Important Changes

Interest on student loans.   You may be able to deduct up to $2,000 for interest paid on a qualified student loan. See Deductible student loan interest under What Can I Deduct on My Return, later.

Paid preparer authorization.   Beginning with your return for 2000, you can check a box and authorize the IRS to discuss your tax return with the paid preparer who signed it. If you check the Yes box in the signature area of your return, the IRS can call your paid preparer to answer any questions that may arise during the processing of your return. Also, you are authorizing your paid preparer to perform certain actions. See your income tax package for details.

Photographs of missing children.   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Important Reminder

Child tax credit.   You may be able to claim a tax credit of up to $500 for each of your qualifying children under the age of 17. See Child tax credit under What Can I Subtract From My Tax, later.

Introduction

This guide explains the federal income tax laws of particular interest to high school and college students. It will help you decide if the income you receive (such as wages, tips, interest, or a scholarship or fellowship) is taxable. It will also help you decide if you should have tax taken out (withheld) from your pay and if you should file an income tax return.

The rules explained in this guide apply to students who are U.S. citizens and unmarried (single). If you are a foreign student studying in the United States, you should see Publication 519, U.S. Tax Guide for Aliens.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

You can e-mail us while visiting our web site at www.irs.gov/help/email2.html.

You can write to us at the following address:

Internal Revenue Service
Technical Publications Branch
W:CAR:MP:FP:P
1111 Constitution Ave. NW
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

Useful Items You may want to see:

Publication

• 501   Exemptions, Standard Deduction, and Filing Information
• 505   Tax Withholding and Estimated Tax
• 508   Tax Benefits for Work-Related Education
• 520   Scholarships and Fellowships
• 919   How Do I Adjust My Tax Withholding?
• 970   Tax Benefits for Higher Education

Form (and Instructions)

• 1040EZ   Income Tax Return for Single and Joint Filers With No Dependents
• Schedule C-EZ (Form 1040)   Net Profit From Business (Sole Proprietorship)

See How To Get Tax Help near the end of this publication for information about getting these publications and forms.

Where Do My Tax Dollars Go?

We pay taxes to help our government raise income (called revenue) to meet its expenses. The revenue raised by the personal income tax and other federal taxes, such as employment taxes (including social security and Medicare taxes), excise taxes, and estate and gift taxes, is used to provide a wide variety of services to the public. Among these are our national defense, conservation of our natural resources, and aid to public education.

The social security tax pays for old age, survivor, and disability pension payments when you become eligible for them. The Medicare tax pays for basic Medicare insurance coverage. Both employees and employers pay these taxes.

How Is My Tax Figured?

You are responsible for reporting your income to the Internal Revenue Service (IRS) and figuring the tax due on it. You do this by filing an income tax return each year you meet the filing requirements. The IRS provides tax forms, instructions, and publications to help you. These forms, instructions, and publications are based on the tax laws passed by Congress that are contained in the Internal Revenue Code.

Taxable income.   Wages, tips, and other fees you receive for work you do, all count as income for tax purposes. Investment income, such as interest on your savings account and dividends, also counts as income for tax purposes.

The law allows you to deduct certain amounts from your income before you figure the tax due on it. These include the personal exemption (if you are entitled to claim one) and the standard deduction (or itemized deductions if you can itemize). These amounts are explained later. What remains is your taxable income.

Tax rates.   Your tax is a percentage of your taxable income. There are five tax rates, 15%, 28%, 31%, 36%, and 39.6%. If you are single and your taxable income is not more than $26,250 for 2000, your tax is the amount of your taxable income times 15% (.15).

The 28% rate applies to taxable income over $26,250 but not over $63,550, and the higher rates apply to taxable income over $63,550.

Computing tax.    Generally, if your taxable income is less than $100,000, you do not compute the tax yourself. Instead, the math has been done for you in the Tax Table that is included in the instructions to the tax form.

You use the Tax Table unless one of the following is true.

1. Your taxable income is $100,000 or more. In that case, use Tax Rate Schedule X.
2. You are required to use Form 8615, Schedule D (Form 1040), or the Capital Gain Tax Worksheet (in the Form 1040 instructions).

