Taxes FAQ

In response to my last post, I wanted to take another post answering some FAQs that I often hear.

Itemized vs Standard Deductions- I often hear that I should save all my receipts for charitable deductions and that certain software will “maximize my deductions”, what’s up with that?

  • For the vast majority of young professionals, we’ll just take the standard deduction ($5,950 in 2012). All of your deductions (charitable deductions, student loan interest, mortgage interest, state income tax) must be more than the $5,950 standard deduction, otherwise you’ll just take the standard deduction.

Eduction Credits and Deductions- I’m a student (either undergraduate or graduate), so I should get big tax breaks, right?

  • Yes! An 8917 for is your ticket. This form documents all of the tuition and fees paid at an eligible educational institution. This amount is tax deductible and even includes: textbooks, supplies and equipment. Even if you pay for school with loans, you can still deduct it. For this to apply, you should be filing your own taxes i.e. no one else claims you as a dependent. It unfortunately does not include student medical insurance or room and board.
  • A 1098-E form is the form from which you’ll deduct interest that you paid on your student loans during the year. Bear in mind that it is capped at $2,500 per year

Getting audited- Sounds scary, what’s up with that?

  • While not 0, your chances of getting audited are quite small, and shouldn’t be anything to worry too much about. As long as you are honest with your numbers, you won’t have anything to hide. A lot of software out there (I know H&R Block for sure), has an audit guarantee.
  • If you do get audited, the IRS just wants to comb through all your records to make sure what you reported is correct. It will be conducted: at your house, at an IRS office, or by mail.
  • Several red flags are: large charitable contributions, being quite wealthy, having a home office and anything foreign related (i.e. overseas income, investments or expenses).
  • Keep good records, be honest and you won’t have much to worry about.

State Taxes- I’ve moved to a different state this year, how will that affect me?

  • Bear in mind that these are completely separate from Federal taxes.
  • You are technically a resident in the state that you live for 6 months.
  • State taxes in theory should be much simpler, some states allow you to calculate deductions and others just keep it simple by not. Typical federal deductions often don’t come into play for states.
  • State taxes are paid based on where you earned the income. Your employer should provide you your state specific tax form and you’ll file based on that income. For example, in 2012, I worked most of my time in Georgia, but did work about a month in Oklahoma. I’ll end up paying both Georgia and Oklahoma the proper percentages based on the amounts I earned while working in each state.

Forms- There are so many forms out there, mind brushing over which form means what?

  • W4- This is the form you fill out when you start a new job or a the beginning of a new year. You use this form to tell your employer how many deductions you’ll be taking and your filing status. This form will set the amount of taxes that are taken out throughout the year.
  • W2- This is the tax form that you get from your employer at year end, shows how much you paid throughout the year.
  • 1040- This is the actual form that you fill out to “file your taxes.”
  • 1099- This is form that independent contractors get showing the income they received.

Head of Household vs Filing as an IndependentWhat’s the difference?

  • Head of the Household implies you had dependents living in your house.

Marginal Tax Rate- Any idea how much we actually pay?

  • http://taxes.about.com/od/Federal-Income-Taxes/qt/Tax-Rates-For-The-2012-Tax-Year.htm

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