If you are an employee and you are getting your paychecks regularly, it is certain that you are already paying taxes. Your employer withholds the taxes you owe on your earnings and files it to the federal government. You should verify your taxes to find out whether you’re paying your taxes correctly or not.    

Why File Tax Returns? 

Tax withheld by your employer is an estimate of the taxes that you will owe by the end of the year. The taxes withheld can vary more or less than the actual amount of your tax liability. In case, you overpaid your taxes and want to claim a refund or have to claim relaxations to save on your taxes, you have to file a tax return.

How to file a tax return?

As per the guidelines by the IRS, individuals have to file returns on Form 1040. Form 1040 can be filled in the following three ways:

  1. MANUALLY- You can download and manually fill the Form 1040 and refer to the instructions on the official IRS website and post/mail it to the IRS. 
  2. ONLINE USING A SOFTWARE: You can use tax software, for e.g. FILETAXES.ONLINE. The software has strategies and algorithms to acquire your information. Filling in the details to the queries of the software, the software calculates all the potential deductions and credits with the net taxable income you are liable to pay taxes on. Once you complete the Form 1040, file it to the IRS electronically.
  3. HIRING PROFESSIONALS: You can take the help of a professional. Accountants or tax preparers file taxes on your behalf.  They can be considered for complex transactions.   

How are your taxes considered?

The taxes you owe are calculated on your annual income. The federal government follows a progressive tax structure. The higher the income, higher is the rate of interest.

Income Tax Interest Rate Slabs
Income Tax Interest Rate Slabs

Right now the U.S. tax structure has the above-mentioned brackets. The tax brackets are applicable on your net taxable income i.e. after subtracting deductions and credits. Here is how it works: Assuming that you are filing under the category of a single tax payer and your total taxable income is calculated to be $90,000.

Income Tax Brackets
Income Tax Brackets
  •  The first $9700 will be charged @10%.
  • The next bracket is between $9,701 and $39,475 i.e. $29,775 charged@12%.
  • The bracket is between $39,476 and $84,200 i.e. $44,725 charged@22%.
  • The last bracket for you is between $84,201 and $90,000 i.e. charged@24%.

Introduction to the Form 1040

The forms that are used in the U.S. tax system for filing tax returns are identified with a particular number. For any individual filing tax returns, it is Form 1040. Form 1040 is the summary of your entire tax situation. Tax returns thereafter are filed to the IRS (Internal Revenue Services) citing your tax situation

The form is divided into sections where you can report your income and deductions to determine the amount of taxes you owe or the refund you expect to receive.

A lot of changes occurred in Form 1040 in the year 2018 which resulted in a negative impact on the Form. To rectify this the IRS released a simpler Form 1040. The IRS simultaneously issued Form 1040-SR, exclusively for the senior citizens. 

The 1040 form contains 3 important aspects

Form 1040 Aspects
Form 1040 Aspects

Who Can File Form 1040?

All the U.S. residents must file Form 1040. It is applicable to employees, independent contractors, self-employed, freelancers, etc. In short, every individual has to file Form 1040. 

People who have annual income exceeding a fixed(by the IRS) threshold, must file tax returns. There are groups and categories that decide whether you have to file tax returns or not. Each group has its own limitations for gross income. You must file returns if your income is above the minimum limit.

Following are the components:-

  • You’re married or single
  • You’re dependent
  • Your age
  • If you are blind

The following are the 2019 standard deductions.

Type of TaxpayerAge at the end of 2019Your Gross Annual Income at the end of 2019
SingleLess than 65 Years
65 Years or Above
$12,200
$13,850
Married
Filing Jointly
Less than 65 Years
Both Spouses
65 Years or Above
One Spouse
65 Years or Above
Both Spouse
$24,400
$25,750
$27,000
Married
Filing Separately
Any Age$5
Head of HouseholdLess than 65 Years
65 Years or Above
$18,350
$20,000
Qualifying Widow (er)Less than 65 Years
65 Years or Above
$24,400
$25,750

Gross income is anything that includes income in the form of money, goods, property, and services that are not exempted from the tax. It even includes income sources outside of the United States.

The threshold provided by IRS for the year 2019 for single tax filers below 65 is $12,200, the cited threshold is for the filing of the tax returns in 2020 for the financial year 2019. The thresholds are updated each year to keep up with inflation.

Impact of TAX CUTS AND JOBS ACT on form 1040

The IRS officially announces the amount of income at the very end of the year. IRS also  mentions standard deductions and personal exemptions for a particular year. 

