Managing Money March with Our Bridges Resource Library

This month, we dive into MONEY! Once we have money, we need to know how to keep track of it. And, of course, we will need to file taxes. Join us for Managing Money March!

• March 5: Money Management Basics
• March 12: Background Information About Taxes
• March 19: Types of Income and Taxes on Earned Income
• March 26: Doing My Income Taxes

This week, we dive into the nitty-gritty of getting ready to file our income tax returns.

This Transition Tip is NOT Tax Advice!

Please note that no one should take anything in this article as tax advice. This article is SOLELY for information, and any tax needs should be taken to a professional in the field.

Bridges’ Support Always Available

Please remember that we at the Bridges Technical Assistance Center are eager to help you meet your money management – or other — needs.

How Do I Calculate My Income Taxes?

Time period

Each year income tax returns are due on April 15 (sometimes later due to weekends and holidays). These forms relate to the prior year. For example, income tax returns covering 2023 income are due on April 15, 2024.

AGI: Adjusted Gross Income

Adjusted gross income refers to the amount of income subject to federal income tax. It includes all taxable income (discussed in last week’s Transition Tip) and certain “adjustments” to income, including many different deductions (discussed below).

The AGI from your federal tax form (1040) is also the starting place for computing your Maryland income taxes. In other words, you need to determine your federal AGI in order to file your Maryland income tax form.

Deductions from Income

Unlike self-employment expenses, deductions from income usually are not related to getting the income. Instead, deductions are usually provided to help reduce taxes based on certain factors.

Deductions are used to decrease your AGI. When your AGI is lower, you will owe fewer income taxes.

Standard OR itemized deductions

Every full-year U.S. resident federal taxpayer is entitled to a standard deduction. In 2023, a single individual can receive a standard deduction of ($13,850).

Everyone also has the right to take itemized deductions. However, the amount of a person’s itemized deductions is based on actual money spent on certain deductible items. Please contact a tax professional for advice.

Other deductions

There are many, many other possible deductions from income. These deductions (along with a standard or itemized deductions) are subtracted from your total income to determine your AGI. Find out more about deductions in the Internal Revenue Service’s publication, Schedule 1 Form and Instructions document.

Special Maryland tax adjustments

The calculation of Maryland’s income tax starts with the AGI (adjusted gross income) from federal taxes. From that starting point, a taxpayer will make “adjustments” to the federal AGI to determine that person’s Maryland taxable income. Adjustments include both additions and subtractions from the federal AGI, but all of these adjustments will not apply to all taxpayers. Please consult a Maryland tax professional for more information.

Tax Credits

We often hear about deductions and tax credits at the same time. Yet they are very different things.

While deductions reduce taxable income, tax credits reduce the amount of tax owed. Thus, a tax credit is worth more than a deduction of the same amount.

For example:

A person has $100,000 in income and a tax rate of 20%, so this person will owe $20,000 in taxes ($100,000 * 20%) before deductions or credits.

• DEDUCTION of $10,000: that $10,000 tax deduction will save $2,000 in taxes ($10,000 * 20%), so the final tax bill would be $18,000 ($20,000 – $2,000).
• TAX CREDIT of $10,000: that $10,000 tax credit will save $10,000 in taxes, so the final tax bill would be $10,000 ($20,000 – $10,000).

Thus, the individual saves a lot more money with the tax credit than with a deduction from income.

Refundable tax credits

Some tax credits are even refundable. This means that the taxpayer will be able to receive a tax refund that is even greater than the taxes owed. Refundable tax credits are rare, but an important one is the Earned Income Tax Credit.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) helps low-income individuals keep more of the money they earn. While SSI payments do not qualify as “earned income,” individuals who earn income from work and receive SSI may qualify for the EITC.

As noted throughout this article, please consult a tax professional for advice.

Other refundable tax credits

For more information about other refundable tax credits, check out the IRS’s Refundable Tax Credits web page.

Tax Forms

Tax returns

1040

The 1040 is the annual federal tax form.

Individuals who do not have a lot of income might not be REQUIRED to file this form, but it can be a good idea to do so anyway. By filing the form, these individuals might be able to get a refund of some taxes that were withheld from their paychecks, and they might be entitled to even more money from the Earned Income Tax Credit.

• 1040-SR: Optional: Individuals who are 65 years old or older may file this instead of the 1040.
• 1040-NR: Required income tax return for non-residents.

1040X

We all make mistakes. While it’s best to make sure everything is correct before filing, the 1040X form (amended tax return) allows us to correct anything we got wrong the first time.

Maryland income tax forms

Maryland uses quite a few income tax forms. Individuals who have lived in Maryland for all of the relevant tax year file form 502 (and 502B if they have dependents). Find out more about Maryland’s income tax return forms on the state’s Individual Tax Forms and Instructions web page.

Employment Tax Forms

W-2

This is the form an employer will create and send to you. This form contains information about your wages and taxes that the employer has withheld.

1099-MISC

When a person earns money but is not an employee, they should receive a 1099 form stating the amount of money they were paid. However, even if the individual does NOT receive a 1099 form, the earned income is still taxable and should be reported on the annual tax return.

Next TWO Weeks

Join us as we kick off April with reviews of new tax preparation tools from the Internal Revenue Service (IRA)!

Please check out the Bridges Technical Assistance Center Resource Library today!

Contact us

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