Taxes 101

1. Taxes 101 John Barrick Chad Coons

2. Quotable • The hardest thing to understand in the world is the income tax. • -- Albert Einstein • The trick is to stop thinking of it as 'your' money. • -- Revenue Auditor

3. Topics • Forms • Filing Status • Personal Exemptions • Standard or Itemized Deductions • Self-Employment Issues • Multi-State Issues • Earned Income Credit • Child Credit • Educational Credits/Issues

4. Forms • Taxsites.com • Some version of Form 1040 (federal) • Utah • Any other states where you worked that have an income tax

5. Filing Status • If married on the LAST day of the year. • MFJ (married filing joint) rates • If spouse incomes very similar, single rates generate lower tax • If spouse incomes dissimilar, married rates generate lower tax. • MFJ rates apply to Surviving Spouse • widow or widower with a dependent child for 2 more years after death of spouse. • MFS (married filing separately) rates are less favorable. Typically used by separated spouses.

6. Filing Status - Unmarried • An unmarried individual not a surviving spouse may file as head of household if they maintain principal residence for a child or other dependent family member. • Single is the default category for unmarried individuals (neither surviving spouse nor head of household).

7. Exemptions • Personal exemption for the taxpayer (2 for MFJ). • You cannot claim yourself if someone is claiming you. • Exemption = $3,000 in 2002 for each personal or dependency exemption.

8. Tests for Dependency Exemptions • Family member OR live in your home for entire year. • You provide > 1/2 financial support • Dependent’s gross income < exemption amount ($3000) • waived for child < 19 OR student-child<24 • Dependent may not generally file a joint return. • Dependent must be a U.S. citizen OR a resident of US, Mexico, Can

9. Deductions • You may take the larger of the following: • Standard Deduction • Easier and more likely • Itemized Deductions • Charitable contributions • Mortgage interest • State taxes • Medical Expenses

10. Standard Deduction • Depends on filing status. For 2002: • MFJ = $7,850 • MFS = $3,925 • HOH = $6,900 • Single = $4,700 • Blind or aged (>=age 65) • MJF, MFS = additional $900 • HOH or Single = additional $1,150

11. Self-Employment Issues • You need to fill out a Schedule C for each separate trade or business • You report the net income here • Income (1099) less expenses • Self-employment taxes • Be prepared for bad news

12. Expenses • What can I deduct? • Travel • Mileage or actual vehicle expenses • Standard rate is 36.5 cents per mile • You should have written proof • Expenses while away from home • Meals (limited to 50%) • Other expenses • Copies, Advertising, Rent, Wages

13. Multi-State Issues • Have you earned income in more than one state? • Are you a resident of a state other than Utah and earned money in Utah? • States without personal income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming). • You will file as a “resident” in one state and a “non-resident” in the other. • You need to apportion your income between states to avoid paying state income tax twice.

14. Continued • Different states do this in different ways. • You should do your non-resident form first. • Most non-resident states only tax you on the income earned within that state. • You need to determine your other state liability if any (not the amount you paid in withholding) • Your resident state will likely tax all of your income and give you a credit for tax paid to another state. • Typically, you end up paying taxes at least as high as your resident state.

15. SE Taxes • This is the bad news • 15.3% of net self-employment income • Note you are paying the employer and employee portion of the tax • You also get a deduction for ½ of tax on Page 1 of your Form 1040 (but remember that the deduction is only saving you a fraction of the whole dollar you are paying).