Taxes: Part I
What should I know about taxes? – Julia O. ’22, economics major
Great question, Julia. Previous Money Matters columns discussed tax forms when a person starts employment and taxes on stock gains. I encourage you to read those articles if those tax topics interest you. This column will address two tax issues that are relevant for college students like you: filling out a Form W-4 and the basics of how to file your taxes. We will have additional columns in the future on taxes as it’s a broad category and cannot be totally covered in one article.
What I am going to go over is for educational purposes and is not tax advice. No one should solely use the information in this article to file, or to decide not to file, their federal, state or local taxes. Each person’s individual circumstances are different and will determine that person’s tax liability. Please consult with a professional tax advisor before filing.
Before a person starts a new job, they will be asked to complete a Form W-4, which tells the employer how much money they should hold back from each paycheck for federal income taxes. The money the employer “withholds” is sent to the IRS as a down payment on the taxes you are expected to owe when you file next year.
The top part (Step 1) of the Form W-4 includes your personal information. Students who are single will file in the “Single or Married Filing Separately” category. Step 2 of the form is designed to “adjust amount” withheld if the person has multiple jobs. Students who do not have any dependents will put in $0 for Step 3 and leave Step 4 blank (no additional withholding).
Students who did not owe federal income taxes last year and expect to owe no taxes in the current year (i.e., will make less than $12,500 this year) may be able to state they are exempt from federal income tax on the Form W-4 by writing “Exempt” underneath line 4(c) on the form (see the General Instructions for further details). If this is your situation, it’s beneficial to be exempt, as your employer will not withhold any taxes from your paycheck and you won’t have to file next year to get the money back that would have been withheld otherwise.
There used to be a simplified form of the 1040 U.S. Individual Income Tax Return form. But unfortunately, it no longer exists. Therefore, if you need to file in 2020, you will need to file the federal Form 1040 and a state tax form as well. The form is long and difficult to fill out by yourself. The good news is that the IRS has a “Free File” offer for those who make less than $72,000 per year.
Even with the free software option, it would help if you fill out your taxes for the first time with someone who has filed their taxes before. I always try to get all of the tax forms I need before I start. This will include the Form W-2 from your employers (a listing of what you earned and the tax withheld, which is usually available around Feb. 1 of the following year) and Form 1099 from any institution you earned interest income, dividend income or had a gain or loss on a sale of an asset. Once you have that information, the filing exercise is much easier.
