Basic basic: Federal and state income taxes are withheld from your paycheck during the year based on an estimate of how much tax you owe. The amount withheld is determined when you fill out a W4. When you file taxes, you calculate how much you actually owe and whether you paid too much or too little. If it's way extreme in either direction, you might want to adjust your W4 with your employer.
What is an exemption?
Each exemption represents a person. If you are filing single, bam, you have one exemption, move on.
What is a deduction?
A deduction is an amount that gets subtracted from your taxable income.
Then what is a standard deduction?
Turns out that the IRS lets everyone take a deduction! This is the standard deduction. If you are single, your standard 2010 deduction is $5,700. If I made $30,000 last year, I would subtract $5,700 and my taxable income would be reduced to $24,300.
What are itemized deductions?
Taxpayers should itemize when their total deductions are greater than the standard deduction, i.e. a single taxpayer gave more than $5,700 to charity. Other deductions include uninsured medical expenses, mortgage interest payments, theft, etc. Most people don't need to itemize.
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Do I have to file?
If you are single and your income was at least $9,350, then you are required to file. If you made less than that, you might want to file anyway because you may get refundable tax credits.
What is the difference between a refundable credit and a nonrefundable credit?
If you owe $1,000 in taxes and you get a $2,000 nonrefundable credit, you will not get money refunded to you. Nonrefundable credits can only reduce your taxes owed to $0, they can't go below that to give you money back. Most credits are nonrefundable. Refundable credits, like the Earned Income Tax Credit, can give you money back.
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Ok I'm ready. How do I actually DO my taxes?
- You need to have all of your W2s from any employers you worked for in 2010. If you had any interest income from savings accounts etc, you need a form 1099 for each account. If you haven't received forms that you were expecting, track em down. The time grows nigh.
- If you have less than $58,000 of income, you can definitely use Free File. If you have more than $58,000 of income, you can use Free File fillable forms, which might be sort of lame but also might be really easy.
- Fill in your information. Follow directions.
- Don't be a chump: use direct deposit if you get a refund.
If you worked in 2010, you get this random refundable credit, which is 6.2% of your income up to $400 for a single taxpayer. If you're using FreeFile, the software will help you do it. If you're filing on your own, claim it on Schedule M.
If you are paying for tuition or paying back student loans:
Read this page about education credits.
Oh, and don't forget to file state income taxes. They are separate.
