Income Tax Facts
By The FoolProof Team
Do you have a job? Are you earning money by babysitting, mowing yards, or doing something else (this is called self-employment)? If so, then you need to understand taxes.
Earnings that are taxable include wages (including tips), salaries, self-employment income, investment income, and some scholarships and fellowships. Investment income includes bank account interest and dividends, stock dividends, bond interest, and other similar income.
Federal Income Taxes
The federal income tax is collected on a pay-as-you-go basis. This means that as you earn money, you pay tax on it. It can be paid in 2 ways: withholding or estimated payments.
If you are earning a paycheck, then tax is deducted from your pay. When you started work, you should have filled out a form called Employee's Withholding Allowance Certificate, also known as a W-4. Most students can claim only one allowance. Your employer uses the information on this certificate to determine how much tax to deduct.
One myth about withholding is that because you are a student you are automatically exempt. This is not true. To be exempt from withholding for 2006 you must meet the following requirements:
- You received a refund of all federal income tax withheld for 2005.
- You expect a refund of all federal income tax for 2007.
To receive a refund of all federal income tax, you must make less than $4850. This is the amount of the standard deduction for a single person for 2007.
If you are earning money but not from a paycheck, then you may need to pay the taxes yourself, by making estimated payments. Such estimated payments are made 4 times a year. If you don't make estimated payments and owe tax at the end of the year, you will also owe a penalty.
For more information see the Tax Information for Students section on the IRS website. It covers numerous topics such as:
- Taxable Income for Students
- Do I have to file a return?
- Is there an exemption from tax for full-time students?
State and Local Income Taxes
Forty-three states have some form of income tax. The seven exceptions are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Two others, New Hampshire and Tennessee, tax only dividend and interest income. The amount collected and how it is collected vary from state to state. There may even be a local income tax collected by your city or county (or collected by the state for them).
To learn more, check out Understanding Taxes from the IRS. Lessons include sections on the hows and whys of taxes. Tutorials include information on the basics of tax preparation and electronically filing your tax return. There are also simulations and other activities.