Updated on 03.24.17

Income Tax Guide for 2017

Ben Franklin said, “Nothing is certain except for death and taxes.” For the majority of American citizens, January 1 marks the beginning of the new year—and a new tax season. That’s the time when taxpayers gather boxes of receipts, receive their W2s, and make appointments to ensure taxes are paid by April 15.

Filing your income tax is a complicated process whether you do it yourself or use a professional service. US tax code is intricate, and for many, navigating the numerous forms, compiling all the necessary information, and performing the corresponding calculations can seem a daunting task. There are more than 120 different tax forms available from IRS.gov. Knowing which forms to fill out and which don’t apply, or even just gaining a basic understanding of the general terms, can be hard. This is especially true of young adults just entering the workforce.

Failing to properly file your taxes and utilize the refund options available to you could mean losing out on significant amounts of money or paying a lot more than you actually owe. Not only can it cost you time to correct and possibly delay your refund, the associated late fees for not paying the correct amount on time can add up. Errors such as unreported income or misused deductions could even trigger an IRS audit. Familiarizing yourself with the tax process and learning just how income taxes and refunds are calculated can go a long way in avoiding these complications.

This comprehensive guide is designed to give you in-depth explanations of everything the average person will need to know about filing their income tax this year and how to maximize their chances for a refund.

The Basics of Income Tax

Depending on your filing status and yearly income, you may not be required by law to file a return with the IRS. However, even if you do not have to file, it may still be in your best interest to submit a tax return because even though you may not owe any income taxes, you may be eligible to receive a refundable credit.

If your income for the year is above a certain amount, you must file a federal income tax return. This amount for which you are liable is dependent on several factors, including your age and the type of income you received. For instance, a single, independent adult under the age of 65 must file a return if they earned $10,350 or more during the year.

Improperly filing your taxes could end up costing you more than you actually owe. Worse yet, it could even trigger a dreaded IRS audit. Correctly filing your taxes on time can ensure you receive the amount owed to you by the IRS and avoid paying any penalties. And by utilizing the numerous credits, write-offs, and other benefits available to certain taxpayers, you can maximize your refund or even reduce the amount you owe. These are the basic ideas you need to keep in mind to get started.

Calculate your Gross Income: If you’re going to do your taxes on your own, start by figuring out your gross income (GI). This is the total amount of money you’ve made in a year from all sources: wages, dividends, gifts, alimony, etc. If you’re going to let a professional handle your taxes, it’s still a good idea to know how much you’ve made, but your tax professional can help you through the process.

Calculate your Adjusted Gross Income: After you’ve determined your gross income, determine your filing status, which is based on family and marital status, and which tax forms you’ll use. Your filing status will determine your standard deduction, a set amount you can deduct from your gross income. Subtracting the standard deduction from your gross income will provide you with your adjusted gross income (AGI).

Calculate your Taxable Income: Some individuals are eligible for exemptions that can bring their AGI even lower. Once you (or a tax professional) have determined the tax credits and deductions you qualify for, you’ll be able to find your taxable income. In many cases, deductions and credits can take your taxable income to zero, resulting in refunds from the IRS.

Non-Taxable Income

There are some sources of income that are usually not taxable. Types of income that are exempt from tax include:

  • Child support payments
  • Welfare benefits
  • Gifts, bequests, and inheritances
  • Awards for damage from personal injury and illness
  • Cash rebates from manufacturers
  • Reimbursements for qualified adoption expenses

There are other forms of income that are usually not taxable except in specific instances:

  • Life insurance payouts are typically not taxable. However, if you redeem the policy for cash, any amount that exceeds the cost of the policy is taxable. Early withdrawals are also taxable.
  • Scholarship payments used for tuition and course textbooks are not taxable, but payments used for room and board are.

Modified Adjusted Gross Income: Your AGI is used to calculate your modified adjusted gross income (MAGI), which the IRS uses to determine eligibility for certain deductions and credits. This figure is equal to your AGI plus any nontaxable sources of income, such as tax-exempt forms of interest earned or income from foreign investments. For many individuals, their MAGI won’t differ much from their AGI. However, things such as student loan interest, tuition, rent losses, and retirement contributions can all have an impact.

