Do You Understand Your Taxes?
Tax returns are the eyes of one’s personal finance. Learning the basics can be very valuable as you plan for your financial future and retirement.
Page 1 of the 1040:
States personal information – Name, Social Security Number, dependents by name and SSN, filing status, and a few other items.
Lists all income from the various income categories – Wages, tips, dividends, interest, business income, social security, pensions, IRA distributions, farm income, tax refunds, alimony, unemployment compensation, capital gains, and other income. All income added together is the Gross Income.
The next part of Page 1 of the 1040 is Adjustments to Income – Alimony paid, IRA and personal pension contributions, health savings account contributions, educator expenses, student loan interest, tuition and fees, and a few more items. The Adjustments to Income total is subtracted from the Gross Income to arrive at Adjusted Gross Income (AGI). AGI is an important figure and is used to determine other aspects of your personal tax situation.
Page 2 of the 1040:
Lists Deductions (Standard or Itemized) and personal exemptions which are subtracted from the AGI to arrive at Taxable Income, from which you enter a schedule or table to determine the tax owed.
There is then an Alternative Minimum Tax (AMT) if applicable, which is an addition to the taxes owed, calculated elsewise in the tax return.
Tax Credits are subtracted.
Other Taxes such as Self Employment Tax are added to come up with your Total Tax.
From the Total Tax figure, taxes paid over the course of the year are subtracted.
Leaving – Amount Owed or Amount Due back to you.
All of this is supported by the Schedules and Forms.
Schedule A - Lists allowable itemized deductions (which can have limitations)
Schedule B – Interest and Dividend Income
Schedule C – Self Employed Income and Expenses (Net carried to Page 1 of the 1040)
Schedule D – Capital Gains and Losses (Net carried to Page 1 of the 1040)
Schedule E – Rental Property Income and Expenses (Net carried to Page 1 of the 1040)
Schedule F – Farm income and expenses (Net carried to Page 1 of the 1040)
There is, of course, more to it than I have written about here, but these are the basics.
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