Written by Dan Caplinger, Daily
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.
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