Accounting and Finance Foundations

Unit 9

Accounting and Finance Foundations Unit 9: Taxes 704

Taxes

Chapter 21

Student Guide

Employers deduct money for federal income taxes from each worker’s pay. This deduction is called a

withholding tax. The amount withheld is an estimate of the taxes due to the federal government at the end

of the year. The government tracks these tax payments through the employee’s social security number.

In Chapter 19, you learned about W-4 forms. Each new employee must fill out a W–4 to determine her/his

filing status and the amount of federal tax to withhold. Once these new employees begin getting paid, the

amount of taxes deducted from their paychecks is tracked. At the end of the year, the employee receives a

statement detailing the amount of taxes withheld throughout the year and the total amount of gross earnings.

This statement is called a W–2.

To determine if you are due a refund or if you owe more in taxes, you must take your W-2

(and other tax documents, in some instances), and complete a tax return.

There are three basic federal tax forms:

1) 1040

2) 1040A

3) 1040EZ

Most young people qualify to use the simplest of the three, which is the 1040EZ. The qualifications for

using the 1040EZ are:

• You are single or married filing jointly.


• You don’t have any dependents (people you support financially).


• You are under age 65.


• You are not blind.


• You earned less than $100,000.


• You earned $1,500 or less in interest.


• Your income came from wages, salaries, interest, tips, scholarships, fellowship grants, and/or
  unemployment compensation.

If you do not qualify to use a 1040EZ, your next step should be the 1040A. Your taxable income must still

be less than $100,000, but that income can come from more different sources than for the 1040EZ. People

of all ages can use the 1040A, even if they have dependents. And, you can earn more than $1,500 in inter-

est and still use the 1040A. However, you are limited in terms of the types of deductions and/or credits that

you take.

If neither the 1040EZ nor 1040A will work for you, you’ll need to use the 1040 form. The 1040 is used

when you earn more than $100,000 and/or want to itemize (individually list) all of your many deductions

(expenses that you are permitted to subtract from income). In short, the 1040 is a good choice if your

financial life is more complicated.

Some major sections of every 1040 tax form are gross income, adjusted gross income, taxable income,

deductions, and exemptions.

Lesson 21.1 Reading Tax Documents