Ways to File

There are three main ways to file your income tax: through the mail, electronically via tax-preparation software like TurboTax, or through a tax professional. The deadline for filing is April 15 unless you request and are approved for an extension. No matter the method you choose, you’ll need to fill out a Form 1040, 1040-EZ, or 1040-A with the necessary information.

Paper filing is the traditional way of preparing taxes, and many people are still more comfortable handling financial information with pen and paper. This method of filing takes longer for the IRS to process, so returns are slower to arrive. The completed 1040 must be mailed to one of several addresses, depending on your location and whether or not you have included a payment.

Tax preparation software is the preferred DIY way of handling taxes. Most software is designed to make taxes easier and will help the user identify available tax deductions and credits they might otherwise miss. Built-in databases are usually updated each year to help you remain on top of minute changes in tax law.

Tax professionals handle your tax returns for you. Hiring an accountant or going to a professional company takes the work out of your taxes and removes the burden from your shoulders. Of course, the tradeoff is you must pay for the service, as well as provide all of your personal financial information to a stranger.

Unless you use the paper filing method, your taxes will be submitted electronically. Electronic submissions are typically safer and see a much faster return than paper submissions.

How Income Tax is Calculated

The United States has a progressive income tax scale. The more money you make, the more you’ll pay in taxes. However, earning a high wage doesn’t mean your entire income will be taxed at the same rate because the progressive income tax scale uses marginal tax rates to determine how your taxes are calculated.

To better understand how your income is taxed, imagine your taxable income is divided into sections. The first section is taxed at one rate, then the next section is taxed at a higher rate, and the section after that is taxed at an even higher rate, and so on. These different portions are called tax brackets. There are seven different tax brackets, and their rates differ based on your filing status (see below for tables of each filing status and their respective marginal tax rates).

Marginal tax rate is best defined as the amount of tax you pay on an additional dollar of income and the United States uses multiple increasing rates for specific ranges of income. For example, a single person will pay a marginal tax rate of 25% on $91,900. However, that’s only on their last bit of income; it is broken down further. They pay 10% on the first $9,325 earned, 15% on the next $28,625, and 25% on the remaining $53,949.

Effective tax rate is the percentage of your taxable income that you pay in taxes. Take the above example; if that single person pays a total of $18,713.50 in taxes, divide that by $91,900 and you get 0.20, or a 20% effective tax rate.

State Income Tax

State income tax is required alongside federal income tax, but can often be deducted from federal taxes. State income tax varies wildly between states.

There are seven states that don’t tax income: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee don’t tax wages, but still levy taxes on dividends and other forms of income.

The different tax rate varies per state (and often per year.) The three states with the highest income tax rates in 2017 are California, with 13.3%; Oregon, with 9.9%; and Minnesota, with 9.85%.

The three states with the lowest income tax rates in 2017 are Pennsylvania, with 3.07%; Indiana, with 3.3%; and Illinois, with 3.75%.

The Five Filing Statuses

There are five different marital statuses you can choose when filing: single, married filing joint, married filing separate, head of household, and qualifying widow(er) with child.

Single

To file as single, a person must be unmarried, divorced, or legally separated on December 31 with no qualifying dependents. The standard deduction for a person filing single is $6,350.

If income is between: Tax due is:
0-$9,325 10% of taxable income
$9,326-$37,950 $932.50 + 15% of the amount over $9,325
$37,951-$91,900 $5,226.25 + 25% of the amount over $37,950
$91,901-$191,650 $18,713 + 28% of the amount over $91,900
$191,651-$416,700 $46,643.75 + 33% of the amount over $191,650
$416,701-$418,400 $120,910 + 35% of the amount over $416,700
$418,401+ $121,505.25 + 39.6% of the amount over $418,400

Married Filing Jointly

If you are married on December 31 of the previous year, you can file your taxes with your spouse. However, this is not required; married couples can file separately from one another, but it is often less beneficial than filing together. The standard deduction for couples filing together is $12,700.

If income is between: Tax due is:
0-$18,650 10% of taxable income
$18,651-$75,900 $1,865 + 15% of the amount over $18,650
$75,901-$153,100 $10,452.50 + 25% of the amount over $75,900
$153,101-$233,350 $29,752.50 + 28% of the amount over $153,100
$233,351-$416,700 $52,222.50 + 33% of the amount over $233,350
$416,701-$470,700 $112,728 + 35% of the amount over $416,700
$470,701+ $131,628 + 39.6% of the amount over $470,700

Married Filing Separate

Married filing jointly usually yields better returns, but not always. In instances where unique tax situations may result in more taxes owed, couples might choose to file separate from one another. The standard deduction for someone filing separately from their spouse is $6,350.

