Federal Income Taxes Federal Revenues Federal Spending Who Needs to File Income Taxes? For most people if you are single you must file if your gross income was at least $9,350. (If married filing jointly $18,700). Even if you didn’t earn $9,350 if you had taxes withheld you need to file to get back any or all of your tax withholdings. W-4 Employee’s Withholding Allowance Certificate Employees complete Form W-4 and Employers use Form W-4 to determine how much income to withhold from an employee’s pay The amount depends on: Employee’s marital status Number of withholding allowances claimed Any additional amount the employee wants to withhold Any exemptions from withholding that the employee claims Form W-2, Wage and Tax Statement Form W-2 reports wages, salaries, tips, and federal income tax withheld as well as Social Security and Medicare taxes withheld. Employers must provide Form W-2 to the employee and to the federal government by January 31 of the year following the work year Wage and Tip Income (taxable earned income) Wages, salaries, bonuses, and commissions are compensation received by employees for services performed are taxable. Tips received as gratuities by food servers, baggage handlers, hairdressers, and others for services performed are also considered to be taxable. Taxable Interest Interest is considered unearned income because money, not a person, is working to earn the income Taxable interest income can come from: Savings and checking accounts U.S. Savings Bonds Certificates of deposit (or CDs) Money market certificates Tax-exempt interest income is earned from bonds issued by entities in states, cities, etc. Form 1099-INT or 1099-OID Interest income is usually reported on Form 1099-INT (and sometimes on a 1099-OID) Taxable interest income is reported on the tax return, even if the taxpayer does not receive Form 1099-INT Dependent A dependent is a person, other than the taxpayer or spouse, who entitles the taxpayer to claim a dependency exemption. A dependency exemption is an amount that taxpayers can claim for their eligible dependents. Each exemption reduces the income subject to tax. A dependent may be either a “Qualifying Child” or a “Qualifying Relative” Qualifying Child In general, to be a taxpayer’s qualifying child, a person must satisfy four tests: Relationship – child or stepchild, foster child, sibling or stepsibling, or a descendent of one of these Residence – has same principal residence as taxpayer for more than half the year Age – must be under the age of 19 or under the age of 24 if a full-time student, or be permanently and totally disabled Support – did not provide more than one-half of his/her own support for the year Qualifying Relative Can be a parent, grandparent, brother, or sister that meets the following: The person’s gross income must be less than $3400 for the year The taxpayer must provide more than half of the person’s total support for the year Federal Tax Filing Status A person can file under one of five different filing statuses. Single Married filing a joint return Married filing separately Head of household--unmarried and paid more than half the cost of a maintaining a home for yourself and another relative who lives with you for over half the year and can be claimed as your dependent. Qualifying widow(er) with dependent child – a person whose spouse has died within the last two taxable years and has not remarried Review W-4 – determines federal tax withholdings from pay W-2 –reports wages, salaries, tips, and federal income tax withheld as well as Social Security and Medicare taxes withheld. 1099-INT – shows amount of possible taxable interest income Earned vs. unearned income Dependent Qualifying child Qualifying relative Review Filing status: Single Married filing jointly Married filing separately Head of household Qualifying widow(er) with dependent child Federal Income Tax Forms Form 1040EZ (easiest) Form 1040A (referred to as the “short form”) Form 1040 (also referred to as the “long form”) 1040EZ You can use the 1040EZ return if: Only two filing statuses: single or married filing jointly. You (or your spouse if married, filing jointly) must be younger than 65; You (or your spouse if filing jointly) were not legally blind during the last tax year. You have no dependents. Your interest income is less than $1,500. Your income, or combined incomes for joint filers, is less than $100,000. Your taxable income is less than $50,000 Break 1040A (the “short form”) To use a 1040A a person must: Have taxable income below $100,000 Use the standard deduction instead of itemizing deductions. All five filing statuses are available Income adjustments allowed on Form 1040A include educator expenses, certain IRA contributions, student loan interest and some college tuition and fees. . 1040 (the “long form”) If earnings are larger, you itemize deductions, or you have more complex investments and other income to report you will need to use Form 1040. You should file Form 1040 if: Income > $100,000. You itemize deductions rather than take the standard deduction. You have self-employment income. You received income from the sale of property. Deductions Deductions reduce the amount of income subject to income tax. Before a deduction can be used, there are a variety of qualifications (such as income level) that must be met by the taxpayer. These can be found in the tax booklets that accompany the tax forms. Some common deductions include: IRA deduction Student loan interest deduction Tuition and fees deduction IRA Deduction Qualifications: Single and AGI < $56K You can deduct up to $5000 if under age 50 Up to $6000 if 50+ Married filing jointly and AGI < $85K You can deduct up to $5000 if under age 50 Up to $6000 if 50+ EXAMPLE: Carlos is in the 28% tax bracket. If he contributes $3,000 to a traditional IRA, he gets a deduction from income of $3,000. This $3,000 decrease in his taxable income will save him $840 in taxes (3,000 x 28%). Standard Deduction The standard deduction reduces the income that is subject to tax. The amount of