Page 18 - FP-Sample-Flipbook

Income Tax Basics Common Tax Terms
It starts with the W-4- Withholding
Allowance Certificate...
When you begin a new job, one of
the first things you do is fill out a W-4
form. This tells the employer how much
money should be deducted from your paycheck
for taxes.
„ You choose a number of allowances based on the
number of dependents you have. Each dependent you
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claim will reduce the amount of taxes taken out.
„ You can claim one allowance for yourself and one
for each dependent. You can also claim allowances
if you are the head of the household, and if you plan
on having at least $1,500 in child or dependent care
expenses during the year.
Next, Income Tax is Withheld...
The amount of income tax withheld from your paycheck varies
based on: For Evaluation Only
„ your marital status
„ the amount you earn At the End of the Year...
„ the number of allowances you claim.
Go online to http://finance.yahoo.com/calculator/career-
work/pay02 for a calculator
that can help you determine the amount of taxes that will be
withheld from your check. There are
also tax tables that can help you identify your taxable
amount. Some states and local govern-ments may also
take out income tax from your check.
Social Security and Medicare taxes (FICA) are also taken.
The Social Security tax rate is 4.2%, and the Medicare tax
rate is 1.45% of your taxable income.
Exercise - Calculating Deductions
„ Tax Deduction: a reduction of
a taxpayer’s total income that
decreases the amount of money used
in calculating the tax due.
„ Exemptions: items that can be
deducted from your total income
before taxes are assessed.
„ Dependent exemption: a deduction for
someone who relies on the taxpayer
for support including food, clothing,
and shelter.
„ You can claim the Head of Household
(HOH) filing status on your tax return
if you are unmarried, have cared for
a dependent for over half the year,
maintaining a home. This can give
and paid more than half the cost of
you more deductions than filing as
single.
„ You receive a W-2 form from
each employer showing your total
earnings and taxes paid for the
year.
„ You also receive statements from
financial companies if you have
received other income through
investments, or paid interest on a
home mortgage or certain types
of loans.
Possible Deductions:
Certain expenses you pay during the year can be subtracted from
your taxes as deductions. The more deductions you can claim, „ Gifts to charity
„ Medical and dental
the less money you will owe the government. Identify some of the
exemptions you can claim from the list on the right based on your expenses (only a set portion)
situation. „ Mileage to and from
medical appointments
Deduction Estimated Amount:
„ Education expenses
„ Other taxes you’ve paid
such as: property taxes,
state, local and foreign
income taxes, real estate
taxes, motor vehicle taxes
„ Home loan interest paid
„ Student loan interest paid
„ Unreimbursed employee
expenses
You Have Until April 15th...
„ to file a 1040 or 1040EZ tax return „ If you pay more tax during the
with the Internal Revenue Service year from your paycheck then you
(IRS) actually owe, you are entitled to a
„ You will need your W-2 and other tax refund. You need to file your
tax statements to complete the tax taxes in order to claim this refund.
„ If you owe more tax, you must pay
form. it by April 15.
„ You calculate the amount of tax you
owe based on all your sources of
income, subtracting any deductions
that will reduce your tax owed.