Do you have a job? Are you earning money by babysitting, mowing yards, or doing something else (this is called self-employment)? If so, then you need to understand taxes.
Earnings that are taxable include wages (including tips), salaries, self-employment income, investment income, and some scholarships and fellowships. Investment income includes bank account interest and dividends, stock dividends, bond interest, and other similar income.
Federal Income Taxes
The federal income tax is collected on a pay-as-you-go basis. This means that as you earn money, you pay tax on it. It can be paid in 2 ways: withholding or estimated payments.
If you are earning a paycheck, then tax is deducted from your pay. When you started work, you should have filled out a form called Employee's Withholding Allowance Certificate, also known as a W-4. Most students can claim only one allowance. Your employer uses the information on this certificate to determine how much tax to deduct.
One myth about withholding is that because you are a student you are automatically exempt. This is not true. To be exempt from withholding for 2006 you must meet the following requirements:
- You received a refund of all federal income tax withheld for 2005.
- You expect a refund of all federal income tax for 2007.
To receive a refund of all federal income tax...