The Form 1040 Tax Return: Claiming Your Adjustments, Exemptions, Deductions and Credits.

Understanding Your Tax Return

The apparent complexity of tax laws is probably one of the main reasons why people, in general, might be turned off from trying to educate themselves concerning basic tax matters that would enable them to attempt doing their own taxes. But even if they choose not to do their taxes themselves, having basic tax knowledge would enable them to understand what their preparers are doing, and place them in a position to detect any possible errors.

Even with just a basic overview, one will quickly realize that a tax return is not quite as complex as it looks. The 1040 tax return is comprised of two pages, and is broken down into 5 major components: income, adjustments, exemptions, deductions, and credits.

Tax adjustments, tax deductions, tax exemptions, and tax credits are terms that are sometimes used interchangeably by laypersons to mean the same thing. Yes, they are all great tax benefits, but each is distinctively different from the others.

In this article, we will take a detailed look at each of these tax benefits, so it would be useful to download a PDF copy of Form 1040 so that you can follow along with me.

Adjustments

These are amounts that you are allowed to subtract from your total income, in order to determine your adjusted gross income (AGI). If you have any of the following expenses, they can be deducted as adjustments to your income:

  • Educator expenses (for teachers).
  • Certain business expenses for reservists, performing artists, and fee-based government officials.
  • Heath savings account contribution.
  • Moving expenses (for example, if you had to move because you changed jobs.
  • Deductible part of self-employment tax (if you file a Schedule C to report self-employment income).
  • Penalties for early withdrawal of funds for a saving account.
  • Alimony paid.
  • IRA contributions.
  • Student loan interest.

Adjustments are reported on lines 23 to 35 on the first page of the Form 1040, and your adjusted gross income (AGI), which is the difference between your income on line 22, and the sum of your adjustments, is reported on line 37.

Deductions

Your Form 1040 tax deductions fall into two categories:

  • The Standard Deduction. This is a standard amount the government allows taxpayers to deduct from their gross income. This is adjusted each year, and the amount of the deduction depends primarily on your individual filing status.
  • Itemized Deductions. This consists of specific expenses that the government allows you to deduct, and these must first be entered on a schedule A.

You are allowed to deduct ONLY one or the other; whichever is greater. This deduction is reported on line 40 of your tax return.

Exemptions

This is your personal exemption, which is an amount taxpayers are allowed to deduct from their total income. This is adjusted each year, and for 2017 this amount stands at $4,o50 per individual. The amount you can deduct on your tax return depends on how many dependents you claim. You get an exemption for yourself, your spouse, if married and filing jointly, and for each dependent you claim. Your total exemption is reported on line 42.

Your deductions and exemptions are both subtracted from your gross income (AGI), to determine your taxable income, which is reported on line 43.

It should be useful at this point to make a distinction between tax deductions and tax credits. Tax deductions reduce your taxable income, whereas tax credits reduce your tax liability on a dollar-for-dollar basis. Consequently, a tax credit is generally the more attractive of the two.

Credits

Tax credits are essentially of two types: Nonrefundable and Refundable. Nonrefundable tax credits can reduce the tax owed to zero, but you won’t get a tax refund for the amount of the credit that exceeds the tax.

For example, if you have a nonrefundable tax credit of $5,000 and a tax liability of $3,000, the credit will eliminate the tax liability, that is, reduce it to zero. The remaining $2,000 of the credit, however, will be lost; the IRS will surely not be sending you a refund check for this amount.

For tax year 2017, Nonrefundable credits and reported on lines 48 t0 54 of Form 1040, and include the following:

  •  Child tax credit
  •  Credit for child and dependent care expenses
  • Education credit
  • Residential energy credit

The total of your Nonrefundable credits are subtracted from your tax as calculated line 47, and after adding any other taxes, this gives you your total tax on line 63.

Refundable credits, on the other hand are a different scenario; if they were to reduce your tax to zero, you will receive a refund for the amount that exceeds the tax.

For example, if you have a refundable tax credit of $5,000 and a tax liability of $3,000, the IRS would refund you the amount by which the tax credit exceeds the tax liability. You would, therefore, receive a tax refund of $2,000.

For the tax year 2017, Refundable credits are reported on lines 66 to 73 of Form 1040, and include the following:

  • Earned income credit.
  • Additional child tax credit.
  • American opportunity credit (40% of the amount).
  • Net premium tax credit.

Refundable credits are added to your withholdings for the year, plus any estimated tax payments you might have made, and this total subtracted from total tax, to determine whether you will receive a tax refund, or if you will owe the IRS.

Milton G. Boothe
Milton G. Boothe

Milton G Boothe is a federally-authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the IRS. 

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The Form 1040 Tax Return: Claiming Your Adjustments, Exemptions, Deductions and Credits.