But then tax cut and jobs act excluded personal exemptions from the tax code from the year 2018 to at least 2025. 

How early can you file the taxes?

Every tax filer has a curiosity to file the returns as the New Year arrives. Filing your taxes early is good but getting an early refund could be difficult. The IRS announces dates according to their guidelines. 

Income Documents needed for filing tax returns

  • Form W-2 for your earnings of 2019 should be received from your employer 
  • Form 1099 should also be given to the independent contractors or for the side incomes if any.

The process for filing your tax returns

The IRS will officially begin accepting and processing tax returns for the 2019 tax year from Monday i.e. January 27th, 2020. The IRS will receive tax returns electronically or by paper returns as well.

In the year 2018, the returns filing date was 28th January, because the IRS had to adjust the requirements of the Tax Cut And Jobs Act that came into existence in the tax year 2018. The process of paper returns was not allowed because of the government shutdown, that ended on January 25, 2019.

The accountants and tax software companies including those with IRS free file programs will help you with filing the taxes immediately if you have complete documents that are required for filing the taxes. You also can E-file or mail your return in advance to the IRS. The IRS will hold your process until the gates are open and your application will be amongst the first few in the process. 

What if you don’t receive your form W-2?

Employees have to be quick enough for receiving Form W-2, at least before the deadline date. The employers are supposed to send out Form W-2 by Jan 31, 2020. If they delay for any reason or couldn’t do it then this could prolong your return process. 

Therefore, reaching out to your employer and requesting them for a copy or a duplicate copy is important, or else you can take the assistance of the IRS by calling at 800-829-1040 for help. Reacting quickly, completing and filing the documents as early as possible is important in filing the returns.

Information about the deadline

The deadline date for filing the tax returns according to the IRS is April 15 Wednesday 2020. An extension period of 6 months is given by the IRS if you’re not ready with the filing of tax returns. By filing Form 4868 you can postpone the return filing date by 6 months i.e. till Oct 15th, 2020. According to the IRS policies, IRS can charge interest and also can penalize if your returns are not filed in time.

When can you receive your refund?

The IRS has already made it clear it will take 21 days to issue refunds for most returns, but if you are filing returns manually, then it may take up to six weeks. If you are requesting a paper check rather than a bank deposit then it may take an extra 10 days for the postal delivery process.

Refunds depend on tax credits you claim:

The refunds are received cumulatively i.e if you have the refund due on EITC  and CTC, the IRS will send you the refund at once and not separately. For example: if you have a refund of $1000 in EITC and $1000 in CTC, the IRS will issue both refunds together.

How to GET Form 1040?

The official website of the IRS provides you with the PDF file that you can download and file the tax manually. Since it is always better if you take the help of the tax software. These tools take you through filling out the form and will analyze the necessary schedules applicable and will also instruct about what all will be needed while filing the tax returns. The tools help you with the calculations as well.

The filing of the tax return totally depends on you, you can file manually or online. The form is divided into sections where you can report your income and deductions to determine the amount of tax you owe and the refund you will receive.

The new 1040 form 

The new form 1040 has changed and is divided into sections on the front and the back of the form as is shown in the image below.

Reporting and calculations of taxable income have been moved back to the bottom of the first page on the 2019 Form 1040, just as it was back in 2017. Tax credits and the calculation of tax owed are now on page 2. Some of the most popular tax credits, including the Earned Income Credit and the American Opportunity Credit, have been lifted from the 2018 schedules and plunked down again on the second page on the 2019 Form 1040. 

Identifying information for spouses and dependents is back on the top of the first page, where it remained for years and years before 2018. And the IRS distributions have their very own line on page one, the deductions before were lumped together with pensions and annuities.

The new form 1040-SR

IRS introduced another form called 1040-SR, it is for the seniors who are 65 or above the age of 65 years. Form 1040-SR is specifically designed for seniors and has a different section of guidelines and policies.

Form 1040SR was signed in February 2018, and the first time it was called off was by               The Bipartisan Budget Act (BBA) in 2019 as a special form for senior taxpayers. Since the form was launched late, it couldn’t be implemented in the 2018 tax year, but it is implemented in the tax year 2019, to be filed in 2020.

The form 1040-SR is available for the taxpayers whose age is 65 or above on the last day of the financial year. The IRS’s basic goal is to simplify the tax return process for the seniors by giving them the special form and minimizing the difficulty and confusion.

