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The Internal Revenue Service (IRS) requires that taxpayers determine and report their taxable income each year and pay any tax due. For most taxpayer’s this is a simple reconciliation of the taxable income earned during the year against the amount of tax withheld. For some taxpayer’s, it can be a complicated compilation of the year’s financial transactions.

Personal Tax Forms

Personal income tax returns are filed using federal Form 1040, Form 1040A, or Form 1040EZ. States that have an income tax have their separate forms that must be filed. These three federal forms are updated every year but are very similar because they all report income, deductions & exemptions, the tax is withheld, and any refund or payment due. The Form 1040 is sometimes referred to as the “Long Form” because it is two pages and has 78 lines, whereas the Form 1040EZ is called the “Short Form” because it only has 14 lines. Form 1040A has 50 lines. The Form 1040 is “longer” because it allows filers to report a wider variety of income, deductions, and credits. The Form 1040EA is “shorter” because it is for simpler tax returns and is designed only for reporting wage and interest income. The more complicated a tax return, the more likely the taxpayer benefits from a tax professional.


Most tax professionals prefer to use the same form for all clients, and we tend to file most returns using Form 1040. It is the most versatile form and using the same form allows us to compare return information easily from year to year.


Taxpayers must identify themselves on the tax returns by listing their legal name and their social security number. When electronically filing a tax return, the names on the return must match the names as associated with the social security number. In short, if you get married and change your name, you must change the name with social security also, or the return may not be accepted. The first name line is usually referred to as the “taxpayer” and the second name as the “spouse”.  The address listed on the return become the official address on file with the IRS.  Physical street addresses are preferred to PO Boxes.


The first five boxes of the tax return are for the selection of proper filing status. The filing status determines how much of a standard deduction is allowed; the marginal tax rates applied to the income, and any credits that the taxpayer is eligible to receive. Filing status can be one of the trickiest parts of filing tax returns, as there are many rules, requirements, and exceptions that create pitfalls for taxpayers.

  1. SINGLE – generally refers to a taxpayer that is not married. Taxpayers that are separated or going through divorce generally may not file as SINGLE unless state law considered them UNMARRIED under a decree of separate maintenance.


  1. MARRIED FILING JOINTLY – generally refers to taxpayers that are legally married. Marital status is decided based on a person's marital status on December 31. Married taxpayers filing jointly generally pay a lower tax rate. There is no requirement for Married Taxpayers to file Jointly, and several reasons why they should not.


  1. MARRIED FILING SEPARATELY – generally refers to the taxpayer that are legally married but choose not to file a Joint Tax Return. This filing status generally pays a higher tax rate.


  1. HEAD OF HOUSEHOLD – generally refers to a taxpayer that is not unmarried and has paid more than half the cost of maintaining a home for oneself and another relative who lives with that person for over half the year and can be claimed as a dependent. This filing status is often misunderstood and misused to gain larger tax benefits.


  1. QUALIFIED WIDOWER – is a special filing status that allows the taxpayer to retain the benefits of the Married Filing Jointly status for two years after the year of your spouse's death. The Taxpayer must have a dependent child in order to file as aQualifying Widow or 


Taxpayers are generally allowed an exclusion from income of a standard amount for each taxpayer and dependent claimed on the tax return. This amount is $4050 in 2016 and it is indexed for inflation.


The Internal Revenue Code §61 defines Gross Income as “all income from whatever source derived…” including, (1) Compensation for services, including fees, commissions, fringe benefits, and similar items; (2) Gross income derived from business; (3) Gains derived from dealings in property; (4) Interest; (5) Rents; (6) Royalties; (7) Dividends; (8) Alimony and separate maintenance payments; (9) Annuities; (10) Income from life insurance and endowment contracts; (11) Pensions; (12) Income from discharge of indebtedness; (13) Distributive share of partnership gross income; (14) Income in respect of a decedent; and (15) Income from an interest in an estate or trust.

Lines 7 through 22 on the Form 1040 capture the reporting of this income and segregates it into its various types of income, because different types of income are treated differently for tax purposes.

