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How to Understand Your W-2

W-2 Tax Form
Guide to understand your W-2


Your W-2: How to Understand This Important Tax Form

Throughout January, workers are getting W-2 tax forms from their employers. To help you decipher the often-obscure codes and numbers you’ll find on your form, below we’ve provided a box-by-box description of what you should expect to see on your W-2.

Boxes a-f: Personal and Business Information

Each W-2 includes information about your employer, including its name, address and tax identification number. It will also have your name, address, and Social Security number. It’s important to check this information to ensure accuracy. Because a copy of your W-2 goes to the Social Security Administration to establish your work history and eligibility for Social Security benefits, mistaken Social Security numbers can lead to lower monthly payments in retirement or even denial of benefits entirely.

Box 1: Wages, Tips, and Other Compensation

Box 1 includes the figure that you’ll include on your income tax form as taxable compensation. The number in Box 1 excludes benefits that aren’t subject to tax, such as amounts you have withheld to pay your share of health-insurance premiums or contributions to employer-sponsored retirement plans.

Box 2: Federal Income Tax Withheld

Box 2 shows how much money your employer took out of your paycheck to cover your income tax liability. You’ll include this on your tax return as well, and if it’s larger than what you owe in taxes, then you’ll get a refund for the difference.

Boxes 3 and 4: Social Security Wages and Tax Withheld

Boxes 3 and 4 show how much of your wages were subject to Social Security tax and how much tax your employer actually took out of your paycheck. This wage amount can differ from what’s in Box 1 because many items that are deductible for income-tax purposes aren’t exempt from Social Security tax. For instance, you still have to pay Social Security taxes on 401(k) and other employer-plan contributions. Also, if you earn more than the maximum amount on which Social Security charges payroll taxes — $117,000 for 2014 — then Box 3 will be capped at that amount.

Boxes 5 and 6: Medicare Wages and Tips and Tax Withheld

Similarly, Boxes 5 and 6 show the same calculations for Medicare taxation. The primary difference here is that there’s no upper limit on income subject to Medicare taxes, so the Box 5 figure will be higher than Box 3 for high-income earners.

Boxes 7 and 8: Social Security Tips and Allocated Tips

For those who work in jobs with substantial tip income, Box 7 will show what tips you reported to your employer. They’re already included in Box 1, so no additional work is necessary on your part. But if you have an entry in Box 8, your employer likely didn’t report enough tip income for you and other employees. As a result, you’ll have to add this amount to your taxable income in Box 1 and also file Form 4137 to report and pay additional payroll taxes on your tip income.

Box 9: Nothing to See Here

One oddity you’ll notice is that your W-2 skips over Box 9. This area was once used to reflect any advance payments of Earned Income Tax Credits your employer made to you. Under current law, though, employers no longer make such payments, and so many W-2s simply have a blank area of the form where Box 9 used to be.

Box 10: Dependent Care Benefits

Those who get financial assistance for caring for children or other dependents will have the amount received in Box 10. You’ll need this number to help calculate your Child and Dependent Care Tax Credit properly, as well as the amount you paid out of your own pocket for care.

Box 11: Non-qualified Plans

Some employees receive money from non-qualified deferred compensation plans, and for most employees, any amount here will already included in Box 1. But if your employer contributes to such a plan for services in prior years, it will be included here and in Boxes 3 and 5 but not necessarily in Box 1. Moreover, government employees who participate in Section 457 plans might have amounts here that won’t be included elsewhere on the W-2.

Box 12: Catchall Area

Your employer can put several items in Box 12. An explanation of each code is on the back of your W-2, and you can also find a list of codes on page 27 of these IRS instructions. Essentially, though, things you find here will give you information about the particular compensation or benefits you received, and in many cases, you’ll need these numbers elsewhere in your tax return to account properly for certain items.

Box 13: For Certain Workers

In Box 13, certain workers will have the boxes marked if they are statutory employees, participate in a company-sponsored retirement plan or receive sick pay from someone other than your employer. This information can determine eligibility for certain tax benefits, and it can also help the IRS identify individuals who would otherwise be treated as independent contractors.

Box 14: Other

This box is available for any other information an employer needs to give employees, such as union dues, payments for educational assistance, or taxes withheld for state disability insurance.

Boxes 15-20: State and Local Tax Information

Finally, Boxes 15 to 20 provide information that state and local tax authorities need to determine what you owe in state and local taxes. Income amounts will appear in Boxes 16 and 18, and any taxes you have withheld will appear in Boxes 17 and 19. You’ll want to use those figures in preparing your state or local returns.

