Understanding Your Income Taxes 101
Posted by TJ on Monday July 23, 2007 @ 04:04 PM
[Tags: taxes, guide, accounting]
Here is how your Taxes work out in a very summarized manner.
This formula should help resolve a couple misconceptions about your income tax including:
Misconception #1 All tax deductions are a direct deduction of my tax liability - This is not the case. Most tax deductions are 'above the line' deductions which means they reduce the amount of income subject to tax. A tax credit only reduces the amount of tax you pay dollar-to-dollar.
Misconception #2 Tax refunds are a good thing - not necessarily. A tax refund is an interest-free loan to the goverment. A tax refund does not reduce the tax you pay during the year it only effects the time you pay it. If you owe money at the end the year, this means, that you did not withhold enough from your paychex during the year, if you get a refund you withheld too much taxes during the year. If you are good with savings, a refund means that you lost out on the interest that refund would of earned had it been in your bank account the whole year.
Disclaimer: Any tax advice included in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.
[Tags: taxes, guide, accounting]
+ Income Earnings from wages, dividends, interest, capital gains - Less: The greater of the Standard or Itemized Deductions Here's where you can deduct Medical, State Income and Property taxes, business expenses, and mortgage interest - Less Dependency Exemptions (in 2006 this was $3,300 per dependant) = Adjusted Gross Income (AGI) X Tax rate = Tax Liability - Less Tax Credits (Foreign tax credit, Child and dependant care expenses, education credit, child tax credit) - Less Withholdings during the year = Total Due (refund) |
This formula should help resolve a couple misconceptions about your income tax including:
Misconception #1 All tax deductions are a direct deduction of my tax liability - This is not the case. Most tax deductions are 'above the line' deductions which means they reduce the amount of income subject to tax. A tax credit only reduces the amount of tax you pay dollar-to-dollar.
Misconception #2 Tax refunds are a good thing - not necessarily. A tax refund is an interest-free loan to the goverment. A tax refund does not reduce the tax you pay during the year it only effects the time you pay it. If you owe money at the end the year, this means, that you did not withhold enough from your paychex during the year, if you get a refund you withheld too much taxes during the year. If you are good with savings, a refund means that you lost out on the interest that refund would of earned had it been in your bank account the whole year.
Disclaimer: Any tax advice included in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.
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Monday December 17, 2012 @ 01:21 PM
This is a quirk in reporting, a unquie situation, but not difficult to properly report.The income from exercise of the stock option is considered employee wages, and as you stated the income is reported just like any other wages on Form W2, with the appropriate withholdings for federal income tax, state income tax, and FICA. You simply report the amounts from the W2 as you otherwise would.The quirk is that the broker is also required to report the sale of the stock. You're dealing with a situation where the income is reported to you twice. You need to report it properly on your tax return to avoid paying tax twice.For example, you're granted a stock option at $6,000 when the value is $10,000. You exercise it. It's treated as if you bought the stock for $6,000 and sold it for $10,000. You have a $4,000 gain. That's reported as wages on Form W2. The $4,000 is included in Box 1 wages that you report on line 7 of Form 1040. The $4,000 amount is also shown in Box 14, Code V.Everything's very simple so far, nothing more to do.Except you're also going to receive a 1099-B from the brokerage company showing a sale of the stock for $10,000. That form is NOT going to show the $6,000 excercise price. If not properly reported, the IRS is going to tag you for an extra $10,000 in stock sales with no basis (the IRS never applies basis to proceeds from stock sales. You're the one who has to indicate gain or loss).All you do is report that $10,000 on Schedule D, Capital Gains and Losses. Then, for cost basis, you report $10,000 (for cost basis rules, the $6,000 is your original cost basis, and the $4,000 you reported as wages is an upward basis adjustment). The amount is reported, the IRS records will match, and the end result is zero gain or loss from the transaction.If you have a tax person who knows what they're doing and they have all the information, what actually happens is you will show a loss on Schedule D in the amount of the brokers fees. If the brokers fee is $50, you would report proceeds of $10,000 and cost basis of $10,050.So, you report W2 as usual, then report a no-gain transaction on Schedule D. Done, and your records will match the IRS.