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In the world of taxes, there are two important piles of money, the "Money You Make" and the "Money They Tax" (taxable income). Filing taxes involves making your "Money They Tax" pile as small as possible using dependents, deductions, and retirement accounts, while avoiding the surest way to shrink the "Money You Make" pile: unemployment.


Before We Dive In

We’re not going to go into every miserable detail of taxes, because, well, the details are miserable. If you wanted miserable, you could have turned on any old Keanu Reeves movie. Plus, many tax laws are very specific to individual cases.

But if you’d like to get a great foundation on taxes that won’t put you to sleep, this topic will set you on the right path.


Your Paycheck

For many people, their first paycheck was a shocker. They weren't expecting to give away 30% of their money to things like Social Security.

Don't get us wrong. Everyone is certainly pro-elderly, especially the Democratic and Republican parties during election years. But once you get your first paycheck, you want to corner every old person you see and start yelling at them, "Give me my money back!" (We love you, Grandma.)

This is where your money is going:

Social Security:
6.2% (you pay this only on roughly your first $100,000 of salary)

Medicare:
1.45%

FICA tax:
Social Security plus Medicare

Federal tax:
Many factors needed to calculate

State tax:
Varies from 0% to 12%

City tax:
Only if you're really lucky


The Two Piles of Money

The money you make is different from the money they tax.

Two important piles of money exist: we'll call them the "Money You Make" and the "Money They Tax" (taxable income). The exercise of filing taxes involves making your "Money They Tax" pile as small as (legally) possible.

These two piles of money exist because Uncle Sam (1) wants us to be a good citizen (buying a home, supporting a charity, etc.) and (2) is compassionate (tax breaks for large medical expenses, kids, etc.)

The really exciting words "dependents, deductions, and retirement accounts" help make your "Money They Tax" pile as small as possible and save you money. These words also get tax accountants really excited.

Dependent:
Someone who depends on you for money (a mouth to feed). This usually means a kid, but a dependent can also mean someone else who lives in your home (your grandpa).

Deduction:
All the other tax breaks (besides a mouth to feed) that Uncle Sam gives away. Since he doesn't know you very well, he'll give everyone a minimum deduction (standard deduction).

If you think you deserve more than the standard deduction, you'll "itemize," or add up all of your good deeds (like charitable giving) and heartache "items" (like medical expenses). If the value of your itemized list (each item has a different value) is more than the standard deduction, you can use this number to make your "Money They Tax" pile smaller.

Retirement accounts:
These go by a number of different names (IRA, 401(k), etc). See our topic on retirement accounts.


Deductions Ideal for Recent Graduates

Student loan interest deduction:
Get a discount for the interest you pay on your student loans. It's a great deal for new graduates by helping your "Money They Tax" pile get smaller. See IRS Publication 970 for more information (IRS.gov).

Moving deduction:
If you move more than 50 miles from your former home (like many new graduates), you can get a tax break (moving deduction) from Uncle Sam for the moving expenses your employer doesn't pick up. (See tax form 3903.)


Forms

W-2 form:
You'll get this form in January or February from your employer. This is your financial report card and describes what you made for the year and how much you paid in taxes. You'll need this to file your taxes.

1040EZ:
This is the easiest form to fill out, but it offers the fewest opportunities to reduce your taxes. You have to meet a bunch of requirements to file this form (no kids/dependents, small income, etc.), but it's often the perfect fit for new graduates.

1040A:
This is the in-between form between the simple 1040EZ and the complicated 1040.

1040:
If you're "itemizing" (making a list of all of your good deeds and problems), selling stocks, or making a lot of money, you'll need to fill out this bad boy in March or April.

You can obtain these forms from by calling 800-TAX-FORM, visiting your local library or post office, or going online at IRS.gov.


Story Time

When Bert first started work, he didn't realize how important the W-2 form was to his well being. He received a copy from his employer in February and lost it by March.

When April rolled around, he realized that he needed this form to file his taxes. So he called up his human resources department and asked for another. Their response was "You, too? What's wrong with you people?"

When Bert returned to work the next day, his cubicle smelled like pea soup, the seat at his desk was missing a wheel, and the keys "W" and "2" were missing from his keyboard.

The following year, when Bert received his W-2 form, he immediately stapled it to his chest. Yes, staples were painful, but they sure beat the smell of pea soup for three long months.