Basically, before 2018, the senior taxpayers opted for Form 1040-EZ, which was for basic financial conditions. Under some rules, certain taxpayers were prohibited to opt 1040-EZ. Then in 2018, the 1040EZ form was eliminated and the IRS came up with the standard form 1040.  Since it is a new form, the taxpayer may get confused about how exactly the form is, how it could work, and what will be the difference between the 1040-SR and the standard form 1040. 

The major difference is that the 1040-SR has breakdowns of standard deductions on the first page of the form. The IRS has also provided an additional standard deduction for the taxpayers who are blind and 65 or above.

“1040-SR is for all filing statuses”

1040-SR considers the following;

  • Salaries 
  • Interest income
  • Dividends
  • Wages and self-employment income
  • Retirement distributions
  • Capital gains and losses
  • Social security benefits

Taxpayers can still itemize using this form, and they can claim the Earned Income Credit, Child Tax Credit, American Opportunity Credit, and Credit for Other Dependents. And yes, they can claim dependents too. 

Schedules for 2019:

According to Kreider, the IRS made some improvements and trimmed extra six schedules from 2018 down to just three schedules for the 2019 tax year.

All the information from the 2018 Schedule 6 now appears directly on the 2019 Form 1040—exactly where it used to show up before the changes in 2018. Information from the other two deleted schedules are now consolidated into the three schedules that still remain:

  • Schedule 1 Additional Income and Adjustments to Gross Income:

This was Schedule 1 in 2018, too, but it has been renumbered.  Schedule 1 has been moved back to the first page of the Form 1040, such as the reporting of the capital gains. Capital gains (or losses) information now has its very own line on the first page (line 6), as does the qualified business income deduction which also was tucked away on Schedule 1 (now on line 10). 

  • Schedule 2 Additional Taxes: This one includes all the information that appeared on the 2018 Schedule 2, but now it also includes the information that was entered on Schedule 4. 
  • Schedule 3 Additional Credits and Payments: This, too, includes all the same information from Schedule 3 in 2018, but now it also has the information from the 2018 Schedule 5. 

 Schedules 4, 5, and 6 from 2018 have been eliminated. 

According to a Sept. 3, 2019, blog post by Tax Policy Centre Non-Resident Fellow, Robert A. Weinberger, the new form “is more than a tune-up but less than an overhaul.” He wrote that among the key changes from last year are the return of the standard deduction, income reporting, and reconciliation to the first page of the income tax return (now including capital gains/losses). 

The 2019 Schedule 1 also asks for additional information about alimony payments because these are no longer deductible or reportable for divorces or marital settlement agreements entered into after Dec. 31, 2018. 

How to fill the form 1040?

The top half of page 1 consists of:

  • Names of the parents 
  • Social security no. of parents, children, and dependents
  • Filing status 
  • Street address
  • Children and dependents available (what tax credit is allowed)

Filing status of the taxpayer:

The filing status of the taxpayers determines the standard deduction and tax rates that will be applicable to your income for the taxable year. Identifying the correct filing status is important, the filing status of the taxpayers has a direct impact on how much you owe to the IRS in the taxable year and also how much of the refund you can claim from the IRS. Choosing wrong or making mistakes in the filing status can result in the audit process.

You can choose only one filing status. There are 5 filing statuses under which you can file- single, head of the household, married filing jointly, married filing separately, and qualifying widow(er). You should always keep one thing in mind that the IRS considers your status on the last day of the financial year.

Single:-  

  • Unmarried, divorced, legally separated or widowed as on December 31st  
  • If you have a child but the other parent is claiming the child as their dependent in a particular tax year.  
  • You must file single if you are not married.

Head of household:-

  • Single as on December 31st or separated
  • Qualifying dependent child or relative
  • Must pay half of the upkeep of home (rent, mortgage, interest, real estate taxed, insurance, repairs, utilities, and food eaten in the home)
  • Generally used by single parents

Married filing jointly:-

  • Married as on December 31st
  • Most common, 99% of the time provides the lowest tax burden
  • File married if according  to STATE LAW you are married
  • If your spouse dies during the tax year, you may still claim married filing jointly for that tax year.

Married filing separately:-

  • Married as of December 31st
  • Not common, 99% of the time provides a higher tax burden
  • File married if according  to STATE LAW you are married
  • If one spouse itemizes deductions the other must do so as well!
  • Limits tax deductions

Limitations of filing separately

  1. No student loan interest deduction
  2. No education tax credit allowed
  3. Child tax credit limited to half the amount
  4. No earned income credit
  5. No adoption tax credit and cannot exclude employer-provided adoption benefits from income
  6. Most cases no credit for child and dependent care expenses
  7. Cannot exclude interest income from U.S savings bonds that you used for education expenses
  8. Cannot claim credit for the elderly or disabled
  9. Cannot deduct a loss from a passive activity

Why file separately?

