Virtually everyone in the United States pays taxes and taxes are collected by local (both city and county), state, and federal government.

This topic will focus on the more practical side of taxation, including how taxes are paid and collected, the agencies that oversee tax collection, and the ins and outs of filing and deductions. You will understand how to file income tax returns and become familiar with the W-2 formA tax form prepared by an employer and given to an employee to be filed with his/her 1040 form, listing wages earned during that year, federal and state taxes withheld, and Social Security tax information., W-4 formA form prepared by an employee for an employer indicating his or her allowances (exemptions) and Social Security number, that enables the employer to determine the amount of taxes to be withheld. , 1040-EZ, and other tax forms.

When are Taxes Collected?

Sales tax and excise taxA federal or state tax imposed on the manufacture and distribution of certain consumer goods. Examples of excise taxes include environmental taxes, communications taxes, and fuel taxes. (e.g., on gasoline, cigarettes, etc.) are collected at the time of purchase and become part of the price. These taxes are paid almost daily as people purchase taxable goods and services. If you made any purchases today, then you have already paid sales taxes. Taxes such as sales taxes seem to just “happen” — there are no deductions and no forms to complete, as there are for state and federal taxes on income.

What is Earned Income?

Earned income includes money received from salaries, wages, tips, bonuses, and commissions. ie. a part-time waitperson at a restaurant will know that the hourly wage plus tips comprise his or her taxable income.

Individuals receiving paychecks have income taxes deducted from the gross amount for the federal government, most state governments, and some local governments. Employees also pay a payroll tax (FICA) for Social Security and Medicare. Many individuals in the U.S. qualify for a tax deductionAn expense subtracted from adjusted gross income when calculating taxable income, such as for state and local taxes paid, charitable gifts, and certain types of interest payment. Also called tax deduction. or a reduction of their income tax. These deductions are subject to conditions set by the IRS and can vary from person to person, based on salary and the number of allowances (i.e., dependentsA person or persons who are financially supported by another person. and filing status) claimed.

Local governments also collect taxes on property based on the value of a home and the municipal tax rate. These taxes are collected directly from the property owner or included as part of your monthly mortgage payments.

How much will I pay in taxes?

According to one study, Americans will work, on average, 107 days in 2012 to meet their tax obligations.

time an average american must work to pay their taxes
107days/year

This amounts to 29% of their earned income on federal income, Social Security, state, and local taxes.1

average paid annually in taxes
29%of income
1According to The Tax Foundation

All About Taxes

While it is always best to consult with a tax professional or an accountantA professional who prepares financial and tax reports, and who keeps, audits, and inspects financial records on individuals or business concerns. , here are some common questions you might ask yourself.

What is the government form that an employer will ask a new employee to fill out when beginning a job?

W-4 form —The form is the Employee’s Withholding Allowance Certificate. This form instructs the employer how much to withhold from pay based on the number of allowances (exemptions) claimed. Allowances refer to the number of people whom an employee supports — including himself or herself. You can also use the IRS withholding calculator to determine how to best complete your W4, so that you do not have too much or too little taken throughout the year.

When might someone claim zero exemptions?

A high school student who works part-time and is claimed as a dependent by a parent might claim zero exemptions. A married man might claim zero when his spouse has claimed him as an exemption. A person who has other income sources that are taxed at lower rates (or not at all) might claim zero to avoid under-withholding.

What happens if an employee overpays taxes during a year?

Based on W-4 certification, when this person files an income tax return he or she will be entitled to a refund. But people who do not contribute enough during a tax year will owe the government money when they file.

What is a W-2 form?

A W-2 form is a Wage and Tax Statement. By January 31 of each year, employers must provide every employee with a W-2 form. This form includes total earnings before taxes for the prior year. Also included on this form is the amount withheld for federal and state taxes and for FICA (Social Security and Medicare).

How is the W-2 form used by an employee?

A copy of the W-2 form is submitted with federal and state tax forms. A copy should be kept for personal records too.

