Taxes
Taxes
Taxes can feel overwhelming, especially when you’re filing for the first time. This page breaks down everything students need to know about earning income, filing taxes, using education tax benefits, and avoiding common mistakes.
Taxes are mandatory payments individuals and businesses make to federal, state, and local governments to fund essential services like roads, schools, healthcare, and national defense. Nearly everyone contributes, whether through income, sales, or property taxes, helping support communities and keep the economy running.
For specific information please visit: Volunteer Income Tax Assistance (VITA) - Seidman College of Business - School of Accounting - Grand Valley State University
Internal Revenue Service | An official website of the United States government
Why Taxes Matter
Whether you’re working on campus, freelancing, receiving scholarships, or earning NIL income, taxes impact your finances in important ways. Understanding how they work can help you:
- Keep more of your paycheck by knowing what can be deducted or withheld.
- Avoid penalties by filing correctly and on time.
- Qualify for valuable education tax credits, like the American Opportunity Tax Credit or Lifetime Learning Credit.
- Understand what documents you need and why, making tax filing simpler and less stressful.
- Plan for future financial goals, like saving for graduate school or a car.
- Track your income and expenses, which helps with budgeting and money management.
- Build a good tax history, which can be helpful for loans, credit, and financial independence.
Summary of Types of Taxes
- A tax on money earned from wages, salaries, self-employment, and investments.
- Uses a progressive system, meaning higher income is taxed at higher rates.
- Taxpayers can reduce what they owe through deductions (like the standard deduction) and credits (such as education, child, or earned income credits).
- Taken directly from paychecks to fund federal programs.
- Workers pay 6.2% for Social Security and 1.45% for Medicare; employers match these amounts.
- Self-employed individuals pay both portions through self-employment tax
- Most states tax income, with rates ranging from 0% to over 12% depending on location.
- Michigan Example:
- Michigan has a flat income tax rate of 4.25% for all residents.
- Local City Taxes (Michigan Examples):
- Grand Rapids:
- 1.50% for residents
- 0.75% for non-residents who work in the city
- These are added on top of the 4.25% Michigan state tax.
- Detroit:
- 2.40% for residents
- 1.20% for non-residents who work in the city
- Also added on top of the state rate
- Grand Rapids:
- Charged on the purchase of goods and services at checkout.
- The rate varies by state and sometimes by city.
Michigan Example:
- Michigan has a flat 6% sales tax, with no additional local sales taxes.
- Paid by homeowners based on the value of their home or land.
- Collected by local governments to support services like schools, public safety, and roads.
Michigan Example:
- Average property tax rate is approximately 1.35%, but exact rates vary by county and city
- A tax on profit from selling investments such as stocks, bonds, or real estate.
- Rates depend on income and whether the gain is short-term or long-term.
Michigan Example:
- Michigan taxes capital gains as regular income at 4.25%.
- Excise Taxes: Charged on specific goods like gasoline, alcohol, and tobacco.
- Estate Tax: Applies only to very large estates (federal exemption is very high).
- Inheritance Tax: Paid by heirs in certain states (Michigan does not have one).
How Taxes Are Calculated
Gross Income vs. Taxable Income
- Gross income is everything you earn before any reductions.
- Taxable income is the amount you’re actually taxed on after subtracting deductions (which lower taxable income).
- Credits reduce the tax you owe directly.
- Your tax rate is applied to your taxable income to calculate your tax bill.
- For more information on Tax deductions and credits visit Tax deductions - MoneySmart Lakers - Grand Valley State University
Example:
- Gross income: $50,000
- Minus deductions: $5,000 → taxable income = $45,000
- Tax rate 20% → tax owed = $9,000
Why file taxes?
It’s a legal requirement, ensures you pay the correct amount, and may result in a refund.
- Common U.S. forms:
- W-2: Employee income and taxes withheld
- 1099: Income for freelancers or contractors
- 1040: Individual income tax return
- 1098-T: From your school showing tuition paid and scholarships received
- Deadline: Usually April 15 each year.
Tips for Managing Taxes
Keep records: Save W-2s, 1099s, receipts, and pay stubs for accurate filing.
Use deductions and credits wisely: Reduce taxable income and taxes owed.
Education Tax Credits:
- American Opportunity Tax Credit (AOTC):
- Up to $2,500 per eligible student
- Available for the first four years of postsecondary education
- Partially refundable (up to $1,000 back)
- Lifetime Learning Credit (LLC):
- Up to $2,000 per tax return, per year
- Available for all years of postsecondary education and courses to improve job skills
- Can be used for unlimited tax years
File on time: Typically April 15; extensions can be requested until October 15.
Plan ahead: Consider retirement contributions, timing of capital gains, and estimated taxes if self-employed.