  • You are separated
  • You do not trust what your spouse puts on their tax return to be accurate
  • In some case, you may get a lower tax burden which means a bigger refund
  • You can protect your own refund money if your spouse owed money to the IRS
  • Some circumstances like large medical expenses…. These normally have a limitation based on your adjusted gross income. If your adjusted gross income drops substantially you may end up getting a larger deduction for medical expenses which may lower your taxes.

Qualifying widow/ widower with dependent child:-

  • It can be used in the year the spouse dies and up to 2 years following the spouse’s death.
  • The benefits are a higher standard deduction.
  • Claiming the dependents

Having dependents for filing your tax return saves a  good amount of money for the taxpayers. The taxpayers used to deduct personal exemptions for themselves as well as dependents according to the internal revenue code. But this provision was eliminated in the year 2018.

“Having dependents helps taxpayers save tax”

Guidelines for taxpayers 

If you are a taxpayer you can claim a dependent. You cannot claim to be dependent if you are someone else’s dependent. 

An example:- if you are 25-year-old, you have a child, you live with your parents and also you are a  full-time student then your Parents can claim you as their dependent, but you can’t claim your child as your dependent. On the other hand, if your parents are not claiming you as their dependent, then probably you can claim your child as a dependent. 

Guidelines for dependents

A taxpayer can’t claim a dependent who is married and filing his/her own returns. But there is an exception.  A married person can file a joint return and still be claimed as a dependent by another taxpayer if the joint return was filed only so the couple could claim a refund.

Your dependent must be a U.S. citizen, a national, a resident alien of the U.S., or a resident of Canada or Mexico.

Children who can qualify

There are 2 categories for dependents: a qualifying child and a qualifying relative. Each category has separate policies.

The child should be related to you, it is not compulsory that you should be her/his biological parent. It would be enough if you are related in some or the other way to the child. For instance, his/her aunt, foster parent, step-parent, or half-sibling. There must be at least a legal and a known relationship with the child,

A child can only be your dependent until his 19th birthday or unless he’s a full-time student. For a full-time student, you can continue to claim him as a dependent till he reaches the age of 24 years. There’s no age limit for children who are disabled.

If a child is earning and he contributes his income to more than half of his expenses, then he cannot be claimed as a dependent.

 For example, If the total cost of your child’s qualifying support needs is $24,000. And his contributions to his expenses are less than $12,000. Only then he/she can be claimed as a dependent. To claim a child as a dependent you must be paying for more than 50% of his/her expenses. 

Another condition is that the child must live with the parents for more than half of the year. Time spent away at college doesn’t count as living away. More than half a year means, at a minimum, six months and one day. So if you share custody, you might want to keep a log of where the child spends each night. 

Relative to qualify

A relative can also be claimed as a dependent. The relative must live with you for the whole year. There are exemptions for close relatives like parents, grandparents, siblings, niece or nephew.

A dependent should get more than half of his/her expenses from you. The same rules are applicable for a dependent as are applicable to a child dependent. If multiple people are supporting one dependent, for example, if you and your siblings are supporting your parents. So for this, you have to file Form 2120. Form 2120 is a multiple support declaration form as per the IRS guideline. But out of all the supporters of a dependent, only one can claim that person as his/her dependent on the condition that everyone should commonly agree. The person who is claiming the dependent should pay more than 10% of the needs of the dependent.

Who can  claim a dependent

There are some tests and inquiries conducted by the IRS for anybody to be eligible for claiming a dependent. The IRS takes care of the dependents at the priority. There is a criterion set by the IRS to claim a qualifying dependent.

  • A parent as opposed to another relative.
  • The dependent must spend more than half a year or more with one parent to decide the claim.
  • If the dependent has spent an equal amount of time with parents then with the highest adjusted gross income parent will get the dependent’s claim.

Who cannot claim the dependent?

A non-qualifying parent can still claim the child as his dependent if the qualifying parent releases his or her claim on the dependency exemption by filing IRS Form 8332 (Release of Claim to Exemption for Child of Divorced or Separated Parents). The parent can indicate the year or years for which he/she is agreeing to release the exemption on the form. The parent can also revoke the release if he/she later changes their mind.

This rule does not apply to all tax credits and deductions. However, in some cases, the right to claim the child cannot be transferred.

Line 1: wages, salaries, tips, etc

Enter the total of your wages, salaries, tips, etc. If it is a  joint return, also include your spouse’s income. For most people, the amount to enter on this line should be shown in box 1 of their Form(s) W-2. But the following types of income also must be included in the total on line 1.

