- Days left

W-2 Forms: Understanding Your Most Important Tax Document

×
Form W-2 Wage and Tax Statement
Alamy
Tax season is just about to begin, and before you know it, you'll be looking to gather up all your key tax forms to prepare your return. If you're like millions of other Americans, the most important tax form you'll receive all year is the W-2 your employer is required to send you. With so much vital information, your W-2 is likely to have the biggest impact on how much tax you have to pay and how big your potential tax refund might be.

Let's take a closer look at your W-2 and the key box-by-box numbers that you should focus on the most in preparing your taxes.

Box 1: What You Get Taxed On

When it comes to figuring your taxable income, the key number on your W-2 is in Box 1, labeled "Wages, Tips, and Other Compensation." This numbers includes all of your taxable earnings for the year, but it also incorporates some useful features that essentially do some of your tax-preparation work for you.

The IRS instructs employers not to include what it calls "elective deferrals" in the Box 1 figure.
The most common item that this affects is any contribution you make to an employer-sponsored retirement plan like a traditional 401(k) plan, as those contributions reduce your taxable income. The benefit of this treatment is that rather than having to keep track of your contributions yourself and include them on your tax return the same way you have to do for IRA contributions, your W-2 already automatically incorporates the necessary adjustment.

By the way, this partially explains why the figures in Boxes 3 and 5 are often different from the Box 1 amount. You do have to pay Social Security and Medicare taxes on amounts you contribute to a 401(k) plan. So for many employees, the Box 3 and 5 figures will be higher than Box 1. Still, the key figure that you'll report on your income tax return is the Box 1 amount.

Box 2: What You Already Paid the IRS

On the other side of the ledger, Box 2 gives you another key figure for your tax return: how much in taxes you had withheld from your paychecks throughout the course of the year.

This amount only includes the withholding for federal income tax. (You'll find Social Security and Medicare tax withholding in Boxes 4 and 6, but most taxpayers don't have to do anything with those figures on their federal tax returns.)

The information in Box 2 tells you not just what to include as tax withheld on your return -- it also gives you a guide to how big your refund will be. By adjusting the amount of tax you have withheld from your paychecks, you can increase or decrease the amount that shows up in Box 2 every year, and change the amount of your refund as a result.

Box 12: The Nontaxable Benefits You Got From Your Job

Apart from those two boxes at the top of your W-2, the other main figures you should look at are in Box 12. There, you'll see broken out deductions for 401(k) contributions (with Code D), or different codes if you have a different type of retirement plan, such as a 403(b) or 457(b) plan. Other figures, including employer contributions to a Medical Savings Account (Code R) or a Health Savings Account (Code W), will appear in Box 12, as will any adoption benefits your employer provided (Code T).

These figures don't usually go on your tax return. But they are helpful in seeing what you get from your employer that isn't included in your wages.

State Income Taxes

Boxes 16 and 17 at the bottom of your W-2 fulfill the same function for your state income tax return that Boxes 1 and 2 do for your federal return. By looking at these boxes, you can get a sense of what your state taxes should look like this year.

Be smart about your taxes

Your W-2 has a huge amount of vital information to help you prepare your tax return. By understanding all of that information, you'll give yourself the best chance to earn the full refund that you deserve.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google Plus.

Increase your money and finance knowledge from home

Basics Of The Stock Market

Stock Market 101 - everything you need to know but were afraid to ask!

View Course »

How much house can I afford

Home buying 101, evaluating one of your most important financial decisions.

View Course »

TurboTax Articles

What is IRS Form 8824: Like-Kind Exchange

Ordinarily, when you sell something for more than what you paid to get it, you have a capital gain; when you sell it for less than what you paid, you have a capital loss. Both can affect your taxes. But if you immediately buy a similar property to replace the one you sold, the tax code calls that a "like-kind exchange," and it lets you delay some or all of the tax effects. The Internal Revenue Service (IRS) uses Form 8824 for like-kind exchanges.

What are ABLE Accounts? Tax Benefits Explained

Achieving a Better Life Experience (ABLE) accounts allow the families of disabled young people to set aside money for their care in a way that earns special tax benefits. ABLE accounts work much like the so-called 529 accounts that families can use to save money for education; in fact, an ABLE account is really a special kind of 529.

What is IRS Form 8829: Expenses for Business Use of Your Home

One of the many benefits of working at home is that you can deduct legitimate expenses from your taxes. The downside is that since home office tax deductions are so easily abused, the Internal Revenue Service (IRS) tends to scrutinize them more closely than other parts of your tax return. However, if you are able to substantiate your home office deductions, you shouldn't be afraid to claim them. IRS Form 8829 helps you determine what you can and cannot claim.

What is IRS Form 8859: Carryforward of D.C. First-Time Homebuyer Credit

Form 8859 is a tax form that will never be used by the majority of taxpayers. However, if you live in the District of Columbia (D.C.), it could be the key to saving thousands of dollars on your taxes. While many first-time home purchasers in D.C. are entitled to a federal tax credit, Form 8859 calculates the amount of carry-forward credit you can use in future years, not the amount of your initial tax credit.

What is IRS Form 8379: Injured Spouse Allocation

The Internal Revenue Service (IRS) has the power to seize income tax refunds when a taxpayer owes certain debts, such as unpaid taxes or overdue child support. Sometimes, a married couple's joint tax refund will be seized because of a debt for which only one spouse is responsible. When that happens, the other spouse is said to be "injured" and can file Form 8379 to get at least some of the refund.