This page just explains the different types of taxes we may see as we prepare taxes.
The system calculates all the tax amounts automatically. Whew!!
The system calculates all the tax amounts automatically. Whew!!
Taxes-- FYI--The system calculates the tax amount once you data entry all the 1099's and W2s.
Income Tax--Income tax is a direct tax that a government levies on the income of its citizens. The amount of tax levied depends on income and filing status.
Federal income taxes are used to provide for national programs such as national defense; veterans and foreign affairs; social programs; physical, human, and community development; law enforcement; and interest on the national debt.
If you really want to know how income tax is calculated, click on the image.
This is just extra information I found interesting--not required to know this.
Income Tax--Income tax is a direct tax that a government levies on the income of its citizens. The amount of tax levied depends on income and filing status.
Federal income taxes are used to provide for national programs such as national defense; veterans and foreign affairs; social programs; physical, human, and community development; law enforcement; and interest on the national debt.
If you really want to know how income tax is calculated, click on the image.
This is just extra information I found interesting--not required to know this.
Other taxes you might see on a 1040 tax return at a VITA/TCE site, besides income tax, are:
- Self-employment tax (which is made up of Medicare & Social Security taxes) The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).
- Self-employment Tax-- a way to explain to a client: If you were working for someone else & getting W-2 reportable wages, you know that you would have a portion deducted for Social Security & Medicare taxes. And, your employer would also be paying these amounts. Now if you're in business for yourself, you are both employer & employee, and it is your responsibility to pay both portions. This tax is based upon the profitability of your business as reported on Schedule C & not on your taxable income as reported on Form 1040. Hence, it is not uncommon for someone to owe no “income tax” at the time that they file, but still owe substantial self-employment taxes (& penalties, if quarterly estimated payments have not been made).
- Excess advance premium tax credit repayment - When the amount of subsidy received for Marketplace health insurance is more than what is allowed for the income level and policy chosen's cost, the policy holder must repay part or all of the subsidy received. This is calculated on the 1040 tax return Form 8962 and is included on Schedule 2 as a tax. (More on Marketplace can be found later)
- Additional Tax on IRA's or other tax-favored accounts - Many retirement plans offer tax benefits when you deposit your money. The purpose of the benefits is to encourage people to save for retirement. If someone chooses to withdraw funds from their retirement account early, they may be subject to an early withdraw penalty of 10%.
- Early withdrawals. An early withdrawal normally is taking cash out of a retirement plan before the taxpayer is 59½ years old.
- Additional tax. The IRS charges a 10 percent penalty on early withdrawals from most qualified retirement plans. There are some exceptions to this rule.
- Nontaxable withdrawals. The additional tax does not apply to nontaxable withdrawals. These include withdrawals of contributions that taxpayers paid tax on before they put them into the retirement plan.
- Rollovers are a nontaxable withdrawal. A rollover happens when taxpayers take cash or other assets from one retirement plan and put the money in another plan within 60 days. A rollover can also happen when they direct their plan administrator to make the payment directly to another retirement plan or to an IRA.
- Social security and Medicare tax on unreported tip income - Tips are considered income and get taxes like income. Tips entered on the tax return that were NOT reported on a W-2, are subject to income, social security, and Medicare taxes. Once you enter the tips, the system will automatically generate Form 4137 to calculate the Social Security & Medicare taxes on the tip income.
- First-Time Homebuyer's Credit from 2008 - In 2008, as a way to boost the economy and help people buy homes, a credit of up to $7,500 was offered by the government. The terms of this credit were that it had to be repaid over a 15-year period on the Individual Federal Tax Return beginning in 2010 (ending in 2025), and if the buyers sold their home, they had to repay the balance in full on their next tax return. (The amount to be repaid is 1/15th of the credit amount each year)
- In 2009 & 2010 they changed the rules of the First Time Homebuyer's credit--it was no longer a credit that has to be repaid, provided the homeowners live in their home for 36 months (3 years). Lucky dogs!!
- I recommend using the First Time Homebuyer's Credit Lookup Tool and printing a copy of the results for the client--it shows credit amount, repayments made, and required annual repayment. irs.gov/credits-deductions/individuals/first-time-homebuyer-credit-account-look-up
- Where to enter in Taxslayer? You can look in the Other taxes menu or type Form 5405, or type First Time in the search field.
- Capital Gains Tax -- The tax rate on a net capital gain depends on length of time the property sold was owned and the tax payer's income. (The system does all the calculations)
- FYI--The maximum tax rate on a net capital gain is 20 percent, but for most taxpayers a zero percent or 15 percent rate will apply.
- In addition, capital gains may be subject to the net investment income tax of 3.8 percent when income is above certain amounts. (this is for very high income clients--not VITA clients)
- For single tax filers, you can benefit from the zero percent capital gains rate if you have an income below $41,675 in 2022.
- Most single people with investments will fall into the 15% capital gains rate, which applies to incomes between $41,675 and $459,750