  • All wages received as a household employee. An employer isn’t required to provide a Form W-2 to you if he or she paid you wages that are less than $2,100 in 2019. If you received wages as a household employee and you didn’t receive a Form W-2 because an employer paid you less than $2,100 in 2019, enter “HSH” and the amount not reported to you on a Form W-2 in the space to the left of line 1.
  • Any Medicaid waiver payments you received that you choose to include in earned income for purposes of claiming a credit or other tax benefit, even if you didn’t receive a Form W-2 reporting these payments. See the instructions for Schedule 1, line 8.
  • Tips income you didn’t report to your employer. This should include any allocated tips shown in box 8 on your Form(s) W-2 unless you can prove that your unreported tips are less than the amount in box 8. Allocated tips aren’t included as income in box 1. Tips also cover the value of noncash tips you received, such as tickets, passes, or other items of value. Although you don’t report these noncash tips to your employer, you must report them on line 1, of the Form.

What is W-2?

Form W-2 is an IRS tax form used in the U.S. to report wages paid to employees and taxes withheld from them. Employers must complete a Form W-2 for each employee to whom they pay a salary, wage, or other compensation as part of the employment relationship.

When filling the line1 we always refer the form W-2 as it has a lot of information that is related to form 1040, the form W-2 includes the following important information:

  1. Wages tips and other compensation
  2. Federal income tax withheld
  3. Social security tax withheld
  4.  Medicare tax withheld
  5. State income tax 
  6. Local income tax

Line 2a:- Tax-exempt interest

Tax-exempt interest is nothing but the interest of income that is exempted from federal income taxes. If you want interest on your investment the best way to get is to purchase municipal bonds issued by the local state. Your interest on the investment might be exempted at the federal level but it will be taxed at the state level.

For example:- let’s imagine Simon invests in municipal bonds. The bonds pay 10% interest per year, in figures $100 interest for every $1000 Simon invests. The $100 will be considered as income to Simon, which is taxable according to the IRS. But because Simon invested in municipal bonds it is tax-free basically Simon’s interest is tax-free.

The taxpayer should report the tax exempted amount they received in form 1040. People that pay more than $10 of tax-exempt interest must report payments to the IRS and the lenders through form 1099-INT or 1099-OID.

LINE 2b:-  Taxable Interest

Each payer should send you a Form 1099-INT or Form 1099-OID. Enter your total taxable interest income on line 2b. But you must fill in and attach Schedule B if the total is over $1,500 or any of the other conditions listed at the beginning of the Schedule B instructions applies to you. 

About Schedule B OF Taxable Interest

Schedule B is a supplemental tax form used to tally up interest and dividend income, particularly if you receive it from multiple sources. Using and filing Schedule B is mandatory if you have over $1,500 in interest and/or dividends. You can also use the schedule to total your interest and dividend incomes so you can report them on your Form 1040, even if you’re not required to file it.

LINE 3a:- Qualified Dividends

Certain dividends known as qualified dividends are subject to the same tax rates as long-term capital gains, which are lower than rates for ordinary income.

Qualified dividends are generally dividends from shares in domestic corporations and certain qualified foreign corporations. It includes shares that you have held for at least a specified minimum period of time, known as a holding period. Another requirement is that the shares should not be hedged; that is, there were no puts, calls, or short sales associated with the shares during the holding period.

These dividends are taxable federally at the capital gains rate, which depends on the investor’s modified adjusted gross income (AGI) and taxable income (the rates are 0%, 15%, 18.8%, and 23.8%).

   Shareholders receiving qualified dividends get an extra treat at tax time because dividends come out as an after-tax profit

Qualified dividends requirements

  • Dividends must come from shares issued by a US company or a ‘qualified foreign company’.
  • Shareholders must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.

Example: – assume hypothetically….. You bought 20,000 shares of XYZ Mutual Fund common stock on July 8, 2019. XYZ Mutual Fund paid a cash dividend of 10 cents a share. The ex-dividend date was AUGUST 20, 2019. The ABC Mutual Fund advises you that the part of the dividend eligible to be treated as qualified dividends equals 4 cents a share. Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $2,000 and qualified dividends of $400. However, you sold the 20,000 shares on SEPTEMBER. 15, 2019. You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days.

LINE 3b:- Ordinary Dividends

Ordinary dividends are a distribution of property that a corporation pays the shareholders when it is profitable. Not every stock you own will pay dividends but if it does, then that income is also taxable. For a typical investor, a dividend is also cash payment. When annual dividends exceed the IRS reporting threshold, then they must report it to schedule B in addition to the total of dividends you receive. 

