Income Taxes

A government imposed direct tax on income or profits paid by taxpayers:
Income tax = tax rate X taxable income 

New Tax Laws for 2020 Explained! (2020 Tax Reform) 2020 Federal Income Tax Rules 

6 Steps to Calculate Your Income Taxes

Step 1. Compile income
Step 2. Subtract exemptions (living expenses)
Step 3. Subtract deductions (standard or itemized)
Step 4. Determine taxable income
Step 5. Subtract tax credits
Step 6. Use Tax tables to figure tax

Employers are required to gather specific information for the IRS when an employee starts a job by filling out IRS Form W-4

  • Contact Information
  • Social Security # (taxpayer ID)
  • Filing Status
  • Allowances Claimed

Determines which tax return form an individual will use and is an important factor in computing taxable income
Five Filing Statuses

  1. Single
  2. Married, Filing Jointly
  3. Married, Filing Separately
  4. Head of Household
  5. Qualifying Widow(er) with Dependent Child

All income received in the form of money, goods, property, and services that is not exempt from tax.

Net vs. Gross (Income, Pay/Salary, etc.) in One Minute: Definition/Difference, Explanation, Examples

Money employers withhold from employees’ paychecks

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Specific deductions that reduce gross income to arrive at adjusted gross income

An individual’s gross income minus specific pre-tax deductions

Example AGI

Monetary exemptions (living expenses) from taxable income depending on filing status and how many dependents claim.

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A monetary reduction in income, resulting from expenses incurred during the tax year, which are used to decrease taxable income

Standard Deductions
A single, fixed deduction based on filing status and tied to inflation, so the amounts vary yearly

Itemized Deductions
A list of individual items/expenses that may add up to a greater amount than the standard deduction

Itemizing vs Standard Deduction – The Rules Have Changed! Mark J Kohler | CPA | Attorney

The amount upon which the IRS levies an income tax

taxable income = AGI – personal exemptions – standard/itemized deductions

Amount of money taxpayers may subtract that reduces the actual amount of tax owed

Five Biggest Tax Credits for Which You Might Qualify:

  1. Earned Income Tax Credit
  2. American Opportunity Tax Credit
  3. Lifetime Learning Credit
  4. Child and Dependent Care Credit
  5. Savers Tax Credit

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A range of income that is taxed at a specific rate (each tax bracket has a different tax rate)
Tax Rate

A range of income that is taxed at a specific rate (each tax bracket has a different tax rate)
Tax Table

A chart that displays the amount of tax due based on income received and filing status

How to Calculate Your Federal Income Tax Liability | Personal Finance Series

Completing a tax return form and submitting it to the Internal Revenue Service (IRS)

Federal Tax Forms

  • IRS Form W-2 
    If you are a worker earning a salary or wage; A report summarizing your annual earnings and taxes deducted or “withheld,” from your pay by your employer
  • IRS Form 1099-MISC
    If you are an independent contractor or self-employed you should receive a Form 1099-MISC from each business client that pays you at least $600 during the tax year
  • You are still required to report all of your income even if you do not receive a 1099-MISC
    IRS Form 1040
    IRS tax form used for filing personal federal income tax returns; it calculates the total taxable income of the taxpayer and determines how much is to be paid to or refunded by the government

January 31
Deadline for employers and businesses to mail W-2 and 1099 Forms to employees

April 15
Filing deadline for previous year’s income tax returns

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Money returned by the government to taxpayers when total taxes paid are greater than total taxes due.

Taxpayers must pay income tax due without waiting for an assessment or face penalties

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The IRS may assess penalties to taxpayers for:

  • Failing to file a tax return
  • Failing to pay taxes owed by the deadline

Eight Facts on Late Filing and Late Payment Penalties