U.S.

February 1, 2013

Understanding Federal Income Taxes

Capt. Nate Mealy
OIC, Fort Irwin Tax Center NTC and Fort Irwin

Ben Franklin once said that “In this world nothing can be said to be certain, except death and taxes.” Well, it is tax season again and the Fort Irwin Tax Center (building 288 Barstow Road) is here to help you with your filing needs.

The most common ways to file taxes are: (a) as a single individual, (b) as the head of a household, or (c) jointly as a married couple. The following table lists some of the percentages of income owed to the IRS based upon a tax payer’s 2012 income and filing status which can be found at http://www.irs.gov/pub/irs-pdf/i1040tt.pdf.

The IRS taxes “taxable income.” This includes any money that you, your money, or your investments earn, including your salary, tips, bank interest, alimony received, pension, stock sales, or profits from sales of personal property. Many things are not included in taxable income even though you earn them; for example, your BAH, BAS, or VA benefits.

To determine your taxable income, you take the money that you earn or generate and subtract from it various adjustments, exemptions, and deductions. The most common adjustments which reduce taxable income are unreimbursed Reservist expenses, alimony paid, and student loan interest paid. As far as exemptions go, each taxpayer is entitled to personal tax exemptions for himself, a spouse, and any other dependents like children or a disabled relative that he plans to claim. Each personal exemption subtracts $3,800 from a taxpayer’s taxable income. If SFC Smith claims himself, his wife, and their daughter on his tax return and makes a $65,000 salary in 2012, his personal exemptions reduce his taxable income to $53,600.

Turning to deductions, taxpayers may elect either the standard deduction – $5,950 for single filers, $8,700 for heads of households, or $11,900 for married couples – or they can itemize their deductions to reduce taxable income. If your itemized deductions (medical and dental expenses, other taxes paid, interest, gifts to charity, and unreimbursed employee expenses, etc.) add up to more than the standard deduction, then you should itemize. If Sgt. Smith itemizes and learns that he can take deductions upwards of $12,000, then he would apply that amount to the $53,600 and arrive at $41,600 in taxable income.

It is at this point that the IRS would calculate the taxes Sgt. Smith owes using the $41,600 and his filing status of married filing jointly. According to the tax table, he would owe $5,394. To that amount he could then apply credits, or dollar-for-dollar reductions of his tax liability like the child tax credit, retirement savings contribution credits, the earned income credit, or a credit for child and dependent care expenses. If Sgt. Smith had $2,500 in credits, he would now be liable to the IRS for $2,894. If the Army withheld any taxes from Sgt. Smith’s salary over the course of 2012, those withholdings would then be applied to the amount owed. If the withholding is greater than what Sgt. Smith owes, the IRS will send him the amount overpaid. If it is less, then Sgt. Smith would owe the IRS the difference.




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