You must also provide the name of each company that is paying it. Each corporation that sends you a dividend payment will also report your annual total on a form 1099. Div 1099 form provides sufficient information for you to prepare schedule B and lastly enter it into the 1040 form.

Line 4a:- IRA distributions

“IRA stands for individual retirement account”

What are the IRA distributions?

IRA distributions are withdrawals from a self-directed IRA, 401(k), or health savings account (HAS). Distributions can be taken in cash or any kind (in that case the actual asset becomes your personal property).

Distributions may involve taxes and penalties depending on your account type and your age. A new direction trust company will report annual distribution activities via Form-1099, which will be issued to you and to the IRS.   

Special rules may apply if you received a distribution from your individual retirement arrangement (IRA) and your main home was in one of the federally declared disaster areas that are eligible for the special rules at any time during the incident period. Special rules may also apply if you received a distribution to buy or construct a main home in one of the federally declared disaster areas, but that home wasn’t bought or constructed because of the disaster.

 Roth contributions are made with post-tax dollars—an important distinction. You’ve already paid income tax on that income in the year you earned it. You can, therefore, take distributions from your Roth IRA tax-free.

The Internal Revenue Service won’t tax you twice on the money you contribute to a Roth IRA, although you do have to maintain the account for at least five years and, as with traditional IRAs, you must be at least age 59 1/2 before you take distributions to avoid a penalty. Even before age 59 1/2, you can take back your principal contributions as long as you don’t touch any investment gains.

PENSIONS AND ANNUITIES

There will be a lot of confusion when it comes to the tax on pensions and annuity. According to internal revenue service, the benefits of pension and annuity payments you receive from the portion of payments are taxable.

There will be questions popping in like: which is it? How do you determine? How much of your retirement income will be taxable? But the good thing is IRS offers you various calculating tools to help you out.

What portion of your pension and annuity payment is taxable?

The IRS indicates that if you contributed after-tax dollars to your pension or annuity, your pension payments are partially taxable. You won’t pay tax on the portion of the payments that represent a return of the after-tax amount you paid. This amount is your cost in the plan or investment, and it includes amounts that your employer might have contributed that were taxable to you as income at the time.

That’s the easy part. Now you have to determine the method by which the remaining amounts are taxed. Partly taxable pensions are taxed under either General Rule or with the Simplified Method

Line 5a; – Security Benefits Social 

Social security benefits will be taxed or not, has to do with your provisional income. Provisional income is an IRS term and the provisional income formula is used to determine if your social security benefits will be taxed or not.

The above diagram is provisional income formula that is used to determine how much of your social security will be taxed

The taxable figure represents any investments you may have so that you can represent any gains from the stock, bonds, and mutual funds. It could include any earned income, it could include any rental income, it could include interest earned off of municipal bonds even though municipal bonds are exempt from federal tax. They are not exempt from provisional income calculation.

Taxable income is then added to tax-deferred, tax-deferred represents any assets that you have like 401(k), IRA, pension and then take 50% of annual social security benefit and add that all together and that is your provisional income number.

So, if you have no retirement accounts, if you have no pension and if you have no earned income, then your social benefit is not going to get taxed. But, if you do and if you have done a good job of saving and preparing for retirement, it is highly likely that your sole security benefits will be taxed.

Social Security Thresholds

Social Security Thresholds
Social Security Thresholds

The flipside to this example is that your Social Security benefits would have been tax-free if your retirement investments kicked off only $7,500. This would drop you under the $25,000 provisional income threshold, even if you kept your part-time job. Your investment income of $7,500 plus $7,000 in wages plus half your Social Security benefits or $9,000 works out to $23,500.

The same would apply if you gave up the job but your investments still provided $15,000 a year in income. Your benefits would be tax-free if your total income came out to less than $25,000.

You can potentially make some adjustments to your income if you plan in advance. For example, you might want to give up that one-day-a-week job if it looks like your investment income and half your benefits are going to nudge you up against that provisional income threshold.

Line 6a:- capital gains

Capital gains and losses are two different parts of cost. Basically it depends on what you paid and few allowable costs of selling and maintaining, and main sales price.

For example – you purchased stock for $400,000, so your gain will be $100,000. Maintaining and selling cost would be $50,000 and it will be sold for $5, 50,000.

