[quote37d60fb22a="mommyjamieof2"]How does this work if I receive a $600 gift does that reduce my refund $600?[/quote37d60fb22a]
No. As TSJ said, everyone's tax situation is different so nobody can tell you what impact it will have on your taxes.
The US tax system is based on tiered brackets. Since a lot of people don't seem to grasp how that system works, here's an overly simplified lesson, which also serves to illustrate just how many variables are involved and thus why you can't ask people on an internet forum about personal tax figures and expect any reliable answers. ;)
[quote37d60fb22a]For 2008, the Federal tax brackets for a single (unmarried) person are
li 10% from $0 to $8,025
li 15% from $8,026 to $32,550
li 25% from $32,551 to $78,850
li 28% from $78,851 to $164,550
li 33% from $164,551 to $357,700
li 35% $357,701 and above
This applies only to amounts above $8,950 (assuming the standard deduction of $5,450 plus one personal exemption of $3,500) for an individual. For example, a single individual without children pays
li 0% of the first $8,950 of income,
li 10% of the income between $8,951 and $16,975,
li 15% of the income between $16,976 and $41,500,
li 25% of the income between $41,501 and $87,800,
li 28% of the income between $87,801 and $173,500,
li 33% of the income between $173,501 and $366,650, and
li 35% of the income exceeding $366,650.[/quote37d60fb22a]
So you can see that once you're above the $8,950 income floor, you start paying taxes based on your total taxable income, but you don't pay one percentage on the whole amount. It's broken up into chunks, with percentages applied to each chunk. If you're married filing joint, head-of-household, etc., then you will have a different set of numbers, but the same concepts apply.
So, to actually figure out your taxable income. Total up all of your income, including from wages, freebies, interest/dividends, etc. This may not include every dollar you earned, because some things like 401(k) & FSA contributions and employer medical plan premiums are typically pre-tax or tax exempt, and thus reduce your gross taxable wages. Then there are a couple of adjustments that a relatively few people can apply to this number before proceeding, but for simplicity lets just say your total income is your AGI (Adjusted Gross Income). Then from AGI you subtract your deductions, either your standard deduction(s) for you and any spouse or dependents, or your total itemized deductions (mortgage points/interest, charitable gifts, medical costs that exceed the floor percentage, lots of other things), whichever is greater. The total deduction is subtracted from your AGI to arrive at your taxable income.
Then referring to the tax brackets above, you chop up the income along those lines and apply the percentages to their relevant chunk of income. [i37d60fb22a]So nobody, no matter their income and highest tax bracket, pays a fixed percentage on their entire taxable income.[/i37d60fb22a] I find that this point is lost on a lot of people who never learned about how the tax system works. They hear "I'm in a 25% tax bracket" and assume they're going to pay 25% on all the income they earned. Not true. Even Bill Gates, applying the 2008 brackets above, pays just 10% of the amount between $8,951 and $16,975, same as you or I. Of course that's a tiny fraction of his total income, so the vast bulk of his taxable income [i37d60fb22a]would[/i37d60fb22a] be charged at the highest bracket.
This total tax amount is then offset by any credits you qualify for, such as Earned Income Credit, child tax credits, etc., to arrive at your net tax liability. If your total tax withholdings for the year (the amount you've paid in so far through payroll deduction or whatever) exceed this net tax liability, then you get a refund of the difference. If not, you have to pay the difference.
As I said, that's an [i37d60fb22a]over-simplified[/i37d60fb22a] explanation that leaves out a lot of detailed possibilities. For example, some other types of income, such as self-employment income, is subject to additional taxes that regular wage earners don't pay themselves. Then you have to factor in capital gains, estate taxes, and a whole slew of other vague and complicated tax laws and liabilities that apply to some but not others. Then of course come state and local income taxes, but only for some states and localities, and each have their own rules and brackets.
So you get the idea that while the same rules apply to pretty much everyone, your overall tax situation is unique to you and you alone -- it all depends on the totality of your tax situation, including income, deductions, credits, withholding amounts, state/local liabilities, etc. etc. This is why nobody can tell anyone how much they might be taxed on any gift amount. To even approximate is basically a wild guess, unless they've actually done your accounting for you.