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In order to file your income tax return, you must be certain to choose the correct filing status. Your filing status will determine your income tax rate and standard deduction. Also, it will determine other deductions, credits, and tax exclusions. So, you can see how important it is to choose the correct one.
There are five income tax filing statuses according to the IRS. They are single, head of household, qualifying widow(er), married filing jointly, and married filing separately. Here are some facts regarding the filing status categories you need to take into consideration:
Single . If you are unmarried at year end, you can file as single. This only applies, however, if you do not meet the tests that are involved in determining whether you are head of household or qualifying widow(er). Single filing status is known for paying more taxes than the other filing statuses, in general.
If you are divorced as of year end (and have a FINAL divorce decree or separate maintenance agreement), the IRS will consider you unmarried for the entire year. File as a single taxpayer. However, if you meet the support test (more than 50% of their household costs) for another dependent – you need to file as a HOH.
Head of household (HOH) . To qualify as a HOH, you must pay more than 50% of the household costs for a qualifying dependent living with you. This dependent may be a child or relative. Or, the dependent you pay over 50% of their support may be a parent, whether or not they reside with you.
Qualifying widow(er) . There are four tests you must meet in order to qualify for filing as a qualifying widow(er) on your 2006 income tax return. They are:
Married individuals can choose between two filing statuses. They are: married filing jointly or married filing separately. The topic of marriage provides many rules and stipulations.
Married filing jointly. In order to qualify for the income tax filing status of married filing jointly, you must have been married as of year end. Marriage, according to the IRS, involves a legal union between a man and woman.
When filing married jointly, both you and your spouse must sign your tax return.
If you were separated (with a provisional decree) or living apart from your spouse as of the end of the year, you are considered married. You can file a joint return or claim the filing status of married filing separately. However, if you paid over 50% of the costs associated with a dependent, you can file as an unmarried head of household.
If you are involved in a common law marriage (recognized by the state you reside in) and are living together as of year end, you are considered married by the IRS. Choose either married filing jointly or married filing separately.
For more details of the different income tax filing statuses available, see Publication 17 – Your Federal Income Tax. Here you will learn about the
In order to avoid any IRS penalties, tax deadline due dates must be met. Here is a calendar of income tax filing deadlines for the tax year 2006 to help you with your tax planning.
Estimated tax payments. These tax payments are usually paid on a quarterly basis.
January 16, 2007. If you are paying estimated taxes, this is the due date for whatever estimated taxes (balance due) that remain from the 2005 tax year.
June 15, 2007
October 15, 2007
January 15, 2008
April 16, 2007. This is the due date for filing your 2006 1040, 1040A, or 1040EZ tax returns.
October 15, 2007. If you filed for an extension on your 2006 tax return, this is the due date/deadline for filing your tax return.
December 31, 2007. This is the last day (deadline) for you to open up a KEOGH plan, if you are self-employed.
Not everyone needs to fill an income tax return. Certain tests and income thresholds must be met. These income thresholds are based upon your gross income, and other tests.
Gross income is defined as all the income you received in 2006 (except, of course, those specifically stated as tax exempt). In general, items which are included in gross income include: wages, tips, self-employment income, interest and dividends, capital gains, rental income, pensions and annuities, and trust distributions.
For the gross income filing threshold test, your filing status and gross income come into play in determining whether you need to file a 2006 income tax return. Age requirements are as ‘on or before January 1, 2007'. The breakdown is as follows:
Taxpayers need to file if their gross income is under $8,450 and they are under age 65.
If over age 65 (on or before January 1, 2007), their gross income must be at least $9,700.
Married and living apart at 2006 year end:
Taxpayers need to file a joint or separate return if their 2006 gross income is at least $3,300.
Married, living together at 2006 year end:
If spouses are both under 65, you need to file a joint income tax return if your gross income is at least $16,900.
If one spouse is 65 or older, you must file jointly if gross income is at least $17,900.
If both spouses are 65 or older, file jointly if gross income is at least $18,900.
If both spouses are filing a separate income tax return, gross income must be at least $3,3300 (any age).
Head of Household:
Taxpayers under the age of 65 must file a tax return if gross income is at least $10,850 in 2006.
If 65 or older, taxpayers must file a tax return if their gross income is at least $12,100 in 2006.
Widow(er) in 2004 or 2005, plus have a dependent child If under 65, gross income must be at least $13,600 in 2006.
For those taxpayers 65 or older, gross income must be at least $14,600.
Federal income tax rates depend upon your taxable income and filing status, in general. For instance, tax rates on dividend income differ from capital qualified gains tax rates.
Taxpayers will usually choose their income tax amount from the Tax Rate Schedule or the Tax Table. If your 2006 taxable income is over $100,000 you will use the Tax Rate Schedule. If your taxable income is under $100,000, you will use the Tax Table. Both of these documents are found in the back of the 1040 Instruction booklet, Publication 17.
The IRS has a variety of marginal tax rates that taxpayers are classified into. There is the 10%, 15%, 25%, 28%, 33%, and 35%. To explain the 10% bracket: for every additional dollar you earn (ordinary income) you will be taxed at 10%. It ends at $7,550. The 35% bracket applies if you have over $336,550 while filing jointly or as a qualifying widow(er).