If you have invested in capital gains then the tax rates are dependent on the length you have held your investment. If you have held your investment for less than a year then there will be higher tax rates. Whereas, investments held more than a year will have lesser tax rates. There are factors for referring to the tax brackets.  

Long term capital gains:- 

Broad changes were made by TCJA (Tax Cut and Jobs Act) for taxpayers in  2018. It also has included few provisions for long term capital gains. There were tax brackets like 0%, 15% and 20% which were allocated on long term capital gains before TCJA came into existence. These rates are also used for the ordinary income of a taxpayer. For example, if you have 15% of long term tax then your ordinary income would be 33%.

Post-TCJA Tax Rates

As of 2020, the 0% capital gains tax rate applies to incomes of up to $40,000 if you’re single, $53,600 if you qualify as head of household, or $80,000 if you’re married and file a joint return.

Beyond this, you’ll jump into the 15% capital gains tax rate. This bracket covers incomes of up to $441,450 if you’re single, $469,050 if you’re head of household, or $496,600 if you’re married and filing jointly. This bracket covers a large swath of investors.

You’ll pay the 20% rate only if your overall income exceeds these levels.

Form 1099-B

In form 1099-B the taxpayers will have to insert all the necessary details about the sale of investments. When did the sale of investments take place to when is it proceeding? The investor also has to fill the purchase date and purchase price while reporting the tax returns.

There is a condition for brokers, which is to provide a cost basis for investments like for mutual funds and stocks in dividends reinvestment plan during 2012. But the reporting requirement started in the year 2013 for other investment products.  

Form 8949

During the year 2011, the IRS released a new form called form 8949, this form is used to report the capital gains and losses from various investments like mutual funds, bonds, and stocks. All the investment transactions are going to be reported in form 8949, dispositions capital assets and sales. And also IRS redesigned schedule D to adjust all necessary requirements.

Short term and long-term gains are reported in the form 8949. All the necessary tax details for 8949  reported on a 1099-B statement.

Schedule D

Schedule D is most often used as a summation of the capital gains you report on Form 8949. In most cases, investors will use Schedule D to show their total capital gains for the year. Other situations that may also require a Schedule D include:

  • Reporting certain transactions you don’t have to report on Form 8949.
  • Reporting gains from Form 2439 or 6252 or Part I of Form 4797.
  • Reporting a gain or loss from Form 4684, 6781, or 8824.
  • Reporting a gain or loss from a partnership, S corporation, estate, or trust.
  • Reporting capital gain distributions not reported directly on Schedule 1 (Form 1040), line 13 (or effectively connected capital gain distributions not reported directly on Form 1040NR, line 14).
  • Reporting a capital loss carryover from one tax year to the next.

Line 7a: Other Income

On the line 7a, there is other income, which is under schedule 1 line 9, to find other income you should go to the schedule 1

  • Other income includes any taxable income for which there is not a specific line identified.
  • U.S. citizens and resident aliens are taxed on worldwide income, and must file a U.S.  Tax return even if all the income is from foreign sources, and even if they paid (or will pay) taxes to another country.
  • Amounts received in foreign currency must be converted to U.S. dollars for reporting on the return. Use the exchange rate prevailing when the taxpayer receives the payment.
  • If the taxpayer is eligible to exclude some or all for foreign earned income, complete Form 2555. The excludable amount will be entered as a negative number on other income lines.
  • Optional specialty courses on health savings accounts are available. 

Line 7b:- total income

Add the amounts from lines 1, 2b, 3b, 4b, 4d, 5b, 6, and 7a. This is your total income.

Line 8a:- adjustments to income

 Report any adjustments to income on Schedule 1, lines 10 to 21. Enter the amount from Schedule 1, line 22, on line 8a.

line 8b:- adjusted gross income

  • Adjusted gross income     The IRS uses your adjusted gross income (AGI) to determine whether you can claim certain deductions and credits and the amounts you are eligible for. The calculation is pretty simple, your total income minus certain tax deductions. The IRS calls “adjusted to income” equals AGI. You can find a list of those deductions on the first page of the standard form 1040. 

Your AGI will also have an impact on the amount of itemized tax deductions you can report. Some expenses must be reduced by a percentage of your AGI. Your federal AGI can also have an impact on your state return, use your federal AGI as a starting point for calculating your taxable income and your eligibility

“Subtract line 8a from line 7b and enter the amount on this line.”

Line 9: standard deductions or itemized deductions

The IRS gives you different options when it comes to claiming deductions on your tax return. You can take the standard deduction or you can itemize your deductions.

The standard deduction is a flat amount set by IRS for each filing status that you can deduct from your taxable income. The standard deduction is simple, but may not allow you to maximize your savings.