If income is between: Tax due is:
$0-$9,325 10% of taxable income
$9,326-$37,950 $932.50 + 15% of taxable income over $9,325
$37,951-$76,550 $5,226.25 + 25% of taxable income over $37,950
$76,551-$116,675 $14,876.25 + 28% of taxable income over $76,550
$116,676-$208,350 $26,111.25 + 33% of taxable income over $116,675
$208,351-$235,350 $56,364 + 35% of taxable income over $208,350
$235,351+ $65,814 + 39.6% of taxable income over $235,350

Head of Household

You may file as head of household if you are unmarried and have paid for more than half of the upkeep and maintenance of your home in the past year. You must also have one or more qualifying dependents. The standard deduction for someone filing head of household is $9,350.

If income is between: Tax due is:
$0-$13,350 10% of taxable income
$13,351-$50,800 $1,335 + 15% of the amount over $13,350
$50,801-$131,200 $6,952.50 + 25% of the amount over $50,800
$131,201-4212,500 $27,052.50 + 28% of the amount over $131,200
$212,501-$416,700 $49,816.50 + 33% of the amount over $212,500
$416,701-$444,550 $117,202.50 + 35% of the amount over $416,700
$444,551+ $126,950 + 39.6% of the amount over $444,550

Qualifying Widow(er) With Child

You may file as a qualifying widow(er) with child if your spouse has died in either of the previous two tax-filing years, you haven’t remarried, and you have a child.

If income is between: Tax due is:
$0-$9,325 10% of taxable income
$9,326-$37,950 $932.50 + 15% of taxable income over $9,325
$37,951-$76,550 $5,226.25 + 25% of taxable income over $37,950
$76,551-$116,675 $14,876.25 + 28% of taxable income over $76,550
$116,676-$208,350 $26,111.25 + 33% of taxable income over $116,675
$208,351-$235,350 $56,364 + 35% of taxable income over $208,350
$235,351+ $65,814 + 39.6% of taxable income over $235,350

Common Tax Forms You Need to Know

Aside from the W2 and the 1040, there are multiple other tax forms you are likely to encounter when filing your taxes. While you don’t need to know the specifics of each and every form, a surface-level familiarity with them will help you understand which form to use when.

Tax Form Details Example Download Link
W2 The W2 is the primary employer-issued tax form. If an employer paid you wages of more than $600 from which income, social security, or Medicare was withheld, you will receive a W2. W-2
W-2G Form W-2G is the “Certain Gambling Winnings” form. It is used to report gambling winnings and any taxes withheld on those winnings. If you have won a significant sum from any gambling institution, you’ll receive a W-2G. W-2G
1040 Form 1040 is the “U.S. Individual Income Tax Return.” It’s the primary form used by individuals to file their income tax returns with the IRS, although there are two variants: the 1040EZ and the 1040-A. The first page of the 1040 collects information on the taxpayer, any dependents, income, and adjustments to income. The second page shows deductions and credits and taxes due. 1040
1040EZ The 1040EZ is a simplified version of the 1040 that consists of only six sections known as the “Income Tax Return for Single and Joint Filers With No Dependents.” Only taxpayers with taxable income below $100,000 who take their standard deduction can file with the 1040EZ. 1040EZ
1040A The 1040A is a shortened version of the 1040, but is still more complex than the 1040EZ. Its nickname is “the short form.” The 1040A has the same usage requirements as the 1040EZ. 1040A
1099-MISC The 1099-MISC is similar to a W2 in that it is provided by employers, but to independent contractors who have earned at least $600 over the course of the year in rent, services performed, prizes and awards, medical and health care payments, crop insurance proceeds, cash payments for fish or other aquatic life, payments to an attorney, and more. This form is also given to individuals who have earned at least $10 in royalties or broker payments. 1099-MISC
1099-DIV Form 1099-DIV is used to report ordinary dividends, total capital gains, qualified dividends, non-taxable distributions, federal income tax withheld, foreign taxes paid, and foreign source income from investments held by fund companies. 1099-DIV
1099-INT Form 1099-INT shows interest income from the previous tax year such as that paid from savings accounts, interest-bearing checking accounts, and US Savings bonds. The form is issued by banks, brokerage firms, and other financial institutions. 1099-INT
1099-G 1099-G is the “Certain Government Payments” form. It’s used to report unemployment compensation, state or local income tax refunds, credits, offsets, reemployment trade adjustment assistance (RTAA) payments, taxable grants, and/or agricultural payments. 1099-G
SSA-1099 The SSA-1099 reports any social security benefits earned, including retirement benefits, disability benefits, and survivor benefits. Depending on a variety of factors, social security benefits may or may not be taxable. There are two variants of the SSA-1099: the SSA-1099-R-OP1 and the SSA-1099-SM. These forms are handled exactly like an SSA-1099. SSA-1099
1098-T Form 1098-T is known as the “Tuition Statement.” It is used to determine potential education credits, tuition and fee deductions, and other benefits for qualified tuition expenses. This form enables credits like The Lifetime Learning Credit, the American Opportunity Credit, and others. 1098-T
1098-E This form is known as the “Student Loan Interest Statement.” Like the name implies, this form displays the amount of interest paid on student loans during the previous tax year. These interest payments are often deductible from your federal tax return, which can lower the amount of taxable income you’re liable for. 1098-E
1095-A Form 1095-A is the “Health Insurance Marketplace Statement.” If you purchased health insurance through one of the Health Care Exchanges, you will receive one of these forms showing the necessary information for you to obtain the Premium Tax Credit, a benefit introduced with the Affordable Care Act to offset the cost of healthcare. 1095-A