You have filed your 2006 income tax return and find more income or expenses that you should have claimed/reported on your Form 1040. What do you do? You need to file an amended return. You must obtain the paper form and submit it via ‘snail mail' to the IRS. (Be certain to keep a copy for your own records). Filing an amended income tax form cannot be done electronically. Here is some information you need to know about an amended return.
First of all, use Form 1040X– Amended U.S. Individual Income Tax Return. The timeframe for filing an amended return is three years from the date you originally filed your tax return. For instance, to file an amended return for your 2006 tax return, you have until April 15, 2009 to file an amended return.
You can use this form to correct a mistake or to claim a refund on the original income tax return. For instance, if you did not report some income (like when you receive a Form 1099 after your filed your 1040), you claimed deductions or credits you should not have claimed or vice versa. You also need to file an amended return when you need to change your filing status on your original tax return (stipulations apply).
When you complete Form 1040X, you need to have your original tax information available. You need to write in your original income, deductions, and any credits taken on your original tax return. You also will report the changes you are making, and any correct amounts. Finally, figure your new tax based upon these new figures. Include your tax payment, if any, along with your amended return.
An exemption is an amount given to you by the IRS to help ease your tax burden. It is a deduction you are entitled to take. The IRS changes the figure yearly due to inflation adjustments. For the year 2006, each taxpayer is given an exemption of $3,300.
You can claim an exemption for yourself. You also may claim an exemption for any qualifying dependents, generally. There is a separate section on Form 1040 and 1040A for your exemption amount. If you file Form 1040EZ, your exemption is automatically included in your standard deduction amount.
If you claim an exemption for a dependent, that dependent cannot also claim an exemption for themselves on their own income tax return.
Exemption phase-out for 2006 tax year. However, there is an exemption phase-out if your adjusted gross income is more than $112,875 (and you file married separately) in 2006. Also, for single taxpayers the exemption is phased out at $150,500, HOH is $188,150, and married jointly have a phase-out at $225,750 for 2006.
Income tax credits are a way to decrease the amount of your taxable income. Hence, they are a benefit to you since they lower the amount of taxes you need to pay to the IRS. Income tax credits are categorized as: personal,
Personal tax credits. They are considered personal tax credits since they affect you personally.
There are a variety of credits available for you to take, but each one has restrictions (limitations) and/or qualifications you must meet in order to claim them. Some of these personal tax credits are not refundable if the tax credit amount exceeds your tax liability. Others, however, are refundable.
Some of the personal tax credits considered refundable to you include: earned income credit, health coverage credit, and the additional child tax credit. You will receive a refund of the excess amount of the credit over your tax liability.
On the opposite end are the nonrefundable personal tax credits. This category consists of mortgage interest credit, education credits, retirement savings credit, child tax credit (generally), dependent care credit, adoption credit, credit for the elderly and disabled, and D.C. first-time homebuyer credit. These tax credits are allowed to the full extent of your tax liability. After that, they are nonrefundable. There is, of course, an exception and stipulation to the child tax credit.
For instance, the dependent care credit applies to working people who need to pay others for care (“care costs”) of their dependents in order for them to work. Requirements to receive this tax credit include: have earned income, maintained a house for yourself and the qualifying dependent, and pay outside help for care. The credit ranges between 20-35% with a set limit of expenses for 2006 care costs of one dependent.
For a more detailed listing of tax credits available to you, refer to IRS Publication 503 – Child and Dependent Care Expenses. You will also find IRS Form 2441 (Child and Dependent Care Expenses) helpful. Also, in order to claim the dependent care credit you must include their tax identification number on your Form 1040 when filing your tax return.
State income tax forms are filed along with your federal income tax returns. In addition to personal income tax on wages and earnings, states can receive income from the following taxes: cigarettes, excise, personal property, gasoline, inheritance, business (such as worker's compensation, payroll, lottery sales, sales taxes, usage, occupational, etc.), and others. Therefore, it is important to know what your state tax requirements are.
State tax forms can usually be obtained by calling your State's Department of Revenue, or its taxing authority. Also, when businesses start up, they usually receive a start-up package containing tax information such as needed forms, deadlines, and state laws. When a new businessowner obtains a business license, the state becomes aware of the new business and sends out this informational tax packet.
Another way to obtain state income tax forms is by visiting two websites. One website is found at taxadmin.org. This site contains all the states with a breakdown of what state form is available. It also contains listings of states that are involved with the IRS partnership known as Free File Alliance. Taxpayers can easily file both their state and federal income tax returns electronically through this partnership.
The other website belongs to the IRS. This helpful online site contains a link to state tax forms.
You also need to know that the IRS exchanges information with states that have income taxes. This is done routinely. Therefore, if you file an amended federal return, you may want to also file an amended state income tax return. That way you may avoid penalty and interests.
Not all states impose a personal income tax. Either call your local State taxing authority, or visit the above-mentioned website of taxadmin.org for more information.
The IRS offers an excellent tool to help taxpayers find out if they are having the correct amount of tax withholding from their paychecks. Upon using the calculator, taxpayers can adjust the amount of taxes they have withheld from their pay. The calculator is found online via the IRS website. Known as ‘IRS Withholding Calculator', it is a very beneficial tool for taxpayers to use. Plus, it is easy.
It is important to note that whatever information you input while using this online calculator will be discarded after you are done. Also, while you are using this information, you are anonymous. That is comforting to know for those of us concerned about identity theft or unsafe information being transmitted across the Internet.
|Jennifer Mathes, Ph.D.|