Income Taxes
I
IS YOUR ANNUAL STRUGGLE with
Who Must File
a federal income tax return something you If you are under 65 years of age and your income exceeds these
levels in 2007, you must file a federal tax return:
put off for as long as possible?
Do you cut corners to make the filing
deadline? If so, you’ve made a costly
mistake. A little time and effort can pay
handsome dividends. This publication
will help you spot tax overpayments and
• $17,500 for married couples,
• $11,250 for a head of household, and
• $ 8,750 for a single individual.
Some people will want to file a return even though they
don’t owe taxes. If you had taxes withheld or are eligible for a
refundable tax credit, you’ll want to file.
learn to take advantage of tax-saving
strategies. It is not a substitute for an
Filing Status and Tax Rates
up-to-date tax guide. Current tax
Your filing status determines what rate will be applied to your
taxable income.
Table 1 shows the tax rates that apply to income under the
most common filing statuses. Income is taxed at a different rate
depending on the filing status. Take a 2007 taxable income of
$30,000, for example. Under the single individual status, the tax
would be $4,109. Under the head of household status, the tax
would be $169 less.
The following information will help you
figure out your filing status.
rules and figures are used throughout.
Keep informed about yearly changes in
the tax law and seek competent advice
when needed.
What determines marital status?
For tax purposes, you’re considered married if
the state you live in recognizes your marriage
on December 31. You’re considered single for
tax purposes if you are divorced or legally
separated on December 31. Ordinarily, it
is to a married couple’s advantage to
file a joint federal return although
there is an option of filing separately.
PM 1455 Revised April 2007
Income Taxes
Taxable Income
Table 1
Over
2007 Federal Income Tax Rates
$
0
7,825
31,850
77,100
160,850
349,700
$
$
0
15,650
63,700
128,500
195,850
349,700
$
0
11,200
42,650
110,100
178,350
349,700
Single Individuals
Married
Filing Jointly or Qualifying Widow(er)
Heads of Household
But Not Over
7,825
31,850
77,100
160,850
349,700
—
Pay
+% on Excess*
Of the
Amount Over
$
0
782.50
4,386.25
15,698.75
39,148.75
101,469.25
10%
15%
25%
28%
33%
35%
$
$ 15,650
63,700
128,500
195,850
349,700
—
$
0
1,565.00
8,772.50
24,972.50
43,830.50
94,601.00
10%
15%
25%
28%
33%
35%
$
$ 11,200
42,650
110,100
178,350
349,700
—
$
10%
15%
25%
28%
33%
35%
$
0
1,120.00
5,837.50
22,700.00
41,810.00
98,355.50
0
7,825
31,850
77,100
160,850
349,700
0
15,650
63,700
128,500
195,850
349,700
0
11,200
42,650
110,100
178,350
349,700
* The amount by which the taxpayer’s taxable income exceeds the lower figure in the
tax bracket.
When does an unmarried person qualify as a head of household?
If you are not married you may qualify as a head of household. You
must have maintained a home that served, for more than one-half
of the year, as the principal residence of a dependent—typically your
child, grandchild, or step-child.
Taxing Income
Not all the money your family receives will be taxed. For example, you
do not have to pay income taxes on child support, gifts, inheritances,
or life insurance proceeds.
Of course, earnings from an employer are taxable. Other examples
of taxed income are income from rental property or a business you
own, and profits on investments you sell (capital gains).
Allowance for Exemptions
Dependents—generally your children—
provide exemptions.
Each taxpayer is entitled to one personal exemption. If you file a joint
return with your spouse, each gets a personal exemption.
In addition to a personal exemption, each of your dependents
is worth another exemption. Check the guidelines for claiming a
dependent that accompany your federal income tax form. The allowance for each exemption is $3,400 in 2007.
Income Taxes
Adjusted Gross Income
Some expenses can be subtracted from your gross income to determine
adjusted gross income. Examples are
• Individual Retirement Account (IRA) deductions
• Alimony (by the person who pays it)
• Payments to retirement plans by self-employed people.
Deductions
There are two options for taking deductions: (1) take the standard
deduction or (2) itemize deductions if the total exceeds the standard
deduction. The 2007 standard deduction amount is based on your
filing status: $10,700 for a married couple filing jointly; $5,350 for a
single person; or $7,850 for a head of household.
You’ll find it to your advantage to keep
records of itemized deductions if you
have a home mortgage, had large medical
bills, made large charitable contributions,
paid significant state income or property
taxes, or suffered a major uninsured
casualty loss.
