It’s tax time! Tonight’s Kossacks Under 35 will provide tax tips for students, student debtors, low income taxpayers, foreign residents, and home owners.
As always, we welcome advice from all Kossacks. The goal of tonight’s diary is to help those of us who are young and perhaps filing our first solo tax returns do the best we can to get a big refund, and avoid the IRS. (That guy over there? He’s Irwin R. Schyster, aka IRS, the former WWF Wrestler. Don’t let him put the Smackdown on you!)
Disclaimer: I am not a tax professional! I am not even trained in anything remotely financial. However, I have been doing my own taxes for 3 years now, and I’ve had to figure most of this out for myself. I am simply sharing what I have learned and researched on the internet. There are plenty of links here to help you see for yourself!
Tax Time. Taxes are due by April 17. (That means either submitted online or postmarked.) I strongly, strongly recommend that you E-file. Nearly all states and municipalities accept E-file. The IRS website allows you to Free File if you made less than $52K. The link also has lists of sites that allow free filing depending on state of residence. I used TaxEngine.com last year, having used a different E-file service the year before, and I found both to be easy and clear. You only have to enter certain information once and the website distributes it as necessary. Best of all, you get your refund very quickly, as a direct deposit if you so choose!
Caution! Make sure you don’t have to submit on paper as well. Last year I split my return between IL and NY, and totally did not realize that I still had to print out a copy of the IL form and submit it. Oops! The website will prepare the paper version for you, so it still kicks ass in that regard. Caution 2.0! The E-file may charge you a nominal fee ($10 - $30) depending on your state of residence. You may be able to avoid this if you simply use the website to prepare the tax return and send it in yourself.
Before you start doing your taxes, make sure you have a copy of your W2 forms from each job you held during the 2006 calendar year. Each job must send you a form. They all should have been mailed by January 31. It will have a copy for you, the Feds, your state, and possibly your city. (Yep, some cities charge you too. Moving from NYC to Austin saves me state and city taxes. A good thing, given my grad student wages.) If you did any freelance work this year, you likely received a W-MISC. You will also need a record from your bank of any interest your savings account racked up – all .0001% of it. If you own stocks or bonds, something should have been sent to you about any dividends. If you have a regular IRA and 401K, you might want to have that information handy as well to cross-check.
Make sure to check with your parents if you are unsure about what might be held in your name. Often, certain securities that your parents may have owned custodially for you revert to you after your 18th birthday. Best to know so you can act accordingly.
The Lingo
Before you start doing your taxes, you need to know the lingo.
- Gross. Gross income is your total income – money, goods, services, property.
- Adjusted Gross Income (AGI). This is what you actually pay taxes on – your gross, minus any deductions (paid interest, IRA contributions, charitable donations).
- Deduction. A deduction is anything that lowers your AGI, for instance, paid student loan interest.
- Credit. A credit will directly lessen how much tax you owe. Let’s say you owe $10,000, but you have a $7,000 tax credit. That would LOWER your overall tax liability, leaving you with $3,000 in owed taxes.
- Head of Household. You are the HOH if you have dependents. Your pets do not count.
- Personal Exemption. Everyone is given a personal exemption of $3,300. You can take it as long as you are not a dependent on someone else’s tax return.
- Standard Deduction. The standard deduction is what is automatically taken away first from your Gross to calculate your AGI. It is $5,150 for single taxpayers, $7,550 for head of household taxpayers, and $10,300 for married taxpayers filing jointly.
Dependent vs. Independent
Unless your parents provide for half of your cost of living expenses, you are an independent. Make sure your parents are not claiming you as a dependent before you start filing. If your parents are claiming you, and you are a student, make sure to check out the resources below for handling tuition and loan interest on your behalf and for your parents. You can save big bucks!!
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) benefits families who earn below a certain threshhold. It credits a significant amount of taxes owed, and if it exceeds what you owe, you get money back. To qualify, you must earn under a certain amount -- $12,120 for unmarried, no-children taxpayers. Here is the chart -- make sure to check it out. The government will give you money for making below this threshhold.
Student Loan Interest
Everyone who is currently paying their student loans will get a hefty tax deduction for the interest paid off during 2006. Your loan holder will send you a Form 1098-E for every loan on which you paid interest. The principle, unfortunately, does not matter. (Double damn!) This is a non-itemized deduction that will reduce your AGI. You can claim up to $2,500 a year in interest expense if your AGI is under $50,000; it starts to decrease as your income increases.
Tuition Credit
If you paid tuition this year for either a degree or job-related training or advancement, you are entitled to a credit for it on your taxes. Your institution of learning must send you a 1098-T form. If you have not received it, first check 1098T.com, then contact your university’s bureaucracy, inefficiency and waiting-on-hold department, ususally the Registrar or Bursar. You will need to file a form 8863 with your taxes to claim your credit. Note that there is also a tuition deduction, below, if you do not want to take or do not qualify for these credits.
