Taxes 101

| April 19, 2011

Hurray it’s Tax  Season – Refund! Show me the money! I have been waiting for so long to reclaim the hundreds that have been pulled from every pay check from all three jobs. This year is different. For the first time I have had to owe taxes to the IRS. This has essentially altered my view on several things, and needless to say I am very very ANGRY! Having had the experience of being both an F1 student and a privileged green card holder this year I have decided to share some fun facts about Taxes.  I look forward to your comments:

What is income tax ? Income tax is a tax (a monetary value) levied on individuals for the purpose of funding federal systems such as health care, education, transportation, infrastructure etc. It is often collected as a pay-as-you-earn basis with supposedly a few amendments made at the end of the tax year. However, this is not always accurate as you will learn to see.

Who needs to file taxes ? Everybody and anybody that enjoys the fruit of income through beneficiary employment :) Employment though has its layers of subjectivity and can range from working for a boss, being an entrepreneur or being a full time student slogging through school on federal grants.

Do international students need to file taxes ? (I.e. on F1 status) The Department of Homeland Security defines this category as students as ‘non immigrant students’ and lays out the following criteria:

“Nonimmigrant students that have any of the following types of income need to file a special form 1040NR or 1040NR-EZ:

  • A scholarship or fellowship, which is not partially or totally a Tax Free Scholarship or Fellowship as defined by the IRS
  • Income partially or totally exempt from tax under the terms of a tax treaty; and/or
  • Any other income, which is taxable under the Internal Revenue Code.”

What does any of this mean? Simply this means if you earn any money while in the U.S. even a scholarship, you may need to file a return. In order to file you need a special tax forms 1040NR and 1040NR-EZ. Usually, taxes are usually withheld from wages, which means you don’t owe the government anything instead you qualify for a refund. The only time filing income tax can be daunting is if you owe the government money – which can happen if you do not fill out your W4 accurately or don’t pay attention to your pay stubs , which I will discuss in the next question.

What is the W4 , how can I ensure that I do not owe the government taxes ? The amount withheld from your pay is determined by two things: how much you make and the information you provide your employer on Form W-4. W4 primarily determine your exemptions which means withholding allowances you want to claim. The more allowances, the less tax withheld. Therefore, in the section that requests your itemized deductions it is key that you sick to small values of 1 and 0 for effective refund results. Also, do not claim dependents if you do not actually have someone dependent on you !

Helpful Hints : I also found the following that might be helpful to know how to ensure a refund when filing taxes.

  • Student Loan Interest – You may be able to deduct up to $2,500 of interest payments on a qualified student loan.
  • Work-Related Education – You may be able to deduct the cost of qualifying work-related education as a business expense if you were not reimbursed by your employer or if the cost exceeded your reimbursement.
  • American Opportunity Credit/Hope Credit – The American Opportunity Credit is an expanded version of the Hope Credit for 2009 and 2010.  Depending on your eligibility requirements, you could be entitled to a credit of up to $2,500 per student on expenses paid for tuition and related fees.
  • Lifetime Learning Credit – You may be able to claim a Lifetime Learning Credit of up to $2,000 per return for qualified education expenses, regardless of hours enrolled or length of enrollment.

Benjamin Franklin is quoted as saying “in this world nothing is certain but death and taxes.” and I am beginning to believe this very much.