By Joanne Barnard
In the next few months you will hear a lot about taxes. W-2’s will roll in as they are required to by the end of January and the drudgery will commence.More than likely high school students are claimed as a dependent on their parents return and may not have the income required to file.
Even if you neither owe, nor get a refund, fill out a return. Seniors will need the information for filling out federal aid applications (see Life 101: FAFSA) and it is a good start to being an active citizen.
Now is a good time to start while the return is clear-cut. As the intricate parts of your finances unfold over time, your return will become more complex. Allow your knowledge to grow with the changes. You are the one who has the most to gain by keeping abreast of your situation.
To start go to irs.gov and download a 2010 form 1040EZ, 1040A or 1040. You will notice some tax return basics. The return is made up of your information (name, address, SSN), your income (earned and unearned), deductions, tax, credits (refundable, non-refundable), payments and the bottom line.
Although the tax code is anything but simple, the procedure for completing a tax return is relatively straightforward. Figure out your income, adjust the income by any deductions, and calculate the tax on that adjusted income. If you have made payments to the government through your work or receive any credits your tax bill is reduced and you may even receive a refund.
Earned income is the amount you receive for work you actually perform. Examples of unearned income are interest earned on savings, dividends, and capital gains.
Deductions reduce the amount of income on which you are taxed. Credits reduce your tax bill. Non-refundable credits can reduce your tax bill to zero. With a refundable credit, if your credit exceeds your tax bill the difference will be refunded.
Understanding the various deductions and credits can be quite daunting. Learning about each as they pertain to you can improve your financial education and hopefully diminish your tax bill. In other words, as your life gets complicated so will your tax return. Start now while your return is straight forward and build your knowledge as you morph.
If you have questions go to the IRS Website (irs.gov) or call them. It may seem like they are pulling money from every orifice of your being, but they are just doing their job. Who knows, you may learn something that could minimize your taxing life.