The US Tax System is based on what is called the “Pay As You Go” rule. That means taxes are withheld from each of your paychecks as you earn your salary throughout the year. Your company then periodically remits these withholding taxes to the IRS and the States, on your behalf. Your bank might also withhold Federal Income Tax from the Taxable Interest you earned during the year – if you gave the bank instructions to do that tax withholding. Federal and State tax might also be withheld from any Unemployment Compensation Benefits you received – again if you instructed them to do that tax withholding.
- The (5) tax categories typically withheld from your paycheck are:
- Federal Income Tax
- Social Security Tax
- Medicare Tax
- State Tax
- Local Tax
The Federal Tax withheld, on your behalf throughout the year, is what is shown on line 7 of the form 1040EZ. The Social Security and Medicare taxes withheld from your paycheck, are forwarded to those programs that support current retired citizens who collect Social Security payments, and receive Medicare coverage. You cannot get a refund of the Social Security or Medicare taxes withheld from your paychecks. These are called FICA taxes (Federal Insurance Contributions Act), or Payroll Taxes. Social Security started in the 1930’s, and Medicare began in the 1960’s. Currently you pay a 6.2% Social Security tax, and a 1.45% Medicare tax.
These FICA payments are also noted as associated to your own Social Security account, because once you contribute to these programs for 40-quarters, or 10-years, you qualify for Social Security payments and Medicare coverage upon your retirement. The final cumulative amount of Social Security/Medicare taxes you contributed into the system during your working career – determines the eventual monthly Social Security benefits you will receive upon your retirement.
The State and Local taxes are remitted to your State, if they have an income tax. Here in New York City, we pay State Tax to New York State, and Local Tax to New York City. Seven States currently have no income tax, and Tennessee and New Hampshire only tax interest and dividend income. Not having a State income tax is a big attraction for these States – as a benefit for new residents to move into their State. Florida and Texas in particular have benefited from this status.
The only tax Credit allowed on the form 1040EZ – is the Earned Income Credit, or (EIC) for short. This appears on line 8a of the form 1040EZ. This credit begin in 1975 for lower income taxpayers, as an incentive to encourage work, and to be rewarded for that earned income. It is one of the U.S. Government’s longstanding anti-poverty programs. It has the effect of lowering the tax liability for those taxpayers who qualify for the credit. For the 2016 tax year, the maximum EIC credit that could be taken on the form 1040EZ was $506. A Single person could make up to $14,880 before the credit is phased out, and a Married Filing Jointly couple could make up to $20,430 before they are phased out of the credit. The credit is calculated from the EIC Table. Click the hyperlink form 1040EZ-EIC Table to see in a separate browser window. You can then see the income levels that generate the maximum credit of $506. For instance, a Single taxpayer earns the full $506 credit when their income is between $6,600 and $8,300. The credit for that Single taxpayer is then gradually lowered and totally phases out as their income reaches the top $14,880 threshold.
Line 9 on the form 1040EZ, adds the Federal Income Tax withheld from line 7, and any Earned Income Credit you are entitled to, from line 8a. This sum is your Total Payments and Credits value.
Your yearly Income Tax Liability is calculated by looking up your Taxable Income value in the tax table, for your filing status of Single or Married Filing Jointly. That Income Tax Liability value is then entered on line 10 of the form 1040EZ. Click the hyperlink form 1040EZ-Tax Table to see the Income Tax Liability values for the various Taxable Income levels from $5 to $99,999. Remember your Taxable Income must be below the $100,000 threshold to use the form 1040EZ. The tax software automatically calculates your Income Tax Liability for your Tax Story, based on your Filing Status and Taxable Income value.
Line 11 of the form 1040EZ calculates the additional penalty tax, if you did not have health insurance coverage for all 12-months of the year. The penalty is called the Individual Shared Responsibility Payment, and is a component of the Affordable Care Act. It affects any tax year after and including tax year 2014. The IRS provides form 8965 Health Coverage Exemptions-Instructions which contains worksheets that begin on page 15 to calculate that penalty tax. All tax preparation software includes the worksheets and automatically calculates this penalty, if it applies to your Tax Story.
Line 12 of the form 1040EZ is your Total Tax liability. It adds the Federal Tax liability from line 10, and any line 11 Shared Responsibility Payment.
If your line 9 Total Payments & Credits, is larger than the line 12 Total Tax, then you will receive a tax refund from the IRS. This refund is shown on line 13a of the form 1040EZ. You can instruct the IRS to directly deposit your refund into your checking or savings account, or you can instruct the the IRS to mail you a paper check. You can also split the refund between several accounts using the form 8888 Allocation of Refund. For instance, some can go into your IRA account, some into Savings, and the rest into Checking. You can also use this form 8888 to instruct the IRS to purchase U.S. Savings Bonds with your refund.
If your line 12 Total Tax, is larger than your line 9 Total Payments & Credits, then you owe the IRS a tax payment. This tax owed to the IRS is shown on line 14 of the form 1040EZ. The IRS can directly debit the tax payment from your checking or savings account – up to Tax Day – usually April 15th each year. Or you can mail the IRS a payment voucher and check to pay your tax due, also typically by April 15th each year. All tax software will print the payment voucher for you – if you mail in your payment.
Congratulations! You have now learned most everything you need to know about the form 1040EZ – from if you qualify to use the form – to if you receive a refund or owe taxes.
Blog #4 begins the explanation of the IRS form 1040A. Click the link below to go to that blog post.
The 1040A: Who Can Use this Form?
Feel free to comment on these blog posts, or send me an email at Mike@TaxesAreEasy.com
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Legal Disclaimer: Nothing written or expressed in this Blog shall be construed as legal, accounting, or tax advice. This Blog is for informational purposes only, to inform Individuals about the IRS tax forms required to file an individual tax return, and the instructions that accompany such IRS tax forms.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any tax transaction or filing any tax form.