Federal Income Taxes

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Federal Income Taxes
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• Federal Income Taxes are the major source of
  revenue for our Federal government. They provide
  close to 40 of revenue!

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• As employees, we pay our income taxes as we go
  through payroll withholdings.
• Self-employed people are required to pay
  estimated taxes, normally on a quarterly basis.

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• If you are required to file a tax return for the
  last calendar year, you must file it by April 15
  of the following year.

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Steps in Figuring Your Tax Refund or Tax Owed

• Compute gross income.
• List all sources of taxable incomewages,
  salaries, interest income, dividends, income from
  self-employment, etc.
• Some income is not taxable interest on
  municipal bonds, life insurance death proceeds,
  gifts, etc.

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Step 2

• Subtract adjustments from income to obtain
  adjusted gross income.
• Some common adjustments Individual Retirement
  Account (IRA) deduction, student loan interest
  deduction, tuition and fees deduction.

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Step 3

• Subtract either the standard deduction or
  itemized deductions, whichever is greater.
• The standard deduction for 2002 for each of the
  four filing statuses follows
• Single--4,700
• Head of Household--6,900 (Can only be claimed
  by someone who is single and provides over 50 of
  the cost of maintaining a household for a
  dependent)

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Step 3

• Married filing jointly--7,850 (The spouses
  combine their incomes and deductions on one tax
  form)
• Married filing separately--3,925 (The spouses
  each file a return)

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Step 3

• To itemize deductions, Schedule A must be
  completed. Following are some common items that
  can be itemized charitable contributions,
  interest paid on a home (mortgage) loan, state
  income taxes paid, property taxes paid.
• If you were filing under the single status, your
  itemized deductions would need to be 4,700
  (the standard deduction for the single status) to
  pay you to itemize.

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Step 4

• Subtract an amount for exemptions to determine
  taxable income. In filing 2002 tax forms, each
  exemption is worth 3,000.

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Five Dependency Tests

• To claim a person as your dependent and thus be
  able to receive the 3,000 exemption, all five of
  the following dependency tests must be met,
  unless there are exceptions.
• Member of household or relationship test The
  person must either be your relative, or (if not a
  relative) have lived with you the entire year.

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Step 4

• Citizen or resident test The person must be a
  United States citizen or resident.
• Joint return test The person must have not
  filed a joint return. An exception If you and
  your spouse simply filed a joint return to get a
  full refund of taxes withheld, your parents could
  claim you as a dependent as long as the other
  four dependency tests were met.

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Step 4

• Gross income test The person must have had a
  gross income during the calendar year of less
  than 3,000. An exception The gross income
  test does not apply to a student under age 24 at
  the end of the year. As a result, even if you
  earned 5,000 during the summer, your parents
  could claim you as their dependent, as long as
  the other four dependency tests were met.

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Step 4

• Support test You must have provided over half
  the persons support during the calendar year.

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Steps 5 6

• Find the tax on taxable income using the tax
  tables.
• Subtract from the tax any credit for which you
  qualify.
• Common credits Education credits, child tax
  credit (600 per each child under age 17), and
  credit for child and dependent care expenses.

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Steps 5 and 6

• Credits are much more valuable than deductions.
  A credit reduces your tax for . In other
  words, if your tax is 2,500 and you qualify for
  a 500 tax credit, your tax is reduced to 2,000.
• Deductions reduce your tax by the amount of a
  deduction times your marginal tax rate. Example
  2,500 deduction person is in the 27 marginal
  tax bracket. Tax reduction by being able to
  claim the 2,500 deduction is 675 (2,500 x .27).

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Step 7

• Compare the tax owed with the tax withheld from
  your pay by your employer during the year.
• Tax owed Tax withheld Additional tax owed
• Tax owed