TSD Income Tax Calculator

To help you cut through all the tax talk and figure out what you owe, The Simple Dollar has built a simple income tax calculator to help you figure out your bottom line.

To use it, simply select your state of residence and tell us what your gross income is for the year. Next, select whether you’ll be choosing a standard deduction or itemizing. Finally, tell us whether you’re married, and if so, whether you’re filing separately or jointly. If you’re filing jointly, we’ll also need to know your spouse’s gross income.

Once you input that info, you’ll be able to see our estimates for what you’ll owe in federal income tax, state income tax (if applicable), and your expected take-home earnings.




Tax Credits and How to Save Money on Your Return

The purpose of filing your taxes is to reduce the amount of taxable income you’re liable for. You can reduce your taxes by investing in retirement savings accounts, contributing to health savings accounts, using tax credits, and itemizing.

Retirement Savings Accounts
A retirement savings account is similar to a traditional, Roth, or Simple IRA. Contributions to these plans are often tax deductible, although the amount is based on your filing status and your MAGI.

Health Savings Accounts and Flexible Spending Accounts
Health savings accounts (HSAs) and flexible spending accounts (FSAs) are both set up via employers. Employees can contribute a portion of their income to these accounts before taxes are deducted (pre-tax) resulting in significant income tax savings. HSAs roll over into the next year if the contributions are not used, unlike FSAs.

Itemizing
If you have a particularly high number of expenses, you can often itemize deductions and receive more than if you had taken the standard deduction. This is useful for self-employed individuals who spend thousands each year on transportation, office expenses, and more.

Tax Deductions Versus Tax Credits

There are a few basic differences between tax credits and tax deductions. Tax credits provide a dollar-for dollar reduction of your income tax liability. This means that a $1,000 tax credit saves you $1,000 in taxes. On the other hand, tax deductions lower your taxable income and they’re equal to the percentage of your marginal tax bracket. Tax credits, as a rule, are nonrefundable; they reduce your overall liability. However, there are “refundable” tax credits that will get you a tax refund once your liability drops to zero. Tax deductions lower your taxable income as calculated by your marginal tax rate.

Tax Deductions

This is a list of common tax deductions, but it is by no means comprehensive.