  1. WAGES, SALARIES, AND TIPS, ETC are earned income from employment and reported on Form W-2. Earned income is subject to ordinary tax rates and generally subject to employment tax, which includes social security and medicare.
  2. TAXABLE AND TAX-EXEMPT INTEREST is investment income reported to the taxpayer on Form 1099-INT. Taxable income is included in the total income whereas tax-exempt income is not included in the total income calculation but may be included in some calculations that determine the taxability of other income, such as social security. Interest Income is generally reported on Schedule B, which is required when interest and dividends exceed $1500.
  3. ORDINARY DIVIDENDS AND QUALIFIED DIVIDENDS are investment income that is reported on Form 1099-DIV and represent a return on an ownership investment in a business. Qualified Dividends are ordinary dividends that are tax at the lower capital gains rate. Qualified Dividends are included in in Total Income and broken out when calculating the income tax using the Qualified Dividends and Capital Gains tax calculation method.
  5. ALIMONY RECEIVED, and separate maintenance payments received by one spouse or ex-spouse from another spouse or ex-spouse generally must be included in the gross income of the recipient spouse (Treasury Reg § 1.61-10(a)). A tax professional can help determine what constitutes alimony and is deductible. Oddly enough, there is no source document associated with the payment of alimony.
  6. BUSINESS INCOME OR (LOSS) is reported on Schedule C Profit and Loss from Business for Sole Proprietor, Qualified Joint Venture, or LLC treated as a disregarded entity for tax purposes. Businesses must report income paid to any non-corporation on Form 1099-MISC, and those proceeds are part of the Gross Proceeds reported on the Schedule C. Expenses are subtracted from gross proceeds arrive at the Net Profit or (Loss). Net Profits are considered earned income and subject to a 15% Self-Employment Tax, that is calculated on Schedule SE. A “Statutory Employee” also files a return using Schedule C and can offset income “above the line”, which can be a great tax benefit. Statutory employees are not subject to Self-Employment Tax. A knowledgeable tax professional can help properly report items of income and expense and ensure a correct calculation of tax.
  7. CAPITAL GAIN OR (LOSS) are reported on Form 8949 and rolled up on to Schedule D. Capital gains or loss result from the sale of an asset – usually stocks, bonds, or real estate – and are the difference between the selling price less the basis in the item sold plus any selling expenses. Capital Gains can be short term or long term. Short term gains and losses result from items held by the seller for less than a year. Short-term gains are taxed at the ordinary income tax rate. Long-term gains and losses result from items help by the seller for a year and a day or longer. Long-term capital gains are taxed at a lower rate, currently 0%, 15%, or 20% (instead of 10%, 15%, 25%, 28%, 31%, etc). Brokerage companies issue a 1099-B that has all of the information to properly report these transactions. A knowledgeable tax professional can help properly report items.
  8. OTHER GAIN OR (LOSS) are reported on Form 4797 and are generally the gain or loss from the sale of business property that results in ordinary income.
  9. IRA DISTRIBUTIONS are distributions (withdrawals) from a traditional IRA. Roth IRAs are generally not taxable if certain criteria are met. Distributions from an IRA are reported on Form 1099-R
  10. PENSION AND ANNUITIES are distributions from pensions, annuities, and other qualified plans. Distributions are also reported on Form 1099-R
  11. RENTAL REAL ESTATE, ROYALTIES, PARTNERSHIPS, S CORPORATIONS, TRUSTS, ETC are all reported on Schedule E. Rental Real Estate Income and Royalties are reported on Page 1 and pass through income from Partnerships, S Corporations, and Trusts are reported on Page 2. Form 1099-MISC is issued for payments for rent or royalties. Pass-through income is reported on Schedule 1065 K-1; 1120s K-1; and 1041 K-1. Income from Schedule E may be “Active” or “Passive”, and its character determines its treatment in other tax areas. An experienced tax professional can help determine the character and tax strategies for this income.
  12. FARM INCOME includes many sources, but the most common source is the sale of livestock, produce, grains, and other products raised or bought for resale, and the value of any bartering. The entire amount a farmer receives, including money and the fair market value of any property or services, is reported on IRS Schedule F, Profit or Loss from Farming. Farmers may receive documents from payors to include 1099-MISC for payments for good and services, crop insurance, etc.; 1099-PATR for patronage dividends, Form K-1s from distributive shares of income from cooperatives, partnerships and agricultural venture. Income from farming is very complex and often difficult to defend in an audit.
  13. UNEMPLOYMENT COMPENSATION generally includes income paid from the state’s unemployment insurance fund. Unemployment Compensation is reported to the taxpayer on Form 1099-G.  Supplemental Unemployment benefits are considered wages and reported as wages and reported on Form W-2. Some private unemployment benefits are taxable and reported on line 21 other income.
  14. SOCIAL SECURITY BENEFITS are reported to the taxpayer on Form SSA-1099 and reported on this line. The gross proceeds are reported on the “a” line, and the “b” line reports the taxable portion. The taxation of Social Security is fairly complex. Software does the calculation, but unless you understand how its calculated, it’s hard to do any planning. See Understanding Your Tax Forms 2016: SSA-1099, Social Security Benefits
  15. OTHER INCOME is a catchall of any income not categorized as above and includes Prizes and awards from Form 1099-MISC,  Gambling winnings from Form W2G,  Jury duty pay sometimes reported on Form 1099-MISC or 1099-G or not at all,  Nonbusiness credit card debt cancellation From 1099-C, Foreign income converted to US dollars, etc. Form 1099-MISCwith box seven income should only be reported as Other Income in certain circumstances as it will most likely generate an underreporter examination notice. An experienced tax professional can help determine the proper reporting and defense.


