Many people have more than one filing option available to them. Choosing the wrong one can cost you a bundle.
Single - This one seems pretty simple, but if you are married and separated, this filing status could apply to you. You can be legally married, but for tax purposes you could be considered unmarried if certain conditions apply. The parameters that consider you unmarried are contained in IRS Publication 501. Visit this link for more information.
http://www.irs.gov/publications/p501/ar02.html#d0e1485
If you are married for tax purposes, you have two choices on your filing status. Married filing jointly and married filing separately. In most cases, filing jointly will provide you a much better benefit. The status of filing separately is restrictive and eliminates or reduces some common deductions and credits.
There will be instances where filing separately will produce a better benefit. For example, in the state of Ohio you will generally get a better benefit on your state taxes by filing separately. Your Ohio filing status has to match your filing status on your federal return. You may pay more in federal tax, but what you saved on your Ohio taxes could be enough to offset it providing you with a greater overall refund or lower overall tax bill. Ohio has a progressive rate structure with no penalty for filing separately. They actually encourage it for the savvy tax person. I am not sure why Ohio lets this happen because the net result will mean more tax dollars for the Federal government and less for Ohio.
The last filing status, and this one causes the most confusion, is Head of Household. You must be unmarried for tax purposes and have a "qualifying person" in order to use this filing status. The most common use of this status is for a single mother or father with a child that fits the definition of a qualifying person. A lesser known use is if your parent is a qualifying person. If you are taking care of a parent and qualify for the Head of Household filing status, make sure your Tax Preparer is aware of you situation. The tax rates are significantly better for Head of Household than it is for the Single filing status.
Showing posts with label Taxes for beginners. Show all posts
Showing posts with label Taxes for beginners. Show all posts
Wednesday, January 24, 2007
Tuesday, January 16, 2007
Tax Terms for Beginners
Are you confused by tax terminology? Here are a few basic terms to get you started.
Adjusted Gross Income [AGI] is all of your income adjusted for a handful of items. If you contributed to an IRA, paid alimony, or have school loan interest. These items are reductions to your AGI.
A standard deduction is based simply on your filing status (joint, single, etc.). Alternatively you can itemize your deductions. You use the deduction that provides you the greatest overall benefit.
Itemized deductions are deductions that are allowed in the tax code to reduce your taxable income. Examples include your mortgage interest, real estate taxes, state and local taxes paid in the current tax year.
Exemptions are like deductions. You generally get an exemption for yourself. If you are married, have three small kids and you file jointly, you will get an exemption for each person. In this case you would have 5 exemptions. Exemptions, like deductions, reduce your taxable income. Each exemption is assigned a value. You multiply the exemption value by the number of exemptions. The total will be used to reduce your taxable income.
Taxable Income is your Adjusted Gross Income less your deductions and exemptions.
Tax - Once your taxable income is determined you then compute the tax owed on this income. The IRS provides tax tables for this. It is simply a matter of locating your taxable income amount on the tax table.
Credits reduce your tax. They are different than deductions and exemptions. For example, if your tax is $2,000 and you have a credit of $500, your tax will be reduced to $1,500. Common credits are the child tax credit, education credits, and the credit for child care expenses. Credits reduce your tax, dollar for dollar.
The most important concept to know is that a tax return filing is a reconciliation of what you owe for the year versus what you paid in. A large tax refund means that you loaned the government your money interest free. See my earlier post [Tax Refunds] on 1/13/07 for an idea of what you can do with your refund.
For more ideas, visit http://www.givemebigmoney.com/
For more tax information, visit the IRS website at http://www.irs.gov/
Adjusted Gross Income [AGI] is all of your income adjusted for a handful of items. If you contributed to an IRA, paid alimony, or have school loan interest. These items are reductions to your AGI.
A standard deduction is based simply on your filing status (joint, single, etc.). Alternatively you can itemize your deductions. You use the deduction that provides you the greatest overall benefit.
Itemized deductions are deductions that are allowed in the tax code to reduce your taxable income. Examples include your mortgage interest, real estate taxes, state and local taxes paid in the current tax year.
Exemptions are like deductions. You generally get an exemption for yourself. If you are married, have three small kids and you file jointly, you will get an exemption for each person. In this case you would have 5 exemptions. Exemptions, like deductions, reduce your taxable income. Each exemption is assigned a value. You multiply the exemption value by the number of exemptions. The total will be used to reduce your taxable income.
Taxable Income is your Adjusted Gross Income less your deductions and exemptions.
Tax - Once your taxable income is determined you then compute the tax owed on this income. The IRS provides tax tables for this. It is simply a matter of locating your taxable income amount on the tax table.
Credits reduce your tax. They are different than deductions and exemptions. For example, if your tax is $2,000 and you have a credit of $500, your tax will be reduced to $1,500. Common credits are the child tax credit, education credits, and the credit for child care expenses. Credits reduce your tax, dollar for dollar.
The most important concept to know is that a tax return filing is a reconciliation of what you owe for the year versus what you paid in. A large tax refund means that you loaned the government your money interest free. See my earlier post [Tax Refunds] on 1/13/07 for an idea of what you can do with your refund.
For more ideas, visit http://www.givemebigmoney.com/
For more tax information, visit the IRS website at http://www.irs.gov/
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