  • State sales tax: If you file a form 1040-A and itemize your deductions, you have the option of claiming state and local income taxes or state and local sales taxes as deductions, but not both.
  • Home mortgage interest: If you own your home, you can deduct the amount of interest you paid that year on your mortgage.
  • Refinancing mortgage points: Points paid on a mortgage can be deducted if they meet the criteria laid out by the IRS.
  • Charitable donations: Contributions to qualified charities can be deducted in the year they are made.
  • Income taxes paid: If you itemize, you can deduct state and local income taxes made during that year.
  • Real estate taxes paid: Real estate taxes paid to the tax authority can be deducted from your taxes owed.
  • Medical and dental expenses: If you itemize, you may be able to deduct medical and dental expenses paid for yourself, your spouse, and any dependents. These include but are not limited to payments made to doctors, payments for insulin, and payments for insurance premiums.
  • Ad valorem tax: In states that have an ad valorem tax on a vehicle, this tax can be deducted from itemized returns.
  • Reinvested dividends: While reinvested dividends aren’t technically a “deduction,” they are a subtraction that reduces the amount of capital gain you make during the year and can lower the amount of taxable income you have.
  • Student loan interest paid by parents: Parents whose MAGI is less than $75,000 ($155,000 for those married filing jointly) can deduct up to $2,500 from interest paid on a qualified student loan.
  • Moving expenses: Eligible moving costs can be deducted. These include travel, lodging, and gas expenses that meet the specified criteria.

Tax Credits

Tax credits reduce the amount you owe. Like the deductions above, this is a list of the most credits, but not a complete one.

American Opportunity Credit

The American Opportunity Credit is an education credit available to a parent or spouse of a student. If no one claims the student as a dependent, then the student can claim the credit for themselves.

Who is eligible?
A student must be pursuing a degree, have no felony convictions, have been enrolled for at least one academic term, and must not have previously claimed the AOTC credit to be eligible. To gain full credit, the student’s MAGI must be under $80,000 if filing single or $160,000 if married filing joint.

What qualifies?
The AOTC is one of the more beneficial credits because it allows taxpayers to claim all of the first $2,000 in qualified education expenses per year, per student. It also allows taxpayers to claim 25% of the next $2,000 education expenses per year, per student. It’s also up to 40% refundable after your tax liability reaches zero.

How to apply
To apply for the American Opportunity Credit, you will need to fill out Form 8863, titled “Education Credits.” You’ll need a copy of your Form 1098-T, as well as a list of all qualifying education expenses, to properly fill out Form 8863.

Lifetime Learning Credit

The Lifetime Learning Credit is an education credit available to a parent or spouse of a student. If no one claims the student as a dependent, then the student can claim the credit for themselves.

Who is eligible?
Anyone taking courses at an eligible institution to improve their job skills, obtain a degree, and is enrolled for at least a single academic period is eligible for the Lifetime Learning Credit. However, if you claim the Lifetime Learning Credit, then you cannot claim the American Opportunity Credit. For full credit, your MAGI must be below $52,000 if filing single or below $104,000 if married filing joint.

What qualifies?
The Lifetime Learning Credit allows you to claim 20% of your first $10,000 in qualified education expenses. Unlike the American Opportunity Credit, it’s not refundable; once your tax liability reaches zero, the credit no longer has any benefit.

How to apply
To apply for the Lifetime Learning Credit, you will need to fill out Form 8863, titled “Education Credits.” You’ll need a copy of your Form 1098-T, as well as a list of all qualifying education expenses, to properly fill out Form 8863.

Earned Income Credit

The Earned Income Credit, commonly abbreviated as the EIC, is a credit available to low to mid-income working individuals, especially those with children. Also, there are other stringent requirements to qualify for the EIC: you must not have any foreign investments, you must have earned at least $1, and your tax year investment income must be below $3,400.

Your income and AGI must be below:

Filing Status Number of Qualifying Dependents Claimed
Zero One Two Three or more
Single $14,880 $39,296 $44,648 $47,955
Married filing jointly $20,430 $44,846 $50,198 $53,505

Child Tax Credit

The Child Tax Credit was designed to offset the cost of raising children. In order to qualify for this credit, you must have a dependent who is under the age of 16 on December 31 and is a United States citizen. The child must be related to you. Also, the dependent must have lived with you for half the year (183 nights) and not provided more than half of their own support. The Child Tax Credit can be worth as much as $1,000 per child. It is refundable if you have earned more than $3,000, but is not refundable if your earnings place you above the 15% tax bracket.

Child and Dependent Care Credit

If you paid someone to take care of your child while you were at work or school, you might be eligible for the child and dependent care credit. This credit is available to all those who earned income (or are disabled and unable to work), have a qualifying dependent, and paid someone to provide care for a qualifying person. This credit can be worth anywhere from 20% to 35% of the amount you paid for care expenses. If your income is below $15,000, then you qualify for the full 35%.