3 Ways to Beat IRS Budget Cuts

Help for Federal Income Tax
3 ways to beat IRS Budget Cuts and make tax prep easier

3 Ways to Beat IRS Budget Cuts and Make Tax Prep Easier


The Internal Revenue Service is warning taxpayers that 2015 could be a tough year to get the tax help you need. IRS Commissioner John Koskinen recently pointed to budget cuts for the federal tax agency that could result in operational shutdowns and furloughs, poor telephone customer service, and delays in return processing and refund payments. National Taxpayer Advocate Nina Olson characterized the cutbacks as telling “millions of taxpayers who seek help each year, in essence, ‘We’re sorry. You’re on your own.'”

Yet just because the IRS won’t necessarily be the perfect resource to get the tax help you need doesn’t mean that you have to go without assistance entirely. For many taxpayers, other sources of help in tax preparation can give you a much better experience.

Let’s take a look at three ways to bypass the IRS to get high-quality help.

1. Get Free Help from Volunteer Income Tax Assistance

T he Volunteer Income Tax Assistance program offers help in preparing and electronically filing tax returns. If you have a disability, are elderly, have limited understanding of the English language or make $53,000 or less in income, then you can typically qualify to participate in VITA. Volunteers are IRS-certified to be able to provide basic help and tax-return preparation, and at many locations, you can get help with more difficult issues. Find a local location via this IRS website:  http://irs.treasury.gov/freetaxprep/ or by calling 800-906-9887.

To participate, bring photo ID along with your Social Security number, date of birth, copies of your previous year’s tax returns,and any W-2s showing your work income and 1099s or other forms showing interest and dividends or other types of income. To take advantage of direct deposit options, you’ll also want to have your bank account and routing numbers handy.

2. 60 or Older? Get Free Help Tailored to Your Needs

The Tax Counseling for the Elderly program is designed to provide free tax help with an emphasis toward serving people who are 60 or older. TCE volunteers tend to be retired themselves and are IRS-certified to offer help on questions about pensions, retirement-account distributions and other retirement-related issues that those over 60 most commonly face.

The majority of TCE sites are administered by the AARP Foundation’s Tax-Aide program, which has operated for more than 45 years and helped nearly 50 million taxpayers nationwide. To find an AARP-administered site, go to this AARP website: http://www.aarp.org/applications/VMISLocator/searchTaxAideLocations.action or call 888-227-7669. You can also use the same IRS links and phone number listed above for the VITA program to find a list of TCE sites as well.

3. Use IRS Free File

The Free File program is a partnership between the IRS and various private companies that make software for tax preparation. Free File offers two different services depending on your income. If you made $60,000 or less in adjusted gross income in 2014, then you qualify for complete tax-preparation services for free. With your choice of several preparation programs, you’ll get guidance throughout the preparation and filing process, with electronic filing at no extra charge. For those who make more than $60,000, tax preparation software isn’t free, but you can still use the program’s fillable forms, which will help you by automatically doing the math for the figures you enter.

The documents you’ll need for Free File are similar to those for VITA and TCE, but the benefit is that you can use your own computer without leaving your home. For more information, check out the IRS Free File website: http://freefile.irs.gov/

The 5 Most Popular Tax Deductions

Income Tax Deductions
The 5 Most Popular Tax Deductions

The 5 Most Popular Tax Deductions: Do You Qualify for Them


Just less than one in three taxpayers claim itemized deductions on their tax returns, with the vast majority choosing instead simply to take the standard deduction, according to the latest available IRS figures, from the 2012 tax year. Yet that still means that more than 46 million returns include itemized-deduction statements, and the figures reveal the several key deductions that more Americans rely on than any other tax breaks available. Let’s take a look at the five most popular tax deductions and whether you can qualify for them.

5. Tax Preparation Fees

More than 21.7 million taxpayers claimed itemized deductions for tax preparation fees. The total deductions claimed totaled up to $7.2 billion, or an average of about $330 per taxpayer.

That number might seem low, especially given how many people need to get tax help. Yet the thing to remember is that your ability to deduct tax preparation fees and other miscellaneous deductions is limited. Unless those deductions add up to more than 2 percent of your adjusted gross income, you can’t deduct a penny — and even if the amount is greater, you can only deduct whatever the excess is over that 2 percent figure. As a result, despite its popularity, many people who pay for tax preparation find themselves unable to take advantage of this deduction.

