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Preparing your taxes yourself is really not as daunting a task as many people might perceive it to be. As a matter of fact, doing your own taxes can be fun. At first glance, the Form 1040 tax return is typically perceived to be a very complex government form, which can only be completed by trained tax professionals. This is an unfortunate misconception, although your paid tax professional might want you to think this way. User-friendly tax software readily available on the market makes it so easy to prepare your own taxes.
The objective of this article, however, is to introduce you to the Form 1040 tax return. This form is comprised of several sections, and we shall proceed to do a brief overview of each section. It would be useful if you were to download a PDF of the 1040 tax form from the Internet, so that you can follow along.
Generally speaking, you will not be writing numbers manually onto your 1040; simply imputing your information correctly into the software will ensure that the numbers fall into the right sections, and the necessary calculations are done.
1. Information Section
This section will typically contain the following information:
• The tax year in question.
• Your name and address.
• The Social Security numbers for you, and your spouse and dependents, if applicable.
• Your filing status. (The software will usually require you to select your filing status at the outset).
• Your personal exemption, and also your dependent exemptions, if applicable. Every taxpayer is entitled to a tax exemption for each dependent they claim on their tax return.
2. Income Section
Most income you receive is taxable. Income from all sources is reported on lines 7 through 21. Some income is figured first on other forms and schedules, and then transferred to the income section.
3. Adjusted Gross Income
Your eligible adjustments to gross income are recorded in this section. Adjustments reduce total income reported on line 22, and ultimately your tax liability. Your Adjusted Gross Income (AGI) is figured on line 37, by subtracting total adjustments from total income.
4. Tax and Credits
Based on the information you entered at the outset, the software will report a deduction of EITHER your Standard Deduction or your Itemized Deductions. This amount, along with your personal and dependent exemptions (if applicable) will be deducted from your Adjusted Gross Income, to determine your taxable income, which is reported on line 43.
Note that the Standard Deduction is a pre-determined deduction, which is primarily based on filing status and age. Itemized Deductions consist of certain qualifying expenditure that the IRS allows you to deduct. The software will deduct the higher of the two.
Your tax is figured on line 44, and from this amount is deducted any tax credits listed on lines 48 to 54 that you are entitled to, and the result reported on line 56.
The credits reported in this section are all non-refundable credits, meaning that if they exceed the amount of the tax figured on line 44, you cannot receive a refund for the unused part of these credits, if any. These credits can only reduce your tax to zero, and that’s where they stop.
5. Other Taxes
There are some other taxes that you may be liable for, depending on your circumstances, and these taxes include the following:
• Self-employed tax.
• Unreported Social Security and Medicare tax.
• Additional tax on IRAs.
• Household employment taxes.
• First-time homebuyer credit repayment.
• Health care: individual responsibility
These other taxes, if applicable, are reported on lines 57 through 62, and they must be added to the amount on line 56, to figure your total tax, which is reported on line 63.
Your payments include all federal tax payments you have already made during the year, and include the following:
• Taxes withheld from your salary by your employer, which is reported to you on Form W-2.
• Any tax withheld from amounts paid to you by any other payer.
• Any estimated tax payments that you made directly to the IRS during the tax year.
Certain other credits that you might be eligible for are also included in this section (lines 66 to 73). These credits are termed refundable credits. Refundable credits are added together with your payments, and the total reported on line 74.
In contrast to nonrefundable credits, refundable credits are the more favorable, and will result in a tax refund even if they exceed your total tax.
7. Refund/Amount You Owe
This is where your tax refund or balance due is reported.
If the total of your payments and refundable credits (line 74) exceed your total tax (line 63), this represents an overpayment of taxes on your part, and is reported on line 75. This will be the amount of your tax refund.
On the other hand, if the total tax (line 63) exceeds your total payments and refundable credits (line 74), this would indicate an underpayment of taxes on your part. This underpayment is reported on line 78, and this means that you owe the IRS this amount.
8. Signature Section
You are required to sign your return, and you do so electronically by following the software instructions.
So there we have it; your tax return isn’t as complex as it looks. So even if you choose to use a tax professional to prepare your taxes, it certainly doesn’t hurt to understand what they have done. Human beings do make errors from time to time.