Saver’s Tax Credit

The Saver’s Tax Credit, otherwise known as the Retirement Savings Contributions Credit, is a special break created for low to mid-income individuals saving for retirement. If you qualify, you can claim 50%, 20%, or 10$ of the first $2,000 you put into a qualifying retirement account. You cannot be a full-time student or be claimed as a dependent on someone else’s return, and you must make below $61,500 AGI if married filing joint.

Energy and Appliance Tax Credits

If you have made improvements that make your home more environmentally friendly and energy efficient, then you may qualify for a tax credit on the cost of those upgrades. Homeowners can receive a credit equal to 30% of the cost of qualified energy-efficient improvements such as solar electric systems and water heaters, wind energy equipment, and geothermal heat pumps. Additionally, homeowners that make smaller qualifying improvements, including items such as windows, doors, roofs, and even some appliances, can receive a credit of 10% of the cost up to a maximum lifetime limit of $500. Those hoping to utilize these credits should get written certification from the manufacturer stating that their product qualifies for a tax credit. This information may be found on the company’s website or on the product’s packaging and should be kept with your tax records.

Tax-Free Tuition Savings Plans

Tax-free tuition plans are a way for people to save money for future education expenses. In most cases, distributions from these savings plans are tax-free. These earnings can also continue to grow without being taxed if used for qualified expenses.

Qualified Tuition Program
Qualified Tuition Programs (QTPs) are sometimes called Section 529 plans. These programs allow contributors to prepay education expenses, or to place money into an account that will be used to pay for education in the future. While there are no tax benefits for contributing, any money placed in the account will continue to grow tax-free. QTP earnings are not taxable, unless the funds are used for non-qualified education expenses.

Coverdell Education Savings Account
The Coverdell Education Savings Account (ESA) is a trust fund. Each account is paid out to a beneficiary. In most cases, the beneficiary must be under 18; however, those with special needs may also qualify. Contributions to an ESA are not tax deductible, and you cannot contribute more than $2,000 per year. Distributions are tax-free unless used for non-qualifying expenses.

Education Exception to Additional Tax on Early IRA Distributions
In most cases, you can’t withdraw funds from an IRA before the maturation date without an additional 10% penalty. However, for certain qualified education expenses, this penalty may be waived—but all normal taxes for IRA withdrawals will still apply.

Education Savings Bond Programs
You may be able to exclude interest from Series EE and Series I bonds issued after 1989 if you use these for qualified education expenses. This benefit can only be claimed fully by taxpayers with a MAGI of less than $77,2000 if filing single, or $115,750 if married filing joint. To claim this, you would fill out IRS Form 8815: “Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1889.”

Scholarships

Scholarship funds used for qualified education expenses are usually considered tax-exempt, but only if they meet eligibility requirements. The amount received must be less than or equal to a student’s qualified education expenses, the scholarship must not be designated for non-qualified expenses like room and board, and it must not be a repayment for services such as teaching.

Scholarships granted for the purposes of research, travel, room and board, clerical help, or equipment are not tax-free.

Other Potential Tax Breaks for Students

If you’re a student, there are numerous potential tax breaks you may be eligible for. Remember that tax breaks are often like scholarships: many go unclaimed simply because people don’t know they exist.

Student Loan Cancellation
Student loan cancellation normally counts as income; however, if your loan contains a provisional clause that the debt will be canceled if you meet certain conditions, it may not be taxable. The loan must be a qualified loan from a qualified lender used to attend an eligible educational institution.

Refinanced Loans
A refinanced loan may be a tax break if it is made from a qualified educational institution or tax-exempt organization in order to encourage students to work in a specific area. For a refinanced loan to qualify, the one receiving the loan must be provided services for a governmental unit or a tax-exempt 501(c)(3).

Student Loan Repayment Assistance
According to the IRS, loan repayment assistance granted by the National Health Services Corps Loan Repayment Program is tax-free.

Potential Military and Veteran Tax Breaks

Tax law is heavily based on the state a person resides in. Because military personnel often live all over the country at different points in the year, their tax situations can be particularly tricky and complicated.

ROTC
The ROTC program sometimes grants education and subsistence allowances for students enrolled in the program. These allowances are exclusions and are therefore not taxable on your income tax return.

