert, do not try to be. TurboTax, H&R Block, and many others can do your taxes quickly, cheaply and accurately. If you are financially successful, get an accountant!

Step 2: determine taxes owed Add up all of your income to determine your Adjusted Gross Income (AGI). Add up your deductions. Add up your exemptions. Subtract Deductions and Exemptions from AGI to determine your Taxable Income. Find your taxes due based on your Taxable Income. Determine how much in taxes have been withheld from your pay. Subtract what you paid from what you owe. If it is a positive number, you owe that! If it is a negative number, you will get a refund!!!

Lets Try! Here is our scenario: Billy is 25, single, and works at Costco. He made $27,500 last year at Costco. Federal Income Taxes Withheld = $4,125 Billy also bartends as a 2nd job and earned $3,500 in tips that have not been taxed.

Find Total Income, Deductions and exemptions Step 1: Add up all income to find AGI. 27,500 + 3,500 = $31,000 in wages, salary or tips. Step 2: Add up your deductions. In 2012, the IRS allows a standard individual deduction of $5,950. Billy has no other expenses that qualify as deductions. Step 3: Add up your exemptions. In 2012, the standard personal exemption was $3,800.

Find taxable income & Taxes owed From AGI, subtract deductions and exemptions. 31,000 – 5,950 – 3,800 = 21,250. Using the IRS web site, search for 2012 income tax tables. Remember, Billy is single! http://www.irs.gov/pub/irs-pdf/i1040tt.pdf

Find taxes owed Using the tax table, use Billy’s taxable income and filing status to determine taxes due. Filing Status Taxable Income Taxes Owed

Compare Taxes Owed to Taxes paid $4,125 was withheld from Billy’s pay check and already sent to the IRS. The taxes withheld will be shown on the W-2 Form. Billy only owes $2,749, which we determined in the last 2 slides. Taxes Owed – Taxes Paid = (refund) or due $2,749 - $4,125 = ($1, 376)

It’s a refund! Because Billy had more taxes withheld out of his paycheck than he owed, the IRS must send him his money back. Now, for homework, you try on your own.