What is a 1040?
When you file an individual income tax return, you’ll use Form 1040 to report your income, deductions, “other taxes,” tax credits, and ultimate tax liability. Your 1040 provides the basics, and it dictates which other forms you need to attach to your tax return.
The ultimate goal of the 1040 is to figure your tax liability (how much you need to pay in taxes) or tax refund (how much you’ll get back). You start with your different forms of income, and then apply any relevant deductions and credits (as well as other taxes besides federal taxes that apply to you).
If you use a tax filing software, it will calculate all of this for you. However, it’s important to understand how the different sections of your income tax return can affect each other. Here’s what the 1040 flow looks like:
Filing status > Exemptions > Income > Deductions > Tax and Credits > Other Taxes > Payments > Refund
The Form 1040 follows this order for a reason: Each detail that you provide about yourself, your income, and your spending will affect how much you owe in taxes (or how much you’ll get back).
From the top
Your filing status will help you calculate certain deductions and credits that you can take later on. For example, if you are single, you receive a standard deduction of $6,300 in 2016. If you’re married, you receive a standard deduction of $12,600.
Exemptions are used to determine by how much your taxable income should decrease. You typically claim an exemption for yourself, and one for each of your dependents (plus one for your spouse, if you’re filing jointly).
There are 14 different kinds of income that the IRS asks you to report, as well as a miscellaneous income category. A few examples are:
- IRA distributions
- Business income
Different types of income may mean filing additional forms or paying a different tax rate, so it’s really important to report each type of income correctly. For example, if you have business income from being self employed, you’ll attach Schedule C: Profit or Loss From Business to report your business income (or loss).
Some of the expenses you have during the tax year qualify as deductions, meaning they can be subtracted from your gross income. When you deduct an expense, that means you don’t have to include the money that you spent as income (and that you pay less in taxes).
Staying on top of your deductions can drastically reduce your taxable income, so familiarizing yourself with every possible deduction could pay off in the long run. Some examples include:
- Self-employed health insurance
- Alimony paid
- IRA contributions
- One-half of self-employment tax
Filing taxes is like math class--you have to show your work. That’s why you have to report each deduction that you claim, instead of just reporting one income amount with deductions already factored in.
Once you calculate your income minus deductions, you’ve arrived at your Adjusted Gross Income (AGI). You want your AGI to be as low as possible, because it’s used to determine your eligibility for lots of different tax credits further down on the 1040.
Tax and Credits
Based on your AGI and several other factors (for example, filing status), you can qualify for several different tax credits. Credits reduce your tax liability, or the amount that you owe the government in taxes. For example, if your tax liability is $5,000 and you qualify for $100 from the Child Tax Credit, your tax liability would be reduced to $4,900.
If you engage in activity that is subject to other forms of taxation, you have to report it in this section of your 1040. For example, self-employment income is subject to a 15.3% tax rate in 2016.
This is where you report any taxes you’ve already paid, as well as refundable credits that can be used to reduce your tax liability. For example, if you’re an employee of a company that withheld your federal taxes for you, then this counts as a payment towards your overall tax liability. Your employer is essentially paying your income taxes on your behalf, and this payment reduces the amount that you owe in taxes when you file in April
This is the fun part. In addition to getting your money back you may be entitled to a refund based on a government program. For example, this may happen if you have taxes withheld from your paycheck, but then qualify for an additional refundable credit like the Earned Income Credit.
Tade Anzalone heads up Stride’s tax and finance support and is a registered tax return preparer and 2017 Annual Filing Season Program Participant. In addition to her years of experience helping people navigate complicated finance and tax obligations, she has degrees in Government, Psychology, and Spanish from Georgetown University.
Disclaimer: The information contained in this Guide is not offered as legal or tax advice. The U.S. federal income tax discussion included in this Guide is for general information purposes only and is not a complete analysis or discussion of all potential tax consequences that may be relevant to a particular individual. In light of the foregoing, each individual should consult with and seek advice from such individual’s own tax advisor with respect to the tax consequences discussed herein. Any information contained in this Guide is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the U.S. Internal Revenue Code of 1986, as amended.