Federal Income Taxes
What is an income tax?
Anyone who collects wages or earns money through investments and other income-producing vehicles must pay federal income taxes. Taxes on wages are typically paid throughout the year through payroll withholding. Depending on your situation, you may receive a refund or owe the IRS.
SIDEBAR: Not all income is taxed in the same way. For example, capital gains are taxed differently than income earned on money in a regular savings account.
What is meant by "withholding"?
Employers are responsible for paying payroll taxes from their employees' wages, which include Social Security taxes. Payroll taxes are paid by "withholding" a sum of money from each employee's paycheck depending on her salary level and the number of dependants the employee claims. Payroll taxes keep a steady stream of revenue coming into the federal government. Additionally, withholding reduces the taxpayer's awareness of how much she is paying in federal income taxes, since the taxes are paid out gradually.
TIP: To calculate how much you should have withheld from your paycheck, use the IRS withholding calculator located on the IRS Web site at: www.irs.gov/individuals/article/0,,id=96196,00.html
What is a 1040?
The federal government keeps track of an individual's income and any taxes owed through tax returns know as a 1040, Form 1040, U.S. Individual Income Tax Return. There are different varieties of 1040s depending on your income. The tax return is often accompanied by "schedules" – special forms filled out by the taxpayer detailing certain items on the tax return, such as business expenses.
Who has to pay federal income taxes?
Any citizen or resident of the United States who earns money during the year, including minors, is subject to income taxes. This applies to aliens (noncitizens) living in the United States.
Who has to file a federal tax return?
Any citizen or resident of the United States earning a certain amount of income during the tax year must file a tax return. For single filers, for example, anyone earning more than $7950 in 2004 had to file a return.
How do I know which form to fill out?
Typically, individuals or couples who do not have children, have an income less than $100,000 and are not itemizing deductions can use the 1040EZ form. Families and persons who itemize must file a longer version of the Form 1040.
SIDEBAR: Taxpayers with income less than $100,000 that comes from wages only use Form 1040A. If you are receiving any income from sources other than employment, you must use Form 1040.
Do children have to pay taxes?
Yes. Laws do not exempt you from owing taxes because of your age. However, if the child's earned income was less than $4,850 (for the 2004 tax year), he does not have to file a return. If the child is less than 14 years of age, the income may be included in the parents' income on the parents' tax return.
Is there one rate of taxation?
No. Tax rates are set by law according to income earned and reported on a taxpayer's tax return. For every income level a certain percentage of those earnings must be paid to the federal government. This is a "progressive rate" of taxation. The basic rate is reduced by lowering or "adjusting" the taxpayer's gross income through a series of deductions and exemptions.