4. Home Mortgage Interest

One of the most important deductions available to homeowners is the mortgage interest deduction, which allows you to write off the interest portion of your mortgage payments on your tax return. More than 34.3 million taxpayers reported mortgage interest on which their lenders had provided information, and another 1.2 million deducted interest despite having no documentation from their lenders. The total amount claimed was the highest of any deduction, with taxpayers writing off more than $326 billion.

Interestingly, that figure comes even as mortgage rates remain near record lows. In past years, when mortgage rates were higher, the mortgage interest deduction was an even more important part of reducing your tax liability. Some have called for a limit to the mortgage interest deduction, but given the policy interest in encouraging homeownership, it would take draconian measures to get rid of this highly popular deduction.

3. Gifts to Charity

Americans are well known for their charitable giving, and more than 37.3 million taxpayers deducted a total of nearly $200 billion. More than 90 percent of the taxpayers who claimed charitable deductions listed cash gifts, while 60 percent made gifts other than by cash or check, which includes donations of things like clothes or vehicles. Gifts of cash and checks made up about three-quarters of the total value of the charitable donations, but that still leaves a substantial amount for non-cash gifts. Many nonprofit organizations rely on the tax breaks from charitable giving to spur donations, and that makes it a popular tax break not just for taxpayers but also for charities as well.

2. Property Taxes on Real Estate

Moving back to homeowners, not every property has a mortgage, but just about every piece of real estate carries taxes. That led 39.2 million taxpayers to deduct their real-estate taxes, with total deductions amounting to $173.3 billion.

Taxpayers are allowed to deduct real estate taxes on any property owned, including not only your primary residence but also vacation homes and even open land in your possession. Note that your deduction is based on the amount you actually pay in any given year, so in some cases, paying taxes earlier than they’re due can actually boost your deductions in one year at the expense of reducing them in other years. That strategy can help you take advantage of the standard deduction and boost your overall write-offs half the time.

1. State and Local Income and Sales Taxes

The most-often-taken deduction is for state and local income and sales taxes. About 43.9 million taxpayers, or 95 percent of all those who file for itemized deductions, took this deduction, amounting to a total of nearly $300 billion.

Historically, taxpayers used to be able to deduct only state and local income taxes. But in part due to the efforts of lawmakers in states that impose no income tax, the rules changed to allow taxpayers to choose to deduct sales taxes instead of income tax. Still, even though a quarter of all returns claim sales tax deductions, the amounts involved heavily favor the income-tax side, with total deducted amounts of $283 billion for state and local income taxes versus just $16.5 billion for sales taxes.

IRS Aims Harder to Protect You Against Identity Theft

Protect against Identity Theft
IRS doing more to protect your ID

WASHINGTON — A notice from the Internal Revenue Service saying your return won’t be accepted might be your first clue that your identity has been stolen.


“The IRS recognizes the first return submitted under a Social Security number, and usually the identity theft is identified when the second return is filed” under that same number, said Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting, US.

Another clue might be an IRS notice saying you have unreported income. That could happen if someone steals your Social Security number and gives it to an employer to avoid being taxed on earned wages. You get the tax bill instead.

Identity theft could lead to long delays in getting your refund or bigger tax bills for unreported income. “Tax refund fraud associated with identity theft continues to be an evolving threat, one that imposes a serious financial and emotional toll on honest taxpayers and threatens the integrity of the tax administration system,” the Government Accountability Office said in a report in August.

236,000 Returns Linked to Identity Theft in 2014

More than 236,000 tax returns processed last year were deemed fraudulent because of identity theft, and nearly $1.2 billion in refunds from those fraudulent returns were blocked, according to the Treasury Inspector General for Tax Administration. The number of identity-theft returns is down significantly from 2012, and the IG said in a report last fall that new filters the IRS put in place to identify the crime may be responsible.

“The IRS is investing in that area,” said Bob Meighan, vice president of consumer advocacy for TurboTax (INTU). “People have to have confidence that the returns that they file are protected and secure,” he said.

The IRS is providing identity-theft victims with a personal identification number to prove who they are when filing tax returns. In 2014, more than 1.2 million of these identity-protection PINs were issued, up from 770,000 the previous year. The agency also has more than doubled the number of workers assigned to identity theft cases since 2011, to about 3,000 in 2014, according to the GAO.

