What Everyone Ought to Know About Their Income Tax Returns – An Introduction

Happy Monday! Now that we are a couple of weeks into the New Year, most of us are easing our way back into regular, post-holiday life. That life, for me, means getting ready for tax season.

As I’ve said before, I love everything personal finance. But of all of the disciplines, I adore tax the most. I get to play with the code, regulations, and forms on a daily basis. And trying to solve each puzzle really energizes me.

I also do my best to educate my clients on their tax life. Everyone should know the basics when it comes to their income tax return, even if you use the most trusted CPA in the world. A lot of my clients get in trouble because they sign their return without truly understanding its contents.

So in commemoration of my love of tax education and the upcoming filing season, I wanted to take a couple of weeks to breakdown a regular 1040 tax form and give you the insights that you need to understand your return.  These posts will outline the form’s construction and give you the salient points needed to comprehending it as a whole.

The lessons will involve six broad categories:

Personal Information: Giving your name, address, ssn, etc., as well as the importance of your filing status and dependents.

Income: How to calculate your gross income for the year and what that even means.

Adjustments to income: Making certain “above the line” deductions to arrive at a figure called your adjusted gross income (AGI).

Taxes and Credits: Figuring out the amount of your income that you pay taxes on (taxable income), the tax owed on that income, and take any allowable credits away from that tax.

Other Taxes: Exploring any additional taxes you may incur (e.g., self-employment tax, additional taxes on retirement plan withdraws, and/or household employment taxes).

Payments: Lastly, taking into account money you have paid to the government during the year (e.g., withholding from your paycheck, estimated tax payments, or refunds applied forward from other years).   

Stay with me and over the next two weeks, you will develop a better understanding of your returns and gain insight into the complex yet fun world of tax.