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Avoid The April 15 Blues*

Just thinking about paying taxes can give you a headache. Here's some helpful information to get you started.

Get Ready

When you're ready to sit down to do your taxes, be sure to have the necessary forms in front of you. Depending on your situation, you might have:

  • Wage and tax statement from your employer, also called a W-2

  • Other income statements, such as a 1099-INT for interest earned on your savings account

  • Federal tax return forms, such as a 1040, 1040A, Schedule A, or 1040EZ

  • State tax return form

Remember, everyone's tax circumstances are different, so the basic tax information below is intended only as a starting point for your tax understanding.

Total Income

One of the things you have to list on your tax return is how much income you've earned throughout the year. While your W-2 reflects the income reported by your employer, there are other sources of income that must be reported on your tax return. Examples of taxable income include:

  • Salaries

  • Commissions

  • Tips

  • Unemployment insurance benefits

  • Gambling winnings, if greater than losses

  • Individual Retirement Account (IRA) and pension plan distributions

  • Interest earned from savings and investments

  • Alimony

  • Contest, prize, raffle, and sweepstakes winnings

You'll want to ensure that you list all of your income correctly to avoid under-paying your taxes. Uncle Sam will impose penalties if you don't pay your taxes!

Adjusted Gross Income

After you've calculated your total income, subtract qualified adjustments to calculate your adjusted gross income, or AGI. Examples of qualified adjustments may include:

  • Personal IRA contributions

  • Health Savings Account (HSA) and Archer Medical Savings Account (MSA) contributions

  • Tuition and fees for college

  • Educators out-of-pocket classroom expenses

  • Student loan interest payments

  • Moving expenses related to your employment

  • Alimony payments

  • Self-employed health insurance payments, self-employed retirement plan contributions, self-employment tax

Your AGI is important because it determines the amount of tax you'll pay. Your tax rate, or tax bracket, is based on your AGI and filing status (single, head of household, married and filing a joint return, or married and filing separate returns). If you maximize the amount of your adjustments, it will lower lower your AGI, and the amount of tax you pay. To see what tax bracket your income falls under, search the Internal Revenue Service (IRS) website for federal tax rate schedules.

Tax and Deductions

Your AGI minus deductions and credits is the taxable income used to determine the amount of tax owed to the federal government. You can either take the standard deduction or itemize deductions. If you do not itemize deductions, you might be able to use the simplified tax forms 1040-EZ or 1040A, depending on your situation. See IRS tax topic 352: Which Form – 1040, 1040A or 1040EZ? Homeowners frequently choose to itemize deductions, because they can deduct the interest paid on their mortgage. For help in deciding to use standard or itemized deductions, see IRS tax topic 501: Should I Itemize?

Except for taxpayers whose situations oblige them to pay the Alternative Minimum Tax (see below), the tax on your income is predetermined and can be found in the IRS tax tables for the tax year you are filing. These tables are in the instruction booklet for the form you are using (1040, 1040A, or 1040-EZ), or online at the IRS website, or contained within tax preparation software. You may also have to add additional taxes, such as self-employment taxes or household employment taxes (when you have workers in your home for childcare, elder care, or household maintenance).

Alternative Minimum Tax

In recent years there has been a growing number of taxpayers who are subject to the Alternative Minimum Tax (AMT). This method of taxation was originally intended to prevent the very wealthy from exploiting tax deductions to the point that they paid little or no federal income tax. But because the AMT is not adjusted for inflation, many middle-class taxpayers, in particular those who live in parts of the country that have a high cost of living and high state and local taxes, are becoming subject to it. If you have income greater than $75,000 and live in an expensive part of the country, you should check to see if you must pay AMT rates rather than the standard tax. See the IRS website for the AMT Assistant, to help you determine if this tax applies to you. For an explanation of the history and controversy over the AMT, see the Wikipedia article on Alternative Minimum Tax.

Who Owes Whom?

Next, determine if you owe the government or the government owes you. Take the total amount of taxes withheld, as stated on your W-2 and 1099 income statements. If the amount of tax is greater than the withholdings, you must pay the government. Otherwise, you should receive a refund.

Did you know that you can have your taxes prepared and filed online with the IRS, for free? See the IRS article FreeFile: Getting Started for more information. Regardless of whether you do your own taxes or someone else does them for you, you can use the IRS e-file service to submit your return online. The IRS claims that in many cases you will receive a refund within 10 days, as long as you have it direct-deposited electronically to your bank account.

This article is a basic overview of information you might need to know about filing your tax return. Visit the Internal Revenue Service (IRS) website at www.irs.gov for helpful publications and tax forms. Become familiar with basic tax information and you'll be ready for April 15 every year. To learn more, read the related articles in our Knowledge Center Library.

Take control of your finances with our debt help tools. Use our calculators and budget planner to help you manage your money.

*This is not intended to be, and is not tax advice. It is always wise to check with a tax professional if you have any questions before filing your taxes. 

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