There are 2 forms of tuition credits to lower your taxes:
- The Lifetime Learning Credit is available to anyone taking a class for work or earning a degree. You get a percentage of the total amount of tuition paid in 2006 as a credit off of your owed taxes. The rates have not been published yet, but in 2005 it was 20% of the total tuition paid, up to $10,000 in tuition, for a maximum $2,000 credit. If your credit exceeds your taxes owed, you do not get the additional amount refunded to you. But, you will get a refund for any taxes you already paid.
- The Hope Credit will lower your taxes by up to $1,650 per student, for the first two years of undergraduate college.
If you have a dependent who is in college (or you are one for someone else) they can claim credits or deductions on your behalf. If the person filing makes more than the income limits for the Hope or Lifetime Learning Credit, they can deduct part of the tuition from the Gross. Note that there are income limits for these credits.
Hybrid Car Credit!
Did you buy a hybrid? Your sexy, eco-friendly car will also net you a tax credit. Click FuelEconomy.gov to calcuate your credit for your fabulous lean, mean, green machine.
Deductions
Your tax return will assume the standard deduction, unless you specify otherwise. The standard deduction allows $5,150 for single taxpayers, $7,550 for head of household taxpayers, and $10,300 for married taxpayers filing jointly. If you are going to itemize – i.e. list all of the write-offs you think you deserve – then you will need this itemized total to EXCEED that amount in order to end up ahead in the tax game.
- Deductions for Graduate Students. If you are a graduate student who is employed by your university, you can write off all of your related expenses as business expenses if you itemize. (Does anyone have more info on this?)
- Deductions for Tuition-Payers. There are tuition deductions for those who are not claiming education credits.
- Deductions for Homeowners. To take a mortgage interest credit, you need a Mortgage Credit Certificate. Honestly, I don’t know too much about this topic, but you can deduct mortgage interest, and home equity loan interest. Check this link for more info. There are also Energy Credits for Homeowners,
- Deductions for State and Local Income Tax. You can deduct any state and local income taxes that are reported on your W2’s, 1099’s and other income forms. You will need to itemize to take this deduction.
- Deductions for State and Local Sales Tax. If you do not claim State and Local Income Taxes, you can claim Sales Tax instead as an itemized deduction. This is especially important if you bought a "big ticket" item this year like a car. Or a yacht. Because thanks to Bush’s economy, we’re all got a yacht now. You can either add up the sales tax from every receipt that you carefully horded all year, or you can use the IRS’s calculator. Sales Tax Deduction Calculator
- Deductions for Medical Expenses. If you itemize, you can also deduct certain medical expenses. Transportation costs to and from medical services count. Check that link for more information.
- Deductions for Educators. Educators can deduct up to $250 for classroom materials expenses. Click the link to get the appropriate info. You must itemize deductions to get this.
- Deductions for First-Time Job Moves. Job-hunting expenses incurred while looking for your first job are not deductible; but moving expenses to get to that first job are. And you get this write-off even if you don't itemize. If you moved more than 50 miles, you can deduct the cost of getting yourself and your household goods to the new area, including 18 cents a mile (and parking fees and tolls) for driving your own car. Google for more on this.
Capital Gains
If you have capital gains, you will need to declare and pay taxes on them as well. Capital gains are money you make from investment, either dividends or short- or long-term gains when you sell a stock, and sometimes a bond.
- Dividends. If you own a stock that pays dividends (small chunks of change one to four times a year), you will need to pay taxes on it.
- Long-Term Gains. If you sold stock that you owned for a year or more, you owe Long-Term Capital Gains tax. First off, call your broker and try to make him/her figure it out for you. If that isn’t an option, you need to compute purchase price, sale price, etc. Here's a link.
- Short-Term Gains. Seriously, if any Kossack Under 35 somehow got some Short Term gains, email me, because you’re writing a diary on how we can all get rich quick.
Filing an Extension
You have about two months from now to do all of this. You should be able to get it done in time. However, if for some reason you don’t, you will need to file an extension to get an extra six months. Here’s the IRS link.
Americans Living Abroad
If you are a citizen living and working abroad, you can exclude all or part of your foreign earned income. You must live abroad for 330 days of 12 consecutive months to qualify. You will need to attach a Form 2555 to your return to claim your exclusion. Capital gains such as interest and dividends do not qualify.
Foreign Residents
Last but not least, tips for all of our foreign resident friends. If you earn money through any form of employment, you must file a return. If you do not earn any money, you still should file a Form 8843 stating that you are a resident alien. If you work in the U.S. you should file a return to prevent over-paying taxes. Foreign students and scholars can click here for tips. All foreign residents will need to file a Form 8233, the Treaty Exemption form, which should drastically reduce your liability.
Other Resources:
Kiplinger’s 13 Most Overlooked Tax Deductions
Specific Tax Law Changes
Ok, that’s it. And aside from feeling like a total tax geek, I am exhausted. If the whole scholar thing doesn’t work out, at least I can work for H&R Block.
So, let’s talk. If you know of other tips and suggestions I have missed, please state them below and I will add them to this diary.
Updates:
- Charitable deductions can be deducted only if you itemize.
- H&R Block also has a good online file service
- There is a tax credit for your phone! See comments below -- it's accumulated phone taxes for several years. One time only, 2006!
- You can still open an IRA for 2006 and throw some money into it, which will decrease your AGI.