Itemized tax deductions are individual expenses you can claim to decrease your taxable income. Added up together, they can add up to more than your standard deduction and potentially save you a lot on your taxes.

There is a wide range of deductible expenses such as

  • Mortgage interest 
  • State and local property
  • Income taxes
  • Medical expenses
  • Charitable contributions

Total your eligible expenses and compare your total to the standard deduction. You should only itemize your deductions if it ends up higher than the standard deduction.

Most Form 1040 filers can find their standard deduction by looking at the amounts listed to the left of line 9. Most Form 1040-SR filers can find their standard deduction by using the chart at the bottom of page 1 of Form 1040-SR. 

This works out to determine which number is greater, the standard deduction available to you or the total of all your itemized deductions. According to the IRS, about 60% of taxpayers choose the standard deduction. 

Line 10:- Qualified Business Income Deduction

A qualified business is any income, gain, deduction, and loss from any qualified trade or business (QTB) including those conducted through:

  • Sole proprietorships
  • S corporations
  • Partnerships
  • Trusts
  • estates

Who is eligible for qualified business income deduction?

Taxpayers, other than corporations, who have qualified business income (QBI) from a qualified trade or business(QBI) or who have qualified publicly traded partnership(PTP) income and section 199A real estate investment trust (REIT) dividends may take this deduction….

Included are:

  • Individuals
  • Certain trusts and estates

   What is a deduction?

Generally, individuals and certain trusts and estates may be entitled to a qualified  business income deduction (QBID) of up to:

  • 20% of qualified business income(QBI), plus
  • 20% of combined qualified REIT dividends and qualified PTP income.

The deduction is limited to the lesser of these amounts or taxable less net capita income.

“Other limitations may also apply depending on the tax payer’s taxable income”

Items reflected on the Form 1040 that reduce qualified business income                       QBI is reduced by any deductions attributable to the trade or business including but not limited to-the deductible portion of: 

  • Self-employed health insurance
  • Self-employed tax 
  • Contributions to qualified retirement plans
  • Deductible unreimbursed partnership expenses, and 
  • Business interest allocable to S corporation or partnership deducted on Schedule E.

Qualified Business Income Deduction (Section 199A Deduction) 

To figure your Qualified Business Income Deduction, use Form 8995 or Form 8995-A as applicable.

Use Form 8995 if:

  • You have qualified business income, qualified REIT dividends, or qualified PTP income (loss),
  • Your 2019 taxable income before the qualified business income deduction is less than or equal to $160,700 ($160,725 if married filing separately or $321,400 if married filing jointly), and
  • You aren’t a patron in a specified agricultural or horticultural cooperative.

If you don’t meet these requirements, use Form 8995-A, Qualified Business Income Deduction. See the instructions for Forms 8995 and 8995-A, for more information for figuring and reporting your qualified business income deduction.

Line 11: taxable income

Taxable income: taxable income is the amount of income used to calculate how much tax an individual or a company owes to the government on a given tax year. It is generally described as adjusted gross income (which is your total income, known as “gross income”, minus any deductions or exemptions allowed in that year).

A lot of people take this part for granted. They just fill in their income, as reported on w-2 or 1099’s, and then spend all their time worrying about deductions. This is probably a mistake. In order to reduce your income taxes, you should understand what income is taxable, and what tax is exempted. Almost all forms of income are taxable.

Unfortunately, according to the internal revenue code, almost all forms of income are subject to tax, except for those items specifically exempted by the code.

This means that almost all forms of income from wages, tips, interest, dividends, bartering, prizes, gambling, and pensions are subject to tax.

Page 1 is concluded with the calculation of taxable income.

Line 12a And b:- Tax

The tax on taxable income will be shown on page 2 line 12, the number shown on line 12b is the tax owed on total income. To calculate tax on taxable income there are instructions given on the official website of the IRS. 

Line 13:- Child Tax Credit

What Are Tax Credits?

First, understand that tax credits aren’t the same as tax deductions.

Deductions are subtracted from your gross income. If you earned $50,000 last year and you claim $10,000 on deductions, the IRS will only tax you on $40,000. That’s certainly a good relaxation, but compare this to tax credits.

Let’s say that you’ve finished your tax return, taking all the deductions you were entitled to. Now you realize that your tax planning was off and you owe the IRS $1,000. You also realize that you’re entitled to claim a tax credit of $1,000, so you go back and do so. Crux-Your tax debt goes away. Now you don’t owe the IRS anything. 

In other words, tax credits are directly deducted from the