Saturday, February 4, 2012

Should You File?

So tax season is approaching for all those who have to file for year 2011.  Deadline for filing your federal tax return this year falls on April 17th (fun fact: tax day is usually the 15th but this year it's two days later since the 15th falls on a Sunday followed by a holiday celebrated in the District of Columbia).  Many of us college students probably don't deal with our own tax return yet.  If you don't work part-time or had a paid internship over the summer, you probably don't have income to report.  For others of us, we still fall under the category of dependent and just let our parents file our taxes under their return.  However, after we graduate and step out into the real world, it is essential to know how to file your tax forms so that the IRS doesn't have to hunt you down.

First of all, let's see if you have to file.  Whether you have to file is a function of your filing status (single, married together, married filing separately, head of household, or widower with dependent child), your age, and your gross income (income from all non-tax-exempt sources).  For independent, single filers under 65 years of age, you have to file if your gross income is more than $9500.  For dependents, you have to file if your unearned income is more than $2400, your earned income is more than $7250, OR your gross income is more than the larger of $2400 or your earned income plus $1750.  Unearned income is earnings from taxable interest, dividends or capital gains.  This is all assuming you are under 65 and not blind.  For special cases, you can look at this link to see what your limit is if you are independent and this link if you are a dependent.  If you do have to file, make sure you prepare ahead of time before the due date on April 17th.

Even if you aren't required to file, if you've had a job where income was withheld, you may be better off filing if you can get a tax refund.  Like I mentioned in my earlier post, depending on how many allowances you claimed on your W4 form, money from your paycheck was probably withheld.  And depending on how much actual money you made in the year, the amount withheld could be too much or too little.  You can usually deduct a certain amount of taxable income and not pay tax on it.  If you are just starting to earn money, the standard deduction is probably what you need to concern yourself about.  For 2011, the standard deduction is $5,800 meaning you can subtract $5,800 from your income when calculating what you have to pay taxes on.  For example, if you made $7,000 total, rather than pay $700 ($7,000 * 10% = $700), you would only have to pay $120 (($7,000 - $5,800) * 10% = $120).  This means if you had more than $120 withheld from your paycheck over the year, you should be getting a refund from Uncle Sam.  This is obviously a simplified example and there are some other things to take into account before you are finished.  There is also another way of reducing your tax bill: itemizing your deductions.  I will talk about this advanced method in a later post (this method is generally better if you are making a lot more money and pay a significant amount of state and/or local tax).

If you did get paid last year, you should be receiving W2 forms from your employer notifying you how much you were paid and how much has been withheld already for taxes.  You will also get 1099 forms from banks and brokers for any interest or dividends and capital gains you received.  These are your references for when you actually file the forms on your tax bill.  If you haven't received these yet, they should be coming in during the next month or so.  You can check Turbo Tax online or some other websites to get an estimate of whether or not you should be getting a tax refund.  Even if you don't need to pay taxes and you don't qualify for a refund, it would still be good practice for the future to learn how to actually handle these tax forms.

Taxes are a big part of managing your cash flows and estimating how you should budget for the future.  They are an important part of our entire economy since they provide income for our government.  It can be thought of as the price we each pay for the infrastructure necessary to conduct business and live in the U.S. the way things are now.  Depending on the other goals of the government, such as some degree of wealth redistribution, tax laws and certain types of deductions get put into place, making them a bit more complicated to understand.  But those nuances are for another day; for now, just make sure you are paying the correct amount and at least paying your taxes if you have to.

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