What if a person receives interest income on a savings account?

Interest income is reported on a form called 1099-INT and people with a savings account would receive a copy from their bank. The bank also sends a copy to the federal government. People who receive dividends on stocks and other financial products that earn interest receive a 1099-DIV.

How do you know the right federal and state tax forms to use when filing returns?

The forms most used by taxpayers are the following.
1040EZ
For use by single or married taxpayers filing jointly with taxable income under $100,000 from wages, salaries, tips, taxable scholarships, taxable interest under $1500, or unemployment compensation, who do not claim dependents or any adjustments to income or itemize any deductions. The 1040EZ will be the first income tax form that most consumers file.
1040A
The 1040A is for taxpayers with no itemized deductions and income under $100,000 from income that can include ordinary dividends and interest, pensions, annuities and IRAs. Several adjustments to income and tax credits are allowed (e.g., student loan interest deduction and credit for child and dependent care expenses).
1040
Form 1040 is for taxpayers who do not qualify to use forms 1040 EZ or 1040A. Itemized deductions include, but are not limited to mortgage interest, miscellaneous income, proceeds from real estate sales, gambling winnings, tax refunds, charitable contributions of vehicles, adoption benefits, etc.

How are tax deductions calculated by taxpayers?

There are two ways. First, taxpayers take what is called a standard deduction and this amount is excluded from being taxed. Second, taxpayers can itemize deductions (if they believe that, in total, they are larger than the standard deduction). Itemized deductions could include mortgage interest, charitable donations, educational and medical expenses, etc. If deductions are itemized, it is recommended that all receipts are saved for up to seven years, in the event of an IRS audit.

How do people calculate the amount of tax that is owed or the refund that is coming?

By using a tax table (print) or online.

Where can people get tax forms?

Tax forms are mailed out to people each year and are also available throughout most communities (post offices, libraries, senior centers, state and federal buildings, city halls) by the end of January. Federal tax forms are also available online at the IRS website: www.irs.gov.

What is so important about April 15 each year?

This is the deadline for mailing tax returns. After this date a penalty could be imposed.

How do self-employed people handle taxes?

On or before April 15 each year, they file federal form 1040, Schedule C, Profit or Loss from Business (Sole Proprietorship), or the “short form,” schedule C-EZ, Net Profit from Business. They must pay the entire contribution to Social Security and Medicare by filing form 1040, schedule SE, Self-Employment Tax (unless net earnings from self-employment are under $400). Since there is no withholding on self-employed earnings, they may also need to pay quarterly estimated taxes, including Social Security and Medicare, four times a year.

Tax laws often change and it is important to always obtain the most recent filing instructions and forms.

Taxes and Financial Planning

Financial planning and tax decision are directly connected. When considering your whole financial picture, it is important to be aware of the tax consequences of certain decisions. Professional accountants and tax preparers can also assist you in understanding more complex tax issues and how your investment decisions or retirement planning will affect your taxes owed.

Free Tax Preparation
by Volunteers

The Volunteer Income Tax Assistance Program (VITA) generally offers free tax help to people who make $50,000 or less and need assistance in preparing their own tax returns. IRS-certified volunteers provide free basic income tax return preparation to qualified individuals in local communities.

They can inform taxpayers about special tax credits for which they may qualify such as Earned Income Tax Credit, Child Tax Credit, and Credit for the Elderly or the Disabled. VITA sites are generally located at community and neighborhood centers, libraries, schools, shopping malls, and other convenient locations. Most locations also offer free electronic filing.

Find a VITA site near you or call 1-800-906-9887.

Filing Your Taxes

In the United States, income tax returnA filed tax form. Also called return. s must be filed typically no later than April 15th. There are many tax services offered during the first few months of each year. If your income is below $50,000 you are eligible for free tax preparation.