Maximum tax rates on net capital gain.    For 2000 the maximum rate on a net capital gain may be 10%, 20%, 25%, or 28%, depending on the situation.

You may have a net capital gain if you sold stock or other property during the year. If you need details, see Publication 550, Investment Income and Expenses.

How Do I Pay My Tax?

Federal income tax is collected on a pay-as-you-go system. This means you must pay tax on the income you earn at the time you receive it. There are two ways to pay your tax. You can have tax withheld from your wages and you can make estimated tax payments on income that is not subject to withholding.

Withholding on wages.   Your employer will generally withhold tax from your paycheck and deposit it in a federal bank. The amount withheld is based on information received from your completed Form W-4, Employee's Withholding Allowance Certificate. The form and its worksheet will help you to calculate the proper withholding.

If, at the end of the year, you have not paid all of the tax due, you may be subject to a penalty for failure to pay estimated tax. To prevent this, you can have more tax withheld by revising Form W-4 (discussed later) or by making estimated tax payments.

Estimated tax payments.   Estimated tax payments are generally required if no tax is withheld from your income. For example, tax is not generally withheld from self-employment and investment income. If you are self-employed or receive investment income, you may need to make estimated tax payments.

Generally, the law requires you to pay estimated tax for 2001 if you expect to owe $1,000 or more when you file your return, unless the amount you will have withheld is at least:

1. 90% of the tax to be shown on your 2001 income tax return, or
2. 100% of the tax shown on your 2000 income tax return.

If you need to make estimated tax payments, get Form 1040-ES, Estimated Tax for Individuals. It has a worksheet and instructions that will help you estimate your income tax for the coming year and figure how much estimated tax you need to pay. Usually you divide the amount you need to pay for the year by four and make four equal payments of tax. These are due on April 15, June 15, September 15, and January 15 (of the following tax year). If the due date falls on a Saturday, Sunday, or legal holiday, the payment will be on time if it is made on the next day that is not a Saturday, Sunday, or legal holiday. See Publication 505, Tax Withholding and Estimated Tax, for more information.

How Does My Employer Decide How Much To Withhold?

Your employer generally uses information received from you to figure how much of your pay to withhold for federal income tax. When you get a job, one of the first things your employer will do is ask you to complete Form W-4. Form W-4 includes three types of information that your employer will use to figure your withholding.

1. Whether to withhold at the single rate or at the lower married rate.
2. How many withholding allowances you claim (each allowance reduces the amount withheld).
3. Whether you want an additional amount withheld.

An example of a filled-in Form W-4 appears at the end of this publication.

Claiming withholding allowances.   Use the Personal Allowances Worksheet on page 1 of Form W-4 to figure your withholding allowances. The worksheet is there to help you figure the correct number of withholding allowances you can claim. For many students this will be one allowance. The worksheet is for your own records. You do not have to turn it in to your employer. You can have more tax withheld by claiming fewer withholding allowances.

If you work for more than one employer at a time, you will be asked to complete a Form W-4 by each employer. If, after reading the Form W-4 worksheet, you decide you are entitled to claim one allowance, claim one allowance at the higher paying job and zero allowances at your other job. Do not claim the same withholding allowances at both jobs because not enough tax will be withheld during the year.

Additional amount.   You want to have enough tax withheld so you won't have to make estimated tax payments, as explained earlier, or be charged an estimated tax penalty for not paying enough tax during the year.

To make sure you are getting the right amount of tax withheld, get Publication 919. It will help you compare the total tax to be withheld during the year with the tax you can expect to figure on your return. It will also help you determine how much, if any, additional withholding is needed each payday to avoid owing tax when you file your return. If you do not have enough tax withheld, you may have to make estimated tax payments, as explained earlier.

What If My Withholding Does Not Match My Tax?