After your tax bill is figured, you
may be eligible for valuable credits
(a dollar-for-dollar reduction in the
amount of taxes due).
Tax Credits
After your tax bill is figured, you may be eligible for valuable credits.
Credits are a dollar-for-dollar reduction in the amount of taxes due.
Some tax credits currently available are
• A refundable earned income credit for certain lower-income
workers. In 2007, married workers living with one child and
having earned income less than $35,241 could get a credit up to
$2,853. A credit up to $4,716 is available for workers living with
two or more children and earning less than $39,783. Workers
between the ages of 25 and 64 with no children and who earned
income less than $14,590 could get a credit of up to $428.
• Child care expenses while you are employed or seeking employment. A percentage of work-related expenses for care of a child
under 13 or a dependent or spouse who is physically or mentally
unable to care for himself or herself may be taken as a tax credit.
The maximum credit for one dependent is $1,050 and $2,100 for
two or more dependents.
• A child tax credit of up to $1,000 per child under age 17. The
credit is phased out for higher income families.
• Saver’s tax credit for certain workers who make voluntary contributions to a variety of retirement plans. The maximum credit is
$1,000. The credit is phased out for higher-income families.
M
Misha earned $25,000 in 2006 and is raising one child under age 17. Instead
of owing the IRS $1,094, she is eligible for tax credits that give her a refund
of $1,021.
• 2006 income
• Tax
• Child credit
$25,000
$1,094
$1,000
• Earned income credit
• Refund
$1,115
$1,021
Income Taxes
Talk Where
abouttoMoney
Get Help Worksheet
with Tax Returns
Recording incidental expenses in a pocket
diary or notebook is a great way to record
deductible expenses. For example, long
distance calls or travel expenses on behalf
of a charity may not seem too important.
But at the end of the year, the grand totals
of these “incidentals” can be sizable
enough to reduce your tax bill.
Local Volunteer Income Tax
Assistance (VITA) programs
can help you prepare your tax
return and often can file returns
electronically at no charge.
For more information, visit
www.extension.iastate.edu/finances or
www.extension.org/personal+finance or
the Iowa State University Extension office
in your county.
File: Economics 3-9
If you have questions about your income taxes, the help you need
will depend on the complexity of your tax situation. First, read the
mini-tax guide that comes with your return in the mail. It will get
you acquainted with all the recent changes in the tax law. The IRS
(www.irs.gov) also has an all-purpose reference called “Your Federal
Income Tax,” publication 17, plus many other free pamphlets.
If your tax situation is more complex, you may want to pay for
professional help. The advice and suggestions you receive may save
you time, trouble, and money. As a general rule, choose a firm that
has been open for business year-round. The tax preparer should
be willing to tell you how the return was prepared and explain
the procedure if you are audited. If eligible for a refund, avoid the
temptation of refund anticipation loans. These “instant refunds” are
actually expensive loans that carry very high loan fees. Instead, file
your return electronically (E-file) and have your refund directly deposited in your bank account. Local Volunteer Income Tax Assistance
(VITA) programs can help you prepare your tax return
and often can file returns electronically at no charge. For the nearest
VITA site in Iowa, call 2-1-1.
Other rules of warning when dealing with a tax preparer are:
• Never comply with a request to sign a blank tax return.
• Don’t deal with a preparer who guarantees a refund.
• Don’t deal with a preparer who suggests under-reporting your
income or “creating” deductions.
• Make sure the tax preparer signs the forms and gives you a copy
of your return.
Prepared by Cynthia Needles Fletcher, professor and extension specialist, Department of
Human Development and Family Studies, and Laura Sternweis, extension communication specialist.
Designed by Mary K. Sailer, Spring Valley Studio.
. . . and justice for all
The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of
race, color, national origin, gender, religion, age, disability, political beliefs, sexual orientation, and marital or family
status. (Not all prohibited bases apply to all programs.) Many materials can be made available in alternative formats
for ADA clients. To file a complaint of discrimination, write USDA, Office of Civil Rights, Room 326-W, Whitten
Building, 14th and Independence Avenue, SW, Washington, DC 20250-9410 or call 202-720-5964.
Issued in furtherance of Cooperative Extension work, Acts of May 8 and June 30, 1914, in cooperation with the U.S.
Department of Agriculture. Jack M. Payne, director, Cooperative Extension Service, Iowa State University of Science and
Technology, Ames, Iowa.