Beginning this year, the number of refunds direct-deposited to a single account is limited to three, another attempt to reduce identity theft. “The fourth and subsequent refunds automatically will convert to a paper refund check and be mailed to the taxpayer,” the IRS said.

National Taxpayer Advocate Nina Olson wants the agency to do more. She has called identity theft “an invasive crime that can have a traumatic emotional impact.” She said early last year that she has called on the IRS to designate a single point of contact, someone who can provide “sensitive, holistic assistance” to an identity-theft victim.

What You Should Do

Kathy Pickering, executive director of the Tax Institute at H&R Block, says prevention is the best defense. Don’t give out your Social Security number or your date of birth, she says.

The IRS also advises people to protect their personal computers and Internet accounts, check their credit reports and avoid giving out personal information over the phone, especially if you didn’t initiate the call.

And beware of phishing attempts — online or over the phone — that seek access to your personal information. “The IRS does not initiate contact with taxpayers by email to request personal or financial information,” the agency said. “This includes any type of electronic communication, such as text messages and social media channels.”

If you get a notice from the IRS that leads you to believe you are an identity-theft victim, the IRS says you should respond immediately. The first step, the agency says, is to complete and submit an Identity Theft Affadavit, Form 14039 at http://www.irs.gov. If the issue remains unresolved, taxpayers should contact the Identity Protection Specialized Unit at 800-908-4490.


Temporary Tax Breaks Extended

College Students
College students, their parents and home owners benefit from extended tax breaks

Temporary Tax Breaks Good for 2014; Future Up to Congress


WASHINGTON — Many taxpayers can rest easier knowing that Congress extended a series of tax breaks for individuals and businesses before adjourning in December.

But the effects will be short-lived. The extension only lasted until the end of 2014. The new Congress that took office Jan. 6 will have to decide once again whether to renew them. Going forward, the tax breaks may not be around. “Don’t rely on them,” said Mark Luscombe, principal tax analyst for Wolters Kluwer Tax & Accounting US.

Credits and Deductions

For the 2014 tax year, Kathy Pickering, executive director of the Tax Institute at H&R Block (HRB), estimates that one in six taxpayers will be affected by the extenders. They include college students and their parents; homeowners; residents of states without income tax, and more. Those who qualify could see larger refunds, or a smaller tax bill. Credits directly reduce the amount of taxes owed. Deductions reduce the income on which taxes are computed.

For individuals, the tax extenders are linked to expenses you’re likely to have, tax break or not, said Bob Meighan, vice president for consumer advocacy at TurboTax (INTU).

Live in a state that doesn’t have an income tax? If you itemize, the congressional extension means you can take a deduction for sales tax.

Are you and your child struggling with the high cost of college? The tax extenders bill passed by Congress includes the $4,000 above-the line deduction for tuition and fees. Above-the-line deductions reduce adjusted gross income, which is used to calculate eligibility for many tax breaks, including the tuition and fees deduction. This is only one of many tax breaks for higher education. Among the others: the lifetime learning credit or the American Opportunity Credit.

“Though income levels differ for each of these three benefits and people should see which one works best, the trend in recent years has heavily been toward the credits,” said Internal Revenue Service spokesman Eric Smith. The extenders also include an above-the-line deduction for schoolteachers in kindergarten through high school who spend their own money on books and supplies for the classroom. They can deduct up to $250 for this expense.

Help for Homeowners

There’s help, too, for homeowners — and those who fell behind on mortgages. Was your house underwater and some of your mortgage debt was forgiven? As a result of the congressional action, that forgiven debt will often not be counted as taxable income. Were you required by your lender to purchase mortgage insurance?  One extender will allow you to deduct the cost of those premiums.  The credit of up to $500 for making environmentally friendly improvements to your home also was renewed for 2014.  Among the things covered: energy-efficient heating or air conditioning, new windows and insulation.

If you’re 70½ or older and required to take a minimum distribution from your retirement accounts, the extenders allowed you to do this tax-free, by rolling it over directly to a charity. But you would have had to do that before Dec. 31 to avoid having the distribution counted as income and taxed as such.

In some previous years, when the tax breaks were extended late in the year, Congress included a special provision that allowed distributions made in January to qualify, the IRS said. There was no such rule this year.

Increasingly, these extenders have only been enacted for a single year. Luscombe says that’s because some in Congress believe they should be discussed as part of “fundamental tax reform.” And that could mean a push for lower individual rates in exchange for giving up some credits and deductions. Politically, that might be difficult for people who are fond of their tax breaks,” he said.