VA Education Benefits
Veterans Affairs benefits provided for things such as subsistence, training, and education are tax-free. However, there may be limits to how far this benefit extends.

Service Academy Cadets
If a cadet or midshipman at a military service academy is paid, this is generally considered personal income and is therefore not tax-exempt. However, certain circumstances may make payment for services exempt.

Potential Homeowner Tax Breaks

Home Mortgage Interest
If you took out a mortgage to finance your home, some of those associated monthly expenses of can be deductible if you decide to itemize your deductions. Typically, any interest payments on a mortgage for a main or second home are deductible as long as the mortgage balance is below $1 million (or $500,000 if married filing separately) and was strictly used to buy, build, or make improvements.

Real Estate Taxes
Homeowners must often pay annual taxes to local and state governments on the value of their property. The real estate taxes are deductible if the tax is applied uniformly throughout the community and the proceeds go toward general community or governmental purposes. Participating owners in a cooperative apartment may also be eligible to deduct their portion of the corporation’s real estate taxes.

Mortgage Insurance Premiums
Mortgage insurance premiums paid or accrued on a mortgage issued after 2006 may qualify for inclusion as itemized deductions. Mortgage insurance premiums associated with funds provided through the Department of Veterans Affairs, the Federal Housing Administration, the Rural Housing Service, or qualified private providers are all eligible for deduction.

Advice on Tax Preparation

Filing your taxes doesn’t have to be a nightmare. Despite the forms, deadlines, and endless numbers, tax preparation can be a rather simple process if you approach it the right way.

Guard Against Tax Identity Theft
Tax identity theft (often called tax fraud) has increased in recent years. Thieves will take your name, your social security number, and your date of birth and use them to file a tax return in your name. When you file your own return, the IRS will kick it back to you—and leave you with a long, lengthy process to correct the situation.

Criminals can get this information from wallets, internet phishing schemes, even misplaced hospital bills. You can take steps to lower your risk. Shred bills when you are finished with them, only browse trustworthy websites, and never enter your personal information online unless you are using a reputable site.

Choose a Tax Company With Year-Round Access
Ask yourself: what would you do if audited? Many professional tax preparers offer assistance in handling the IRS in these situation. H&R Block, for example, sells additional “Peace of Mind” insurance which means all you have to do is turn over your audit letter to them and the company will handle it. Tax companies that close at the end of the tax season are unable to provide services like this, as audit letters often arrive in the weeks following the April 15 deadline.

What to Do in Case of Audit
The first thing to remember is that audits are not always a negative thing. You might be audited as the result of a random screening or because something on your return was filed the wrong way. Audits may be performed via mail or through an in-person interview; all contact information and related materials will be in the initial letter you receive.

There are a few steps to take:

  1. Determine why you are being audited: Did you make a mistake on your math? Did you claim too many donations? Did you forget to include a form? The audit letter will usually inform you of the reason you’re being audited. Once you determine the reason the IRS is investigating your return, you’ll be able to address the situation.
  2. Gather all relevant documents related to the audit in one place: Collect all of your tax forms together, including any W2s, 1099s, or other forms you have received. It may also be a good idea to collect your previous years’ tax returns to prove consistency.
  1. Maintain courtesy and politeness in your responses: Treat an audit like a speeding ticket; if you are courteous and quick with your responses, the process will go much more smoothly.

DIY Taxes Vs Hiring a Professional
Hiring a professional to do your taxes can be an expensive endeavor, so many people would prefer to handle it themselves. However, you should ask yourself a few things first. Are you comfortable with your tax situation? Do you understand the laws enough to apply them, and are you okay researching tax law if you find something you don’t understand?

If you aren’t comfortable researching tax law, the idea of working with numbers and calculations scare you, or the entire concept of deductions and credits seems like black magic, you might be better off hiring a professional. On the other hand, if you don’t mind numbers and tax law holds some interest for you, then do it yourself—but be sure to double and triple check your calculations before submitting.

Asking for an Extension
It’s possible to file your taxes after April 15. Filing Form 4868 will allow you to extend your filing deadline to October 15. However, estimated tax payments are still due April 15. Even if you file later in the year, you must still include a payment with your estimated total taxes by April 15 in order to avoid late penalties from the IRS.

