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Cultural Competency Lesson #3: Is Our Tax Code a Foreign Language To Everyone?

Updated on February 26, 2014

The Basic Language of Taxes - Scientia Potentia Est

With all the computer programs out there to do your taxes for you, I know what you are thinking: why should I have to worry about knowing basic tax language? The answer is that the tax code and laws change every year. Some deductions expire, while others continue or increase. Understanding the basic terms, so that when these changes come about, you are informed, rather than confused, can sometimes mean the difference between a sizable refund and owing money to the government. And, referring back to my former job where I taught these terms to immigrants and refugees, the teachers admitted that they learned just as much as the students did!

There are eight levels of Language Acquisition (Bloom, 1956), and while those of you who are reading this are probably American, I found that teaching at the most basic level was beneficial to everyone, because the most basic level achieves the greatest level of understanding for us all. So let's get to it and learn some tax vocabulary!

Tax Vocabulary - Did You Know........?

Sales Tax - While you might already know that a sales tax is an added cost when buying goods and services, what you might not realize is that even in states where there is no sales tax (NH, AK, DE, MT, and OR), we STILL pay tax on prepared foods in the grocery store. So, if you like the bagged salad and pre-grilled chicken and ribs that grocery stores offer, rethink your menu if you don't like being taxed. Also, if you buy less than a 1/2-dozen bagels, they are taxed at the same take-out rate that they would be if you went to a fast-food restaurant and ordered one as a to-go item. (I TOLD you there is something for us all to learn!)

Federal, State, and City Personal Income Tax - There are currently 9 states where there is no state tax (AK, FL, NV, SD, TX, WA, NH, WY and TN) and if you live in or work in a metropolitan area, you also pay a city income tax.

Withholding, Your Pay Stub, and Form W-4 - Withholding is the amount of money taken from your paycheck each pay period, so that at the end of the tax year (April 15 - April 15), the amount of deductions should equal what you owe in taxes.

Checking your pay stub will ensure that the correct amount is taken out each month. And, if you don't check your pay stub, start doing so (most of us just look at how much the check is and if you're in the majority - self included - it is spent before you get the stub - right?). There was a mistake on my paycheck when I began teaching these courses - that's right - I was teaching tax literacy under the IRS umbrella and while writing this curriculum, decided to practice what I preach and check my own paycheck stub. I had always just discarded it in the past! Good thing I did about three weeks after starting the job, because where it says Federal Income Tax, the amount deducted was $0.00!

Form W-4 is key to making sure that the amount taken out of your paycheck neither exceeds nor goes under the amount you owe. Filling it out improperly could cause you to either have to write an additional check to the Federal Government or get a refund. While the latter may sound nice, it is not exactly in your best interest.


Formula For Filling Out Form W-4

On the first day of your job, do you remember being handed a W-4 and instructions (that might as well be Wingdings)? And, do you remember not really knowing what numbers to put?

Secret to the W-4: The higher the number of dependents, the less will be taken out of your paycheck. So, for example, if you are married and have two children and you claim 10 to have the minimum taken out so you get more disposable income, then on your pay stub, it will show the amount taken out. For every number of dependents, there is a living allowance, which is how the amount is calculated to be taken out of your paycheck. Conversely, if you are married with two children, but claim 0 dependents, then the max will be taken out of your paycheck, which may trigger a refund.

To ensure better accuracy so you don't overpay or underpay, when you get your paycheck, calculate the amount of taxes you owe dividing that number by the number of paychecks. (It will also depend on how your filing status is, which will be covered in the next article in this series.) This will determine whether you need to contact your Human Resources department to change your W-4. You can change your W-4 anytime on an unlimited basis throughout the year. Key to this trick, however, is also to remember to not have too little taken out, because there might be penalties assessed if, on April 15th, you cannot pay any excess in full.

Refund Bad, Credit Good - Why?

Refund - If, at the end of the tax year, you have had too much of your own money taken out of your paycheck, then you get a tax refund. This is your money coming back to you, which is why you don't really want a refund. Why should you give more than you should to someone to hold your money when you could use it for an investment or accrue your own interest in a bank account or CD?

Credit - A tax credit, on the other hand, is money from programs of the federal government - free money coming to you that is not taxable income next year. Let's hear it for credits - give me a C, give me an R...........! The following table shows some of the tax credits.


So, the next time you hear a friend brag that he or she is getting a big tax refund this year, you can do two things, actually three: (1) suggest he read this tax literacy article, (2) think of how uninformed he is that the government had his money for a year and he didn't, and (3) laugh, because you now know better - all the way to the bank!


Next Lesson: Cultural Competency: The Difference Your Filing Status Can Make


Earned Income Tax Credit

MARITAL STATUS
# OF CHILDREN
INCOME LESS THAN:
MAXIMUM EITC
Married/Single
3 or more children
$51,567/$46,227
$ 6,044
Married/Single
2 children
$48,378/$43,038
5,372
Married/Single
1 child
$43,210/$37,870
3,250
Married/Single
0 children
$19,680/$14,340
487
1. You must file Married Filing Jointly to claim the EITC for Married status. 2. If you did not know about EITC, YOU MAY BE ELIGIBLE 3 YEARS BACK (and can file a 1040X Amended tax return to claim the money).

CHILD TAX CREDIT - Up to $1,000 for each Qualifying child*

FILING STATUS
INCOME LESS THAN:
Married Filing Jointly
$110,000
Single Head of Household or Widowed
75,000
Married Filing Separately
55,000
*A qualifying child is any child under the age of 17 who has lived with you for at least 6 months of the tax year. *A qualifying child is also a child at any age who is disabled. *For other qualifying child definitions, contact your tax preparer.

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    chopinmewsy 3 years ago

    I found this article extremely helpful because I'd like to do my own taxes.

    Thanks Drfil!

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