the standard deduction depends upon the taxpayers: filing status, age of the taxpayer and spouse, whether the taxpayer or spouse is blind, and whether the taxpayer can be claimed as a dependent on another taxpayer’s return 2009 Standard Deduction Tax Filing Status Standard Deduction Single $5,700 Married and filing jointly $11,400 Qualifying widow(er) with $11,400 dependent child Head of household $8,350 Married and filing separately $5,700 Exemptions Exemptions reduce your taxable income. They are the result of tax breaks granted by the government. There are two types of exemptions: Personal exemptions for taxpayer and spouse Dependency exemptions for dependents Each exemption reduces the income that is subject to tax by the exemption amount. For 2009, the exemption amount is $3,500. Credits Unlike deductions and exemptions, credits reduce your taxes directly, dollar for dollar. Credits arise from a number of things. Most often, though, they are the result of the taxpayer doing something that Congress has decided is beneficial for the community. Some common tax credits include: Child and dependent care expenses credit Child tax credit Hope education credit Lifetime learning education credit Retirement savings contributions credit Child and Dependent Care Expenses Credit Allows taxpayers to claim a credit for expenses paid for the care of children under age 13 or a disabled spouse or dependent The credit can be up to 35% of expenses and decreases as the taxpayer’s AGI increases. To qualify, you must pay these expenses so you can work or look for work. Child Tax Credit (1040A) The child tax credit allows taxpayers to claim a tax credit of up to $1000 per qualifying child. For many families, the child tax credit will exceed their tax liability. In many such cases, the unused portion of the child tax credit is refundable as the "additional child tax credit." In order to claim the credit, the taxpayer and child must meet a number of requirements Child Tax Credit Requirements Taxpayer Requirements: Modified adjusted gross income (AGI) is below Married filing jointly - $110,000. Single, head of household, or qualifying widow(er) - $75,000. Married filing separately - $55,000. Review Deduction – reduces amount of taxable income Standard deduction – dependent on filing status, age, blindness, and taxpayer dependency Exemption – reduces income subject to taxes Credit – reduces dollar-for-dollar the amount of tax 1040 (The Long Form) You must use the 1040 if: Your taxable income is $100,000 or more You claim itemized deductions You are reporting self-employment income You are reporting income from sale of property (referred to as capital gains) If you're filing a 1040, then the two most important secondary forms are IRS Schedules A & B. 1040 Schedule A If you have deductible expenses that exceed the standard deduction you want to “itemize”. The following are the most common types of deductions appearing on Schedule A. Medical and Dental Expense These are all of you medical and dental related expenses, subject to a 7.5% threshold. That means you can only deduct these expenses that are in excess of 7.5% of your Adjusted Gross Income (AGI). Taxes Paid These include state and local income taxes and property taxes. Most of us pay state income taxes so we can take that deduction on Schedule A. If you own a home, then you've probably paid property taxes too. Interest You Paid If you're a homeowner and have a mortgage on your house, this is where you deduct the interest expense associated with those payments. Your mortgage company will send you a statement of interest paid sometime in January - Form 1098, Mortgage Interest Statement. Interest paid, along with taxes paid are usually the two largest tax deductions found in Schedule A. Gifts to Charity If you've made any gifts to charity, including donations to a church, they would go into this category. Keep in mind that for donations in excess of $500 and / or non-cash donations the IRS may require additional record keeping. 1040 Schedule B IRS Schedule B is the form is used to report interest income and ordinary dividends if the total amount earned is greater than $1,500. If you have money in an interest bearing savings account, then the banking and / or financial institutions will have sent to you a form 1099- INT in the mail. If you have received a distribution of dividends, then the banking and / or a financial institution will report this information a form 1099-DIV. Oregon Tax Forms Oregon has two personal income tax forms for full-time residents: 40S (the “short” form) 40 (the “long” form) In addition to the five filing statuses available on federal forms Oregon also has: Registered domestic partner filing jointly Registered domestic partner filing separately Oregon allows you to deduct your federal tax liability (up to $5600) from your taxable income Each exemption credit reduces your tax obligation by $169 The taxpayer may elect to contribute a portion of their refund to a variety of charitable funds. Filing Your Taxes Completing forms by hand and mailing Hiring an accountant or tax preparer Using tax software such as TurboTax E-filing Refund vs. Taxes to Pay When withholdings and credits exceed your tax liability a person qualifies for a refund If withholding and credits are less than your tax liability a person needs to pay additional money Some taxpayers choose to apply refunds to their next year tax obligations Being Audited There are two main reasons why an individual or business may be audited by the IRS: Random audits are not as frequent as they used to be; however, they do still exist. The majority of audits ordered by the Internal Revenue Service (IRS) are because they noticed a large mistake or they feel a taxpayer is trying to deceive them to receive a larger tax refund. The IRS typically requests an audit one to three years after a tax return has been filed; however, they can request an audit at anytime if they feel a taxpayer was trying to defraud the government.
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