Chapter 4. Detailed review of Form 1040

Tax form 1040 can be completed in 7 steps. 

 

How to

Think of the form 1040 as a basic addition and subtraction problem! It is suggested that you practice using a pen and paper first before you venture into filing electronically, this assures that you have all the needed information and you are comfortable with 1040.

 

 

Step 1 - Complete personal information

• • List personal information, filing status, and exemptions

Step 2 - Input your wages, interest, tips (income)

• • Add all income from your:
    • Job
    • Tips
    • Taxable interest
    • Business income
    • Alimony received
    • Unemployment compensation
    • Social security, and so on
  • Add everything you received during the year that is considered taxable income

Step 3 - Subtract adjustments

• • This is your opportunity to adjust the income stated in step 2 in order to arrive at your adjusted gross income.
    • Remember that Congress is always making tax changes, as minor as they may be, they may impact your tax filing
    • It is important to review Publication 17 before you claim an adjustment

Step 4 - Subtract deductions

• • Subtract deductions then calculate tax on taxable income, and subtract credits
  • Each tax filer is entitled to a certain dollar amount of deductions
    • Think of these subtractions as a break on your income that can be excluded from a tax liability
  • You can choose either:
    • Standard deduction based on your filing statusOR 
    • Itemize deductions depending on how many deductions you are entitled to
      • If you choose to itemize deductions, you will have to complete other related forms such as the Schedule A
  • Once you subtract deductions, you arrive at your taxable income
    • This is the amount on which you need to calculate your tax liability before you subtract any tax credits
    • Remember that a non-refundable tax credit reduces your tax liability, but only a refundable tax credit will generate a tax refund

Step 5 - Add/total other taxes

• • Step 4 helps you get to your tax liability from your taxable income
  • Step 5 add other taxes from other sources to get the sum of total tax. Such as:
    • Self-employment tax (Note: This is the sum of both the employer and employee portions of Medicare and Social Security Tax)
    • Social security tax
    • Net investment income tax
    • Other taxes and penalties may be added here
  • Many individuals, especially students, might not have anything to add in this section
    • You still need to review each line to make sure you don't skip any relative information.

Step 6 - Add refundable tax credits

• • This is the step in which you compare your withheld income tax with your tax liability and add refundable tax credits to determine if you are entitled to a refund, or if an additional payment is due from you
  • This section is a clear example of the relationship between W-4 and W-2 discussed in a prior chapter in this module
  • This step settles your tax obligation between what was withheld throughout the year and your determined liability at the end of the tax year

Step 7 - Finishing details

• • This step allows you to finish your filing process by either claiming a refund or paying an amount due to settling your tax account for the year
  • Most financial transactions are now done electronically so you can include your bank routing and your bank account information to receive a refund or pay online to satisfy the additional amount due
    • You have to sign the form if you are sending a paper form, or sign digitally and file electronically using the many available sites for tax filing

The 2018 Form 1040 uses a "building block" approach so the federal tax return could be reduced to a single, simple form. Taxpayers can supplement this form with new numbered schedules, if needed. These new schedules are:

• Form 1040 (Schedule 1), Additional Income and Adjustments to Income Links to an external site.
  Taxpayers use this schedule to report items such as capital gains, unemployment, compensation, prize or award money, gambling winnings or to claim deductions, such as student loan interest deduction, self-employment tax and educator expenses.
• Form 1040 (Schedule 2), Additional Taxes Links to an external site.
  Taxpayers use this schedule to report amounts they owe for the Alternative Minimum Tax (AMT) or when they need to make an excess advance premium tax credit repayment.
• Form 1040 (Schedule 3), Additional Credits and Payments Links to an external site.
  Taxpayers use this schedule to claim a nonrefundable credit other than the child tax credit or the credit for other dependents, such as the foreign tax credit, education credits, general business credit

 

Practice

Now that you know how to complete form 1040 for tax filing, think of paying it forward and discuss filing your taxes with a friend or a family member.

 

Congratulations!  You can move on to Chapter 5. Tax tips for college students

To review the full module on Federal Tax for the US individuals, click here.