What The IRS Form 1040 Does And Why You Should Know

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If you are a United States taxpayer, you are going to have to become familiar with the IRS form 1040 to file your annual tax return. The form is divided into easy to follow sections where you will report various deductions and income to help determine the amount of taxes you will need to pay or the amount of the refund you will receive. Depending on your specific type of income, you may need to fill out additional forms and schedules.

Reporting Income

The first page of the Form 1040 allows individuals to calculate their Adjusted Gross Income or AGI. The first section includes an area to fill out for salary and wages, interest, tips, dividends, local tax refunds, business income, alimony, IRA and pension distributions, capitol gains, Social Security benefits, farm income, and unemployment income.

There is a box n this form that includes a place to fill out any other income that may not fit into one of the categories. It is essential that you list all income that you receive throughout the year unless it is tax-exempt. The total amount of all this income is known as the total income.

Understanding The Deductions For AGI

The IRS will allow you to claim specific deduction from your total income to arrive at the adjusted gross income. There are several allowable adjustments which include any alimony payments that are made, student loan payments, IRA contributions, health saving plan contributions, as well as self-employment tax payments. The AGI is essential as there are many deduction limitations that will be affected by it.

Deductions and Exemptions

On the second page of the 1040 Form, one will come across the ability to reduce the AGI further with either standard deductions or a total amount of itemized deductions. Itemized deductions such as mortgage interest, excess medical expenses, and unreimbursed business expenses will fall into this category.

If the total amount of the itemized deductions does not exceed the amount of the standard deductions on the filing status, your taxable income is going to be lower than if you were to claim the standard deduction. Once you have chosen the best deduction, you will be able to reduce the taxable income by claiming an exemption for yourself and one for every one of your dependents. Once you have subtracted your exemptions, you are going to be left with the taxable income. This is simply the amount that will be subjected to an income tax.

You can use a program like TurboTax, which will help you recommend whether you should choose the standard or itemized deductions.

Calculating Taxes And Claiming Credits

The next step is to figure the amount of tax you will owe on your taxable income by referencing the tax tables that are included in the instructions. Once again, if you are using a program like TurboTax, this amount will be automatically calculated for you. You will need to compare the amount of the total tax withholding amount to the tax bill found at the bottom of the 1040 Form, which will allow you to know if you will expect a refund or need to make a payment. If you believe you are eligible for any of the additional tax credits that are listed on the 1040, you will need to reduce the amount of tax you owe through the credits before completing the form.