Some tax preparers will charge as much as $200 to prepare your taxes even if you are eligible for free tax preparation. Some tax preparers also instant refunds Refund anticipation loans, often with very high interest, arranged by tax preparers for people who file their returns electronically. so individuals do not have to wait for a check or electronic deposit in their checking accounts. These are called Refund Anticipation Loans and the annual percentage rate can be as high or higher than 100%.

Tax Credits

Tax credits are credits offered by the government that reduce that actual amount of taxes you owe. This is different from deductions or exemptions because those reduce the amount of taxable incomeThe amount of income subject to income taxes found by subtracting exemptions and appropriate deductions (IRA contributions, alimony payments, unreimbursed business expenses, some capital losses, etc.) from adjusted gross income. . If your combined tax credits exceed the amount of tax owed, you can receive that money in your refundMoney returned by the government to a taxpayer who paid in excess of the amount due. . You can read about some of the most common credits, two of which are described below on Tax Topics on the IRS site.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC), also refered to as EIC, is a tax credit to help you keep more of what you earned. On the EITC homepage, it is defined as

“...a refundable federal income tax credit for low to moderate income working individuals and families.”

The credit can be quite large and many low-income families are not aware they qualify. For example if you have two qualifying children and earned $40,964 ($46,044 married filing jointly) in 2011, your credit could be as much as $5,112. To see if you qualify visit the EITC Assistant page.

Child Tax Credit

The Child Tax Credit is an important tax credit that may be worth as much as $1,000 per qualifying child depending upon your income. To learn more about the requirements, see Ten Facts about the Child Tax Credit on the IRS site.

Determining Your Withholdings

Determining how much money you have your employer deduct from your paycheck (your withholdingAn amount of an employee’s income that an employer sends directly to the federal, state, or local tax authority as partial payment of that individual’s tax liability for the year. When a person starts a new job, he/she is required to fill out a W-4 form indicating his/her filing status and the number of allowances (exemptions) claimed. ) for taxes is crucial, yet an often overlooked exercise. If you withhold too little per paycheck, you might owe the IRS a significant amount of money when you file your taxes. Conversely, if you withhold too much money there are overlooked consequences.

Yes you will likely get the over-withheld money back when you file your taxes, but by over-withholding, (prepaying your taxes with more money than necessary) you are losing the opportunity to make that money work for you. In other words, if you have more money coming to you per paycheck not only can that help meet basic expenses each month, but you will ideally save it to build an emergency fund or perhaps invest it to earn a return that it otherwise would not get. By not over-withholding you could use your money better than the government can to help manage your own personal finances. Otherwise, the extra money being held by the IRS over the course of the year is essentially an interest free loan you have given to the government.

Going Paperless: Electronic Filing

You can download federal forms for e-filingThe filing of taxes electronically (a paperless filing). anytime at www.irs.gov. The IRS reports that for the 2010 tax year, 70% of all income tax returns were e-filed (35% of these were filed from home computers).

If you are having difficulty resolving your tax problems…

If you have a dispute with the IRS or are having trouble paying your taxes, you can contact your local Tax Payer Advocate or file a Form 911. For information on how to do this, please visit the Get Tax Help page.

The Taxpayer Advocate Service (TAS) exists to ensure everyone is treated fairly by the IRS. They are an independent agency who will guide you through the process of resolving your tax problems for free and can assist with IRS debt negotiation.

SAMPLE SCENARIO: FILING A TAX RETURN

Cicely King is employed as a high school coach. She is single, with no dependents. Her annual salary is $27,500. She received a small raise in June. At the end of the tax year, her W-2 form reflected earnings of $28,345. Cicely will use form 1040EZ because she is single with no dependents and has no other source of income. The federal tax withheld in 2011 was $2,707 (shown on her W2). The tax due for her income bracket after exemptions is $2,399 (you can find this on the tax tables). Therefore, on a 2011 income tax return, Cicely would be due a refund of $308.

This example has been adapted from an online IRS simulated filing to conform with the 2011 tax table.