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Exemptions, deductions and other tax options explained

Question: Does everyone have to file federal and state income tax returns? In what situations would someone be exempt from filing?

Answer: Not everyone must file a tax return. If your gross income is less than the filing threshold, you do not need to file. However, there is a big difference between those who must file and those who should file. Even if your gross income is less than the filing threshold, you should file a tax return to claim any possible refund of taxes withheld and for tax credits such as the State of Hawaii Refundable Food/Excise Credit.


Q: What do I need from my employer to file?

A: Employers have until the end of January to distribute a W-2 (tax form) to their employees. Additionally, by March employers will provide verification of any health insurance they provided to their employees. For the 2015 tax filing season, tax filers can file their tax return without their employer’s health insurance verification, but it will be mandatory next year.


Q: What is the difference between exemptions, credits and deductions?

A: All three benefit the tax filer in different ways.

An exemption reduces the tax filer’s taxable income and is based on the number of qualifying individuals in the household. The 2015 fixed exemption amount is $4,000/person, so the total exemption amount is the number of qualifying household members multiplied by $4,000.

A deduction also reduces the tax filer’s taxable income. It is the amount of taxable income you are allowed to disregard. The tax filer can take the standard deduction or itemize their deductions, whichever is more beneficial.

A tax credit reduces your tax liability and is either refundable or nonrefundable. Refundable credits can reduce your tax liability to below zero, which means even if you do not owe any taxes you could receive a tax refund. Nonrefundable credits can only reduce your tax liability to zero, so if you do not have any tax liability, you will not get any additional refund.


Q: What receipts should I be saving throughout the year to write them off?

A: Save receipts for things like childcare, cash and noncash charitable giving, out-of-pocket school expenses and nonreimbursed business expenses. There is a complete list of items that can be claimed on the IRS website: irs.gov. When in doubt, save the receipt, and discuss if it should be included with your tax preparer.


Q: What are my options if I can’t afford an accountant?

A: Goodwill Hawaii offers free tax-filing assistance statewide to assist low- to moderate-income households file both their federal and state tax returns. If your household income was $54,000 or less in 2015 and you are not a home or business owner, visit goodwillhawaii.org or call 808-836-0313 to make an appointment. Goodwill Hawaii also accepts walk-ins and other restrictions may apply.


Q: What do I do if I’m freelancing and none of my taxes are being withheld from paycheck?

A: If you are considered to be self-employed, you should make tax payments quarterly in addition to filing a tax return. If you are not considered to be self-employed, and receive a 1099-MISC (tax form) or have received other payments, a tax preparer can assist you with including that income on your tax return.


Q: What do W-4 withholdings mean during tax time?

A: You complete a W-4 for your employer so your employer knows how much money to withhold from your paycheck for taxes. It’s recommended that you choose the number of W-4 allowances based on the number of members in your tax household and also consider any other credits or deductions you may have. The higher the number you claim on your W-4, the less taxes will be withheld.


Q: What do I do if I can’t afford to pay my taxes this year?

A: It is recommended that you pay the amount you can afford. There are several options to pay off the remaining balance including paying with a debit or credit card or working with the IRS on an installment plan. The IRS charges interest on the balance due, so you should strive to pay it off as quickly as possible. Also, consider adjusting your withholdings from your taxable income to avoid having a balance due next year.


Q: Will I be audited?

A: It is a possibility. Ensuring your tax return is accurate and complete can alleviate a lot of the stress of filing your taxes and give you confidence if you are audited, to know you are ready.


Q: What do I do if I realize I made a mistake after I have filed?

A: If you realize you made a mistake on your return, an Amended Tax Return can be filed to correct the mistake.


This article originated from Honolulu Star Advertiser; written by Kathryn Mykleseth; and published Jan 24, 2016

Lori Lau


Lori Lau
>> Title: Director of Workforce Development
>> Company: Goodwill Hawaii
>> Website: goodwillhawaii.org
>> Email: info@higoodwill.org