Your withholding probably won't match your tax liability exactly. So when you report your income and figure the tax on your tax return, you will usually find that you either underpaid or overpaid your tax. If you owe, you should pay the balance due when you file your return. You can pay by check, money order, or credit card. If you paid too much, the IRS will issue you a refund after you file your return. You can also request direct deposit of your refund. For more information, see the Form 1040, Form 1040A, or Form 1040EZ instructions.

Can I Ask My Employer Not To Withhold Tax?

Do you have a part-time job but are not earning enough to be required to file a tax return? If so, you can ask your employer not to withhold income tax for 2001 by claiming exemption from withholding if both of the following are true.

1. For 2000 you had a right to a refund of all income tax withheld because you had no tax liability.
2. For 2001 you expect a refund of all income tax withheld because you expect to have no tax liability.

Students are not automatically exempt from withholding. You can claim exemption only if both of the above statements are true.

Dependents.   You cannot claim exemption from withholding for 2001 if someone will be able to claim you as a dependent on his or her tax return for 2001 and your 2001 income will be over $750 and will include more than $250 of unearned income.

Claiming exemption.   You claim exemption from withholding on Form W-4. Fill in the identifying information at the top of the form and skip lines 5 and 6. On line 7 write the word EXEMPT. Then sign and date the form.

Generally, the exemption from withholding expires on February 15 of the year following the year for which you claim exemption. If you remain eligible and want to claim exemption from withholding for that following year, you generally must give your employer a new Form W-4 by February 15 of that year.

If you claimed exemption from withholding but your situation changes (for example, you received a raise in pay or you are working more hours), you have 10 days from the day you reasonably believed you were no longer exempt from tax to give your employer a new Form W-4. You should claim the correct number of withholding allowances on the new form so your employer will withhold the correct amount of tax.

Must I File a Return?

Whether you must file a tax return depends on:

• Whether your parent or someone else can claim you as a dependent on his or her tax return (regardless of whether or not that person actually claims you),
• How much gross income you received, and
• What kinds of income you received.

Can you be claimed as a dependent?   If more than half of your support for the year is provided by another person, you can generally be claimed as a dependent. That person will usually be your parent (or someone else who is related to you or whose household you are a member of).

Support.   This includes amounts spent for food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. To determine whether you can be claimed as a dependent, do not include qualified scholarships and fellowships in figuring support if you are a full-time student.

Dependents.   If you can be claimed as a dependent, you must file a tax return for 2000, if any of the following apply.

1. Your unearned income was more than $700 (if not blind).**
2. Your earned income* was over $4,400 (if not blind).**
3. The total of your unearned and earned income was more than the larger of -
   1. $700 (if not blind),** or
   2. Your earned income (up to $4,150) plus $250 (if not blind).**

*Includes any part of a taxable scholarship or fellowship grant that you must include in your income, as explained later under What Kinds of Income are Taxable?

**Plus $1,100 if blind.

Under age 14.   If you are under age 14 and certain conditions apply, your parent can elect to include your income on his or her return. If your parent makes this election, you do not have to file a return. See Publication 929, Tax Rules for Children and Dependents.

Not a dependent.   If you cannot be claimed as a dependent by someone else, you must file a return for 2000 if your gross income for the year was $7,200 or more.

Income from self-employment.   Your total earnings from self-employment (generally gross business income before subtracting your business expenses) are counted in your gross income for purposes of the filing requirements discussed earlier.

Example.   You earned $700 from providing typing services on weekends. Your expenses totaled $325. Your net earnings from self-employment were $375 ($700 - $325). You must count the $700 (rather than the $375) in your income when figuring whether you are required to file a return.

Net earnings of $400 or more.   Even if you are not otherwise required to file a return, you must file one if your net earnings from self-employment were $400 or more. This is because you must pay self-employment tax. See Self-Employment Income, later.

Example.   During the summer you mowed lawns. You earned $500 after subtracting your expenses. You must file a tax return and pay self-employment tax because your net earnings were $400 or more.

If you are not required to file a return, and income tax was withheld from your pay because you did not claim exemption from withholding, you will be entitled to a refund of all the income tax withheld. You must file a tax return to get it, even though you would not be otherwise required to file.

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