Benjamin Franklin is credited with saying that nothing in this world is certain except for death and taxes. The fact of the matter is that if you’re a living, breathing human being, you’re a citizen of a government that wants you to pony up some cash to keep that government functioning.
Unfortunately, if you’re a citizen of the United States, you’ll find that the tax system in this country is especially confusing. This shouldn’t make you feel bad; people have literally made careers out of poring over the various tax laws so they can give the best advice to their clients. Unless you’re a professional who studies the IRS tax code for a living, it’s perfectly normal for you not to understand all of its intricacies.
Here are a few basic questions you might have about tax laws and some quick answers. However, it’s always best to get your tax advice from a qualified professional who can properly evaluate your personal circumstances.
- What Do I Put on Form W-4?
Form W-4 is the form you fill out when you get a job. It’s used to identify your exemptions – that’s a fancy word that describes how much Uncle Sam will pull out of your paycheck. The higher your exemptions, the less money the federal government takes from your gross pay.
As a rule of thumb, if you’re single and have only one job, you’ll get two exemptions. Just put a 1 in rows A and B.
- Why Is Money Being Taken From My Paycheck?
The United States has a tax system based on income. In other words, you pay taxes based on what you earn. In an effort to keep you honest, the government pulls money out of your paycheck and keeps it rather than allowing you to keep all of your money and hope that you have enough in savings to pay the taxes due after a year.
The money you earn from your job is called gross income. That’s how much you’ve agreed to be paid in exchange for your work. After the government takes its share of money out of your paycheck, you’re left with what’s commonly referred to as take-home pay. That’s a sensible name, since it’s the money you actually take home.
- Why Do I Keep Hearing About Tax Brackets?
The more you earn, the more you pay. Somebody who makes $1 million per year will pay a higher percentage of that income on taxes than someone who only makes $50,000 per year. The federal government divides everybody up into tax brackets based on income. As of this writing, there are seven tax brackets.
- I Just Filed My Taxes for the First Time and Got a Big Refund! That’s Great, Right?
Wrong. That means you loaned Uncle Sam money, interest free, for a year. It also means you didn’t take enough exemptions on Form W-4. Ask your employer if you can resubmit Form W-4 so that you can increase your exemptions and have less money deducted from your paycheck. Then, you can do something wise with that money, like put it into a mutual fund.
- What’s Adjusted Gross Income?
You might have heard people talking about adjusted gross income (AGI) when discussing their federal taxes. That’s the income that the federal government uses to determine your tax bracket and, ultimately, the amount of money you owe in taxes.
Most people who file taxes are entitled to certain deductions. These are expenses or allowances that the federal government permits you to subtract from your overall gross income to determine the income that’s used to calculate your taxes.
For example, if your income is $20,000 a year and you have $3,000 in deductions, then your AGI is $20,000 – $3,000 or $17,000. You’ll be taxed on that $17,000, even though you earned $20,000.
What are valid deductions that you can take? That varies from person to person and is a matter that should be discussed with a professional tax advisor. Some common deductions are mortgage interest, business expenses, student loan interest, charitable contributions, local taxes and state taxes.
- I’m a Dependent; Do I Have to File a Return?
It depends. First of all, you need to determine your status as a dependent. As a rule of thumb, you must be under 19 years of age or a full-time student under the age of 24 and financially supported by a parent to qualify as a dependent.
Even if you’re a dependent, you have to file a return if you earned more than a certain amount of money. As of 2014, you were required to file a return if you earned more than $6,100 as a dependent. Since the amount varies from year to year, it’s best to consult a tax advisor about this issue.
The United States tax system might seem daunting. However, just like many other challenges you’ll face in life, you’ll adapt to it as time goes on.
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