Tax Basics: A Beginners Guide to Taxes

Congress writes the Internal Revenue Code (IRC), also called the tax code, which directs the collection of taxes, the enforcement of tax rules, and the issuance of tax refunds. The Internal Revenue Service (IRS) is the government agency within the U.S. Department of Treasury that carries out these functions. The IRS interprets the tax laws through their regulations, which provide guidance about how tax laws are applied. The IRS also uses revenue rulings, procedures, and letter rulings to offer guidance. Although the IRS can offer its interpretations the federal courts have the final judgment on the interpretation of the tax code regardless of the IRS's position.

The income, payroll, sales, and real estate taxes from individuals and companies are disbursed by the federal government, according to its budget, to finance programs such as national defense, Social Security, education, national parks, and services such as welfare.

Two types of income are subject to taxation; earned and unearned income. Earned income includes salaries, wages, tips, commissions, bonuses, unemployment benefits, sick pay, and some noncash benefits. Unearned income includes interest, dividends, profits from the sale of assets, business and farm income, rents, royalties, gambling winnings, and alimony. Contributions to a retirement account such as a 401(k) or IRA may reduce a taxpayer's taxable income.

Which Tax Form Should I Use?

Individual taxpayers must use one of three forms to file your return: Form 1040EZ, Form 1040A, or Form 1040. Form 1040EZ is the simplest form to use. In order to use Form 1040EZ the taxpayer must meet all of the following requirements:

• must be filing as single or married filing jointly;
• must be under 65 and not blind;
• must not be claiming dependents;
• must be claiming less than $100,000 in taxable income;
• must be claiming income only from wages, salaries, tips, and a limited number of other kinds of income;
• must not receive any advanced earned income credit payments;
• must not claim any adjustments to income such as IRA and student loan interest deductions;
• must not claim any credits other than earned income credit;
• must not owe any household employment taxes on wages paid to a household employee.

If you do not qualify to use Form1040EZ you may be able to use Form1040A. This form has many of the same restrictions, though it permits a wider array of tax credits. Form1040 is available to report all types of income, deductions, and credits. Form1040 also permits itemized deduction, some adjustments to income, and credits that may be unavailable on Form1040EZ and Form1040A.