If you're in college, maybe you've had to file an income tax return for a summer job or internship, but the odds are that you haven't really needed to worry much about income taxes. But as soon as you get that great job upon graduation and start seeing that big salary roll in, you and the tax man are going to develop a very close relationship. So it's never too early to learn about how to file your income tax return and minimize your tax bill no matter what country you live in. So let's start with some basics. In most systems, your income tax is determined by four things. The amount of income you earned, any expenses that you may legally deduct from that income, any tax exemptions you are allowed and the tax rate you will be charged. In terms of the basic math, it comes down to your income minus any deductions and exemptions. That's your so-called Taxable Income. This taxable income is then multiplied by your marginal tax rate to determine your taxes owed. Now let's break this down a bit. Your marginal tax rate will be the same if your country uses a flat or proportional tax. However in countries with a progressive tax system, your marginal tax rate will rise with the amount of your taxable income. As for any tax exemptions, if you have any children you can claim them as a dependent. Just like your parents have been claiming you as an exemption for most of your life. And there are other exemptions as well depending on the system. Now let's get to the two biggest elements your income and your other deductions. The amount of income you report is your gross income or total income. It's a collection of income from all the possible sources. Two of the most common sources here are the wages you earned and the dividends and interest you may have received from holding stocks and bonds. In addition, there are capital gains associated with selling stocks or property for a profit, and maybe even the rental income you received on a property you own. Now, from that gross income, you are allowed to deduct any legitimate expenses specified by the tax authority. And this is where you really want to become an expert. For example, one of the biggest deductions in the American tax system is the deduction for any interest paid on your mortgage. In fact, this is a huge incentive for you to own your own home. Because the government is effectively helping you to pay for it by giving you a tax break, and it's hardly the only deduction associated with homeownership. Other deductions associated with homeownership include causality loss, if your home is damaged or destroyed. Energy credits. Real estate taxes. And even first-time homebuyer credits. More broadly, there are deductions for charity, moving expenses, and so on. And if you work for yourself, you'll be able to deduct a whole range of expenses associated with running your business. The broader point here is this, wherever you may live, you need to get to know your tax system and its deductions. And here's a key tip, while your income tax form is likely to be pretty simple and won't likely require any sophisticated software, I still recommend that you consider buying your own tax preparation software. On this note, in the United States, the Internal Revenue Service has a program called free file at irs.gov/freefile where they offer software and tools to help you file your taxes if your income is under $58,000. For most of us in the near term that will be the ticket. That said, a commercial tax prep software is likely to be more informative. Such software will not only guide you through the process it will also provide you with the full laundry list of possible deductions. While you may not be eligible for these deductions at this point in your life, you will at least learn about them, and thereby, learn how you might incorporate such deductions into your future financial decisions and plans. Some important tools here include investments, retirement accounts, and accounts to put away savings for your children's education. In fact, my parents are paying for college with such an account and they save thousands of dollars in taxes by planning ahead. Thanks, Mom and Dad. At any rate, let's move on to final issues and key tips in part three of this lesson. [MUSIC]
