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Follow-Up Corner
In our December 2011 Issue "Mystification of the Tax Season", we spoke about why everyone may not be entitled to a tax refund and why they shouldn't always expect a tax refund from Uncle Sam during the tax season. Our main goal was to bring awareness to the average taxpayer about how the tax system works. Since then, XNE Financial Advising, LLC has prepared tax returns for approximately 23 new clients in January. The average Federal Refund for these 23 individuals equaled $3,294.00 and the average fee charged was $82.00 to e-file their Federal & State Returns (inexpensive, we know). |
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HE/SHE THAT UNDERSTANDS THE TAX BASICS ALWAYS WIN
During the tax season, you may hear individuals state they are very surprise that they ended up owing taxes or why their refund wasn't as large as it was a year ago. The biggest derivative of these changes will take place for an individual when fluctuations of income occur or disqualification of various credits. In this article, we will go over some basics about taxes without jumping into all the various credits, adjustments to income, itemizations, and phase-outs. We believe the two most important aspects of one's tax return are their FILING STATUS and number of EXEMPTIONS.
FILING STATUS is determined in large part by the person's marital status on the last day of the year. People who get married during the year will be considered married for the whole year for tax calculation purposes. Currently, there are five filing statuses, Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) w/ dependent child. The selection of which filing status is so imperative because it helps determine a person's tax bracket (and therefore the amount he or she must pay into taxes) as well a reduction in their taxable income. For 2011 tax period, the amount of deduction for each filing status can be found below:
- Single $5,800.00
- Head of Household $8,500.00
- Married Filing Jointly $11,600.00
- Married Filing Separately $5,800.00
- Qualifying Widow(er) $11,600.00
Taxpayers are entitled to claim a personal EXEMPTION for themselves and any dependents they support. The personal exemption acts just like another tax deduction because it reduces the taxpayers' taxable income, so you end up paying taxes on less income then reported on your W2s or 1099s. For 2011, the exemption amount is worth $3,700.00.
Now that we've covered the two most important aspects of tax filing, we can personally see how it will affect a taxpayer during the tax season before they visit a tax professional. For demonstration purposes, we'll assume a 10% tax rate in each scenario.
Taxpayer A makes $35,000.00 and files Single; Taxpayer B makes $35,000.00 and files Head of Household with one dependent:
Taxpayer A:
$35,000 Taxable Income
- $5,800 Single Deduction
$29,200 Taxable Income
- $3,700 Exemptions (taxpayer)
$25,500 Taxable Income
A 10% Tax Rate will show a $2,550 Taxes Due
Taxpayer B:
$35,000 Taxable Income
- $8,500 Head of Household Deduction
$26,500 Taxable Income
- $7,400 Exemptions (taxpayer and dependent)
$19,100 Taxable Income
A 10% Tax Rate will show a $1,910 Taxes Due
Taxpayer B is required to pay $640.00 less than Taxpayer A simply because of their FILING STATUS and EXEMPTIONS. How about if Taxpayer B has three dependents?
Taxpayer B:
$35,000 Taxable Income
- $8,500 Head of Household Deduction
$26,500 Taxable Income
-$14,800 Exemptions (taxpayer and 3 dependents)
$11,700 Taxable Income
A 10% Tax Rate will show a $1,170 Taxes Due
Taxpayer B now has a much smaller amount of taxes due. Now, why don't you plug in your numbers and see how much you should've possibly paid into taxes for this year. Once you figure that out, take a look at your W2 to see how much you paid into Federal Income Taxes for the year. If the amount of your W2 is less than your calculation you may owe and if the amount on your W2 is much more than your calculation then you will likely receive a refund for the difference.
For those that aren't able to self-complete their taxes or feel as though they may be missing out on some credits and deductions then feel free to reach out to us. We charge less than the National and Regional averages and we don't get paid until you receive your refund direct deposited. We're also an IRS Authorize E-file Provider so you will get the same benefits at the retail store-fronts with us for cheaper and less time consuming (ability to stay home if you don't want to come out). |
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See Our Tax Season Video
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