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Cracking the Code: Filing your Income Tax Return Part 1

Cracking the Code: Filing your Income Tax Return Part 1

Income tax returns are of several types. You need to use the tax return form that corresponds with your unique situation and facilitates you to claim the deductions, credits, income etc. that are applicable. In this 3-part article series, we are going to talk in detail about one of the most common types of income tax return – IRS Tax form 1040.

Income Tax Filing: U.S. Individual Tax Return (IRS Tax form 1040)

It is the standard federal income tax form that is used to report the income of an individual. It is also called the long form because the form is more extensive compared to the shorter ‘1040 A’ form that facilitates taxpayers to claim a number of itemize deductions, tax credits, other expenses and adjust income.

While it may take slightly longer to complete the 1040, the benefits it offers to taxpayers are tremendous. It gives them more opportunities to lower their tax bills. When filing your federal income taxes, there are a number of forms for you to choose from. However, if you do not have a good idea of the form you qualify for; the safest best is to use IRS form 1040.

Obtaining Form 1040

There are a number of ways through which you can acquire the long form or 1040. The most convenient and the fastest option is to download it on your computer. The form can also be obtained from post offices and local libraries around tax time or from an IRS office or a tax centre. Additionally, you may also submit a request to receive the form by U.S. mail.

You need to have the following information ready before filing your 1040 tax form:

  • Your residency status

  • Your filing status

  • Your proof of identification

  • Your social security number, your spouse’s social security number and social security number of your dependents

  • Your date of birth, the date of birth of your spouse, and date of birth of your dependents

  • Your past tax return’s copy

  • Your routing number; and

  • The number of your bank account

Here is a list of instructions you need to follow when filing out different sections of the form:

  • Your Name, Address, and your Social Security Number

In this section, you need to provide your name, your address, and your social security number. You need to know that an incorrect or missing social security number can have serious consequences such as a reduced or delayed tax refund, or even an increase of tax. If you are a resident or a non-resident alien, you can provide your ITIN or individual taxpayer identification number wherever you are required to provide your social security number on the tax return.

  • Your filing Status

In this section of the form, you’ll be required to include your tax filing status, whether you’re filing it as a single person, filing jointly, you’re married but filing separately, you’re the head of household or a qualifying widow/widower with dependent child. It is possible that you qualify for multiple filing statuses, in which case you’ll be required to make a choice. In such situations, it is a good idea to pick a filing status on which you get maximum benefits.

  • Tax Exemptions

Taxpayers are allowed by the IRS to claim personal exemptions not only for themselves but also their dependents. A personal exemption is more or less similar to a tax deduction because it reduces your taxable income. Bear in mind that if your income exceeds a certain amount, your personal exemption may be less.

  • Income

Your income, as defined by the IRS, is “the money you receive during the given tax year”.  In order to determine their annual income, most people commonly review their W-2s (wage and tax statements). Taxable income is generally defined as gross income less any allowable tax deductions. It is more important than ever to realize that your taxable income encompasses more than just your annual salary.

It may include gains you receive from stocks, real estate sales, casino wins, betting wins, etc. The value of bartered items is also subject to tax and is included in taxable income.

Furthermore, income that may be part of your gross income but not identified as taxable income would include; proceeds from your life insurance policies, welfare benefits, workers compensation benefits, scholarships, compensation for personal injury etc.

  • Adjusted Gross income

Adjusted gross income may be defined as gross income from all taxable sources less allowable tax deductions. These may include business expenditures that have not been reimbursed, alimony, medical expenses, or retirement plan contributions that are deductible.

Adjusted gross income is very important in calculating your overall tax liability because it can have an impact on your tax bracket, the amount that can be contributed to retirement accounts that are qualified and the tax credits an individual may qualify for.

On the other hand, gross income is defined by the IRS as, “income received in the form of services, money, goods or property that is not exempt from tax. This may include income that you’ve received from outside the U.S or income that you’ve received from a real estate sale”.

  • Tax and Credits

Furthermore, if you qualify for any tax deductions or credits, you would want to reap the benefits. As a result of tax deductions, your taxable income is reduced, whereas a reduction in tax credits reduces the actual amount of taxes owed by a person – both will increase your odds of receiving a tax refund. You need to make sure that you fully understand how to claim any income tax benefits, as any mistakes may hinder the processing of your return.

As a result of your tax deductions, your taxable income is lowered. Moreover, tax deductions are equivalent to the percentage of your marginal tax bracket. For example, if you lie in the 25% tax bracket, a deduction by $1,000 may help you save $250 in taxes (0.25*$1,000 = $250).

 

We’ll continue this discussion in the next article of this series. Don’t forget to follow up.

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