By Patrick Amey
One of life’s universal truths is that every time we get a jump in pay, Uncle Sam generally does as well. Throughout our jobs and careers, there are trigger events – gaining a second income, securing that big promotion or receiving a large bonus, for example – that significantly increase our income and catapult us into a higher tax bracket.
Given the significance of our tax payments, it only makes sense to thoroughly understand the basics of your personal income tax return form, otherwise known as the Form 1040.
The 1040 is the two-page form on which you complete the summary for all your income, adjustments, deductions, etc. and declare your final income tax tally.
The first part of the form is where you provide the basics – name, address, and your filing status (married, single, filing jointly or separately, etc.), and the number of exemptions you are claiming.
The Income section is where you declare all of your income, regardless of source, for the year in which you are filing. All income from W2 wages, unemployment, investments, rental property, etc. is declared in this section. The Income section also includes IRA contributions, pensions, capital gains and losses, and other special circumstances. Once these are all accounted for, the last line of the section should reflect your total income.
The Adjusted Gross Income (AGI) section captures items such as Health Savings Accounts (HSA), any IRA deductions, self-employed adjustments, student loan interest and other “special” costs or expenses you incurred during the year. Once you add these up, you subtract them from your total income to arrive at your adjusted gross income – your “new” total income that has been “adjusted” for your special circumstances.
With your AGI as the starting point, you begin to look at Tax and Credits. In this section, you subtract the exemptions given to all filers on the tax form (maybe just you or perhaps you and a partner/spouse) and your dependents). Note: Some people with a high AGI will be phased out of exemptions.
You will also subtract standard and itemized deductions. This includes things like healthcare expenses, home interest, charitable contributions, and other taxes paid like personal property tax and state tax. Note again: Some with a high AGI will also be phased out of these deductions. Credits such as foreign taxes paid and educational tax credits are deducted directly from your tax liability, not your taxable income. Once you have tallied your tax and credits, you’ll declare your total tax.
You then document any payments you have already made, such as withholding, and estimated payments you’ve made for the year to arrive at your total payments.
If your total payments made exceed your total tax, you will receive a refund for the difference. Conversely, if the total tax exceeds your payments, you will owe the difference.
Taxes will be one of your life’s constants, so the more you know about the varying components of both your income and spending, the more likely you are able to positively impact your financial position.
For help with your specific financial planning needs, schedule a meeting by clicking below, contact Patrick Amey –pamey@makinglifecount.com, or call (913) 345-1881.