Adjustments to income are expenses that reduce your total, or gross, income. You enter income adjustments directly onto Form 1040 of your tax return. The amount remaining after deducting these expenses is "adjusted gross income." Adjustments to income reduce your tax bill but are not itemized deductions, which you list separately on Schedule A and Schedule C. That means you benefit from adjustments to income whether you itemize deductions or take the standard deduction.

Above the Line

Adjustments to income are "above-the-line" deductions because they appear on page one of Form 1040, above the line that reports your adjusted gross income. Contrast these adjustments to "below the line" deductions, which appear on page two of Form 1040. There are two types of below-the-line deductions. The first is the standard deduction, which in 2015 is $6,300 per individual. The second type is itemized deductions that you list on separate tax forms and summarize the amount on Form 1040, below the adjusted gross income line. If your itemized deductions exceed your standard deduction, you'll pay less tax by itemizing.

Contributions to Tax-Deductible Accounts

Several adjustments to income stem from contributions you make to certain tax-deductible accounts, such as individual retirement accounts (IRAs), qualified employer plans -- for example, 401k's and 403b's -- and health savings accounts (HSAs). For 2014 and 2015, you can contribute up to $5,500 of your annual income to a traditional IRA -- $6,500 if you're age 50 or older -- and deduct the contribution as an income adjustment, subject to certain limitations if you also contribute to a qualified employer plan. The contribution limits on other retirement accounts vary but normally exceed those for IRAs. For 2015, an individual can deduct up to $3,350 in contributions to HSAs, which are accounts you can use to help pay for medical expenses.

Adjustments for the Self-Employed

Certain adjustments to income apply to self-employed individuals. Self-employment tax consists of Social Security and Medicare taxes. As a self-employed individual, you must figure and pay this tax yourself. The 2014 self-employment tax rate is 15.3 percent of your gross income, but you can deduct half of the tax as an adjustment to income. Self-employed individuals can also adjust gross income for the cost of health insurance and for contributions to self-employed retirement plans, such as a simplified employee pension or a personal 401(k).

Other Adjustments

Other adjustments to gross income include moving expenses, certain business expenses for reservists, any penalties paid for an early withdrawal of savings from, for example, a certificate of deposit, and alimony paid. Subject to certain requirements, you can deduct up to $2,500 of interest you paid on student loans and up to $4,000 in tuition and fees. Quicken includes a Tax Planner Tool that allows you to enter and calculate your adjustments to income. You also can assign Quicken transactions to particular tax categories, such as adjustment to income, and export the information to your tax preparation software when preparing your return.



Adjusted Gross Income is defined as gross income minus adjustments to income.


Taxpayers may take the standard deduction or itemize their deductions on Schedule A. Taxpayers generally pick the method that gives the higher deduction, but in some circumstances, taxpayer must itemize. Most taxpayers take the standard deduction unless they own real property and pay mortgage interest or real estate taxes.


A dependent is your qualifying child or qualifying relative. If you are entitled to claim an exemption for a dependent, that dependent cannot claim a personal exemption on his or her own tax return. Phase-out of exemptions — Your deduction is reduced if your adjusted gross income is more than a certain amount.


The tax can be calculated using the tax tables, a straight calculation, or by using the Schedule D Qualified Dividends and Capital Gains Method.

The tax may be offset by non-refundable tax credits including the Foreign Tax Credit from Form 1116; Education Credits from Form 8863; Retirement and Savers Credit from Form 8880; Child Tax Credits from Form 8812; Residential Energy Credits from Form 5695; and other General Business Credits from Form 3800 or Credit for Prior Years Minimum Tax from Form 8801.


Other taxes include the self-employment taxes from Schedule SE; Uncollected or Unreported Social Security and Medicare Tax from Form 4137 and Form 8919; Household Employment taxes from Schedule H; First Time Homebuyer Repayment from Form 5405; Individual Responsibility Payment (Healthcare tax); Additional Medicare Tax from Form 8959; and Net Investment Tax from Form 8960.


Federal Income Tax withheld from W-2; Estimated taxes paid on 1040-ES; Earned Income Tax Credit Schedule EIC; Additional Child Tax Credit from Form 8812; refundable portion of the American Opportunity Credit from  Form 8863; Net Premium Tax Credit from Form 8962; Amount Paid with Request for Extension from Form 4868; Excess Social Security and Tier 1 RRTA Tax Withheld; Credit for Federal Tax on Fuels from Form 4136; Tax Paid by RIC or REITon Form 2439; Health Coverage Tax Credit on Form 8885


FORMULA:          Income Less Adjustment = Adjusted Gross Income

  • Income Less Adjustment = Adjusted Gross Income
  • Adjusted Gross income less deduction less exemptions = Taxable Income
  • Taxable income less non-refundable tax credits = Income Tax
  • Income Tax plus Other Taxes less payments and refundable tax credit = Refund (balance due)

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