First, you add up your income from all sources for the year. From that figure, you subtract any "adjustments" you may have. These can include educator expenses, moving expenses, self-employment taxes, an IRA deduction, a deduction for student loan interest, the cost of tuition and fees for formal education, and more.
Of key interest to very low-income performers is an adjustment for "qualified performing artists." In today's world, the QPA adjustment is losing significance, but there are a few who can benefit immensely from it. When you make that little, you deserve every break you can get.
To qualify for the QPA adjustment, your total income must be $16,000 or less, and you must have at least two W-2s from performing jobs, each showing gross wages of at least $200. You can have more than two, and the amounts can be more than $200, but it's important to remember the minimums. The final requirement is that your total acting expenses for the year must equal at least 10 percent of your "adjusted gross income," which is arrived at by subtracting all relevant adjustments from your total income.
It's at this point that you get to deduct your expenses. You can either use the standard deduction or, if your total expenses exceed the amount of the standard deduction, itemize your deductions. Most actors will spend enough money pursuing their careers that itemizing is the better choice, but you should still understand the value of the standard deduction.
The amount of your standard deduction is based upon your "filing status." The categories are single, married filing jointly, married filing separately, qualifying widow(er), and head of household. The standard deduction for the status of single or married filing separately is $5,700. For married filing jointly or qualifying widow(er), it's $11,400. For head of household, it's $8,350. Either the standard deduction or the total of your itemized deductions is then subtracted from your adjusted gross income.
The next step is to reduce your income by the value of your "personal exemption." For 2010, this amount, determined by the government, is set to be $3,650.
Once you have subtracted adjustments, deductions, and exemptions, what is left is considered "taxable income." To figure out your tax on this amount, you need to understand how the tax-rate schedule works.
Understanding Tax Rates
The tax rates are 10, 15, 25, 28, 33, and 35 percent. How they affect your taxable income depends on your filing status.
For a single person, the first $8,375 of taxable income is taxed at 10 percent. Every additional dollar up to $34,000 is taxed at 15 percent. After $34,000, income up to $82,401 is taxed at 25 percent. The 28 percent cap is $171,850; the 33 percent cap is $373,650; and all income over $373,650 is taxed at 35 percent.
It may sound confusing, but it's rather straightforward. Let's say your taxable income is $45,000. The first $8,375 of that income is taxed at 10 percent, for a tax of $837. The amount between $8,375 and $34,000 is taxed at 15 percent, for an additional $3,844. Finally, the remaining $11,000 is taxed at 25 percent, for another $2,750. Add those amounts together—$837 plus $3,844 plus $2,750—and you have your total tax due: $7,431. Although in this scenario you end up in the 25 percent tax bracket, you are also being taxed in the 10 percent and 15 percent brackets.
Ideally, you've already had at least $7,431 withheld in taxes from your paychecks. If you haven't, then you have to pay the shortfall to the Internal Revenue Service. If you've had more than $7,431 withheld, then the surplus is the refund that the IRS pays you.
Gee, tax preparation is actually very simple, isn't it?