W-2

A W-2 - a form required by the IRS that employers must file annually and provide copies to employees. This form details the employee's total taxable wages, social security and Medicare wages, tax withholdings, and any additional income information for the calendar year. 

 

Box a - to keep personal information secure, only the last 4 digits of the SSN, however the employer will submit the full SSN to the IRS 

 

Box b-f - personal information like an identification number, EIN, name, address, zip code and control number are added to the boxes b-f. 

 

Box 1 - taxable income. This includes salary, tips, bonus, and any other payment received from the employer. 

 

Box 2 - shows the federal tax amount that the employer withheld from pay.  

 

Boxes 3 and 4 - Box 3 is the amount of compensation subject to Social Security tax and Box 4 is the amount of Social Security tax withheld. The current Social Security tax rate for employee's share of Social Security wages is 6.2% maxing out at $168,600 for 2024.  

 

Box 5-6 - Box 5 reports whatever portion of earning is set for Medicare tax. The employee contributes 1.45% of the Medicare tax. Box 6 shows Medicare Tax is withheld. This amount includes employee contributions to Medicare and the 0.9% additional Medicare Tax on any of those Medicare wages and tips above $200,000 

 

Box 7-8 - Box 7 is all reported earnings from tips and box 8 shows the tips that the employer report paid to the employee.  

 

Box 10 - reports the total dependent care benefits paid or incurred by the employer on behalf of an employee.  

 

Box 11 - the employer adds the deferred compensation received from a Nonqualified plan. Deferred compensation refers to a dollar amount that an employer sets aside to pay later. This is used for things such as a retirement plan or stock-option plan.  

 

Box 12 - Uses codes to list other compensations or reductions applicable to an individual's taxable income, such as code DD for healthcare benefits.  

 

Box 13 - contains 3 selection boxes for Statutory employee, Retirement plan, and Third-party sick pay. These items are not subjected to federal income tax withholding. Note: There may be some limits to this rule regarding IRA contributions. 

 

Box 14 - used to enter any information that  does not fit into any other section such as union dues, uniform payments, state disability insurance taxes withheld, nontaxable income, health insurance premiums deducted, etc.  

 

Box 15-20 - show the employee's state and local earning and withholding detail. This includes the state and local taxes that are deductible (if a taxpayer itemizes on their federal tax return). 

 

Employer sponsored health insurance premiums - Code DD in Box 12 represents these employer provided benefits that reduce taxable income but aren't included in Box 1 

Basic Income Tax Formula

The 2 types of deductions: above-the-line and below-the-line 

 

Above-the-line deduction - Reduce your gross income (which your total income) to determine your adjusted gross income (AGI). These deductions are available to all taxpayers, regardless of whether they itemize deductions. Examples include: 

  • Contributions to traditional IRAs or 401(k) plans 

  • Health savings account (HSA) contributions 

  • Self-employed health insurance premiums 

  • Student loan interest 

Calculation example: Your gross income is $85,000 and you contribute $5,000 to your 401(k) and paid $1,000 in student loan interest. These deductions reduce your gross income from $85,000 to an AGI of $79,000. 

 

Below-the-line deductions - These deductions are applied after calculating your AGI and help determine your taxable income. For married couples filing jointly in 2024 the standard deduction is $29,200. Unless your itemized deductions like mortgage interest, state and local taxes, and medical expenses-exceed this amount, you'll likely take the standard deduction. Examples include: 

  • Mortgage interest 

  • State and local taxes 

  • Medical expenses 

 

Federal tax credits - these credits differ from deductions because they directly reduce the amount of tax owed. Tax credit can even lead to a refund if you don't owe any tax, depending on the type of credit. Example: You qualify for a $1,200 tax credit, it reduce your tax liability from $5,512 to $4,312 

 

Federal tax credits fall into 2 categories: refundable and nonrefundable. 

 

Refundable credits - These are the most advantageous because you can receive the full credit amount as a refund, even if you owe no tax. Examples include: 

  • Earned Income Tax Credit 

    • Tax credit for workers with low to moderate income 

    • For 2024, the Earned Income Tax Credit (EITC) ranges from $623 to $7,830 depending on filing status, number of qualifying children, and earned income. 

  • American Opportunity Tax 

    • Credit for qualified education expenses paid for eligible students for the first 4 years of higher education up to $2,500 per eligible student. 

    • Partially refundable if the credit brings the amount of tax owed to 0, 40% of the any remaining credit (up to $1,000) can be refunded.  

  • Additional Child Tax Credit 

    • For 2024 the Child Tax Credit (CTC) is $2,000 for each qualifying child; however, the CTC that can be claimed as refundable is limited.  

    • For 2024, the max Additional Child Tax Credit (ACTC) has increased to $1,700 for each qualifying child. A child must be under the age of 17 at the end of 2024 to be qualifying child. In addition, at least $2,500 in earned income must be reported in the tax year to qualify for the ACTC.  

Nonrefundable credits - these can reduce your tax liability to 0 but won't result in a refund if the credit exceeds your tax owed. Examples include: 

  • Child Tax Credit/Credit for other Dependents 

    • Child Tax Credit (CTC)- For individuals who claim a child as a dependent who meets additional conditions. Credit can be taken in addition to the credit for child and dependent care expenses, and the earned income credit. 

    • For 2024: $2,000 for children under 17 years of age, subject to income limits. 

    • Credit for Other Dependents - for individuals with a dependent who doesn't qualify for the child tax credit but meets additional conditions. For example, a disabled child or relative of any age or a dependent over 17 who is a student. The maximum amount is $500 for each qualifying person and is subject to income limits. 

  • Child and Dependent Care Credit 

    • You can claim the child and dependent care credit if they paid expenses for the care of qualifying individual to enable themselves (and their spouse, if filing a joint return) to work or actively look for work. The amount of the credit is a percentage of the amount of work-related expenses you paid to a care provider for the care of qualifying individual. The percentage depends on your AGI 

    • If you receive dependent care benefits from there employer as reported on Box 10 of the W-2, this amount will affect the dollar limit applied to the total dependent care expenses used to calculate the credit amount 

  • Adoption Credit 

    • This includes the credit for qualified adoption expenses up to $16,810 for tax year 2024. Credit in excess of tax liability may be carried forward for up to 5 years.