Taxes & Tax Forms Flashcards
Taxes
When you hear the word “taxes,” you might think of that stressful time at the beginning of the year when everyone is busy filing their tax returns and waiting for refunds. But did you know that taxes are actually a part of our lives all year round, even if you don’t have a job?
We pay taxes on so many things, like the things we buy, the homes we live in, and even when we stay in a hotel.
Why do we have taxes?
Federal:
- Social Security, Medicare, national defense, environmental protection, research, federal programs, national parks
State:
- Education, health care, transportation, public safety, state programs, state parks
Local:
- Public schools, libraries, police and fire departments, local programs, local parks
Which taxes do you pay
- Income taxes: These are taxes you pay on the money you earn from a job, a business, or investments. The federal government and some state governments collect income taxes. The more you earn, the more you pay in taxes.
- Payroll taxes: These taxes are taken out of your paycheck to fund Social Security and Medicare, which provide retirement and health care benefits for older Americans. Both you and your employer contribute to payroll taxes. These taxes are taken out separately from your income tax.
- Sales taxes: When you buy goods and services, you might pay a sales tax. This tax is a percentage of the purchase price and is collected by state and local governments. The rate varies depending on where you live.
- Property taxes: If you own a home or other property, you’ll pay property taxes. These taxes are based on the value of your property and help fund local services like schools and public safety. Property taxes are collected by local governments.
- Corporate taxes: Businesses pay taxes on their profits. These taxes are collected by the federal government and some state governments. Corporate taxes help fund various government programs and services.
- Estate and inheritance taxes: When someone passes away and leaves behind money or property, the government may collect estate or inheritance taxes. These taxes are based on the value of the assets and are collected by the federal government and some state governments.
- Excise taxes: These are taxes on specific goods, like gasoline, alcohol, and tobacco. Excise taxes are collected by federal, state, and local governments and are usually included in the price of the product.
- Hotel and occupancy taxes: When you stay in a hotel or other short-term rental, you might pay hotel and occupancy taxes. These taxes are collected by local governments and help fund local tourism and other community services.
- Toll taxes: When you use certain roads, bridges, or tunnels, you might have to pay a toll tax. These taxes are collected by state and local governments and help pay for the maintenance and construction of transportation infrastructure.
Tax forms
With your new job comes some paperwork, including two very important forms: the W4 and the I9. These are both for taxes.
W4
(Wage-4)
The W4 form helps your employer figure out how much income tax to take out of your paycheck. You’ll answer a few personal questions like your marital status and if you have any kids.
No worries, though, you can update your W4 form anytime something in your life changes during the year and your employer will adjust how much taxes they are withholding.
W4 (Wage-4): Think of W standing for Wage, and 4 as four letters in work : Fill it out when you start a new job, so your boss knows how much to take out in taxes.
I9
(Identification-9)
Now, the I9 form is all about making sure you’re legally able to work in the United States. To fill it out, you’ll need a proper ID like a driver’s license or passport.
Think of I for Identification. There are 9 numbers in Social Security numbers, so it helps you remember that it’s for proving you can legally work in the U.S.
W9
If you are working a side gig or working as a freelancer—or if you’re starting a new job as an independent contractor—you might need to complete a W9 form. This form gives your taxpayer identification number (or Social Security number) to the person paying you, so they can report your income to the IRS.
Focus on the W for Work, since it’s related to work like the W4. To remember the 9, remember it is similar to the I9 - both W9 and I9 have to be filled out before you start a new job. You’ll use it when you provide your Taxpayer ID Number for stuff outside your regular job.
W2 form
In January, your employer will send you a very helpful form called the W2. It tells you all about the money you made and the taxes pulled from your paycheck during the previous year. Make sure to keep it safe, as you’ll definitely need it when you file your taxes!
W2 (Work-2): Again, think of W for Work or even Wage. There are 2 copies: one for you and one for the tax authorities (IRS). This form reports the wages you earned and taxes withheld during the year.
1099 form
If you received any money from any other source, you will receive a 1099 form. This can be from your side job, contract work, or even from your bank for any interest you earned in your account.
1099 (10-99): Remember that it’s related to the W9 (they both end with 9). It’s the form received for various extra income. You can also think of 99 in it as standing for 99 ways you could earn extra money like side jobs, freelance, gigs, interest, dividends, even lottery and gambling!
Paying for college or a house? Here come 1098 forms
If you have any educational expenses or you’re a homeowner, there’s a useful form called the 1098. This form has the details on mortgage interest or college expenses and will arrive during January and February. 1098 form is very helpful because it can help lower your taxes.
Remember the 1099 form as the one that shows all your extra income? Now, the 1098 form is 1 less than 1099 (1098 = 1099 - 1), which you can remember as a way to subtract or lower the amount in taxes you owe.
The 1098 form helps by reporting your tuition and mortgage interest payments, which could lead to tax deductions.
April and the 1040 form: The finale of tax season
The grand finale for wrapping up taxes is usually on April 15th. This is the day you’ll need to complete the 1040 form, letting the government know about your income and nailing down your final taxes for the year. Keep in mind, the 1040 form uses all the info you’ve collected from your W2s, 1099s, and other forms. Once you complete this form, you will know if you owe taxes, or if you are getting a refund.
Lots of people get their taxes out of the way even before the April deadline, but it’s definitely the last call to get them done.
To remember the 1040 form, think of it as the “10-4” moment in the movies. In classic walkie-talkie lingo, “10-4” means “got it” and signifies the end of communication. Now, simply add a “ty” after “4,” and you’ve made a connection with the form’s name: “10-4ty.”
When you file your 1040 form, you’re basically telling the government, “10-4, got it!” and wrapping up your annual income communication with them. Just like the “10-4” in the movies, it’s a quick and memorable way to know you’ve reached the end—nothing more after. In this case, it’s the end of your taxes for the year.
Gross and taxable income
Gross income is your total income over the course of the year. This includes everything from wages and tips to any interest, dividends or capital gains you earned. Right off the bat, you are allowed to subtract certain things from your gross income—these are called above-the-line deductions. That will give you what’s called your adjusted gross income.
From there, you may claim certain exemptions and deductions. Once those exemptions and deductions are taken, the number you are left with is called your taxable income. You calculate your taxes based on that amount.
Tax deductions
You may deduct certain expenses when calculating your taxable income. For example, if you made $45,000 last year and have $5,000 in deductions, you effectively pay taxes on $40,000 of income.
- Above-the-line deductions: These are subtracted from your gross income right off the bat; they include qualified contributions to retirement accounts and alimony payments.
- Itemized deductions: Additional deductions are calculated using the IRS Form 1040 Schedule A. These deductions include certain medical expenses, charitable contributions and more.
- Standard deduction: If you choose not to itemize, you can generally qualify to take a standard deduction. This is available to most people, though certain restrictions apply, and the amount is determined by your filing status. You may choose to itemize if your itemized deductions would exceed the amount of the standard deduction.
Tax credits
A tax credit reduces the amount of tax you owe the government dollar for dollar. With some credits, if your credit exceeds how much you owe, you’re entitled to get the difference back as a refund.
One of the most popular credits is the Earned Income Credit (EIC), meant to reduce taxes for lower- and middle-income families. The amount of the credit is determined by your income and number of children.
Dependents
A dependent is someone you support financially—for example, elderly parents or children. Claiming dependents may help qualify you for exemptions and credits. Children may qualify as dependents until age 19, or 24 if they’re full-time students.
Older children or adults who qualify as dependents may still file tax returns, and may even be required to file if their incomes exceed certain amounts.