The Most Popular Tax Software

The market for professional tax preparation software is dominated by three main names: TurboTax, H&R Block, and TaxAct.

For more information, check out The Simple Dollar’s article The Best Tax Software of 2017.

TurboTax
TurboTax is one of the most well-known names in the game. The software guarantees the maximum possible tax refund, walks you through how to prepare your tax return, keeps you informed of the latest tax laws, and much more. The basic version of the software is $39.99, but prices can range as high as $109.99 for the self-employed version of TurboTax.

H&R Block
While H&R Block is better known for their professional tax preparation services, the company also offers software that do-it-yourselfers can use to prepare their tax returns. The software includes free unlimited advice from a tax professional, free in-person audit support, a money-back guarantee, and more. Prices start at $29.95 for the basic tax software and go as high as $89.95 for small business tax software.

TaxAct
TaxAct differs from the other two on this list in that it provides its most basic software for free. People filing 1040EZ or 1040A forms can use the software for free. People who itemize or have more complex returns can purchase the software for $27, while self-employed individuals and small business owners must pay $37 to use the software. The other difference with TaxAct is that the entire process is performed online; you don’t have to download the software, but this also means the cost is a one-time payment that you must make each year you use the program.

20 Tax Terms You Need to Know

It can be tough to understand your taxes if you don’t understand the terminology. Here are 20 basic tax terms you should know. All quoted definitions come from Investopedia.

  1. Adjusted gross income: Adjusted gross income (AGI) is defined as “a measure of income calculated from your gross income and used to determine how much of your income is taxable.”
  2. Basis: Basis, or cost basis, is the original cost of property adjusted for factors like depreciation.
  3. Capital gains: Capital gains are defined as “an increase in the value of a capital asset that gives it a higher worth than the purchase price.”
  4. Charitable contribution: Charitable contributions can be defined as “gifts made by an individual or organization to a nonprofit organization, charity, or private foundation.” Charitable contributions can take the form of cash or property.
  5. Defined benefit plan: A defined benefit plan “is a retirement plan that an employer sponsors, where employee benefits are computed using a formula that considers factors, such as length of employment and salary history.”
  6. Defined contribution plan: A defined contribution plan “is a retirement plan in which a certain amount of percentage of money is set aside each year by a company for the benefit of each of its employees.”
  7. Dependent: A dependent is defined as “an individual whom a taxpayer can claim for credits and/or exemptions.”
  8. Exempt from withholding: If you are exempt from withholding, “your employer will not withhold federal income tax from your wages.” What this means in practice is that you will need to make voluntary quarterly payments to avoid penalties during tax season.
  9. Exemption: An exemption is “a deduction allowed by law to reduce the amount of income that would otherwise be taxed.”
  10. Filing status: Your filing status is “a category that defines the type of tax return form an individual will use.” As stated above, there are five filing statuses based on your marital status: single, married filing jointly, married filing separate, head of household, and qualifying widow(er) with child.
  11. Gross income: Your gross income is your “total personal income before accounting for taxes or deductions.”
  12. Itemized deduction: Itemized deductions are claimed in place of the standard deduction. These are eligible expenses which a taxpayer can claim on federal income tax returns which reduce their total amount of taxable income.
  13. Interest: Interest is defined as “the charge for the privilege of borrowing money, typically expressed as an annual percentage rate.” Taxpayers also earn interest from specific accounts which financial institutions will use to generate revenue.
  14. Progressive taxation: Progressive taxation is a tax structure that “takes a larger percentage from high-income earners than it does from low-income individuals.”
  15. Refund: Your tax refund is the “payment from a state or federal government for an individual’s overpaid taxes.”
  16. Standard deduction: The standard deduction is the “base amount of income that is not subject to tax and can be used to reduce a taxpayer’s AGI.”
  17. Taxable income: Taxable income is “the amount of income used to calculate an individual’s income tax due.”
  18. Tax credit: Tax credits are “amounts of money a taxpayer is able to subtract from taxes owed to the government.”
  19. Voluntary compliance: Voluntary compliance is the “principle that taxpayers will comply with tax laws and…accurately report their income and deductions honestly.”
  20. Withholding: Your withholding is the amount of your wages that are not included in your paycheck because it goes automatically to federal, state, and local tax authorities.

About this resource:

Created on: February 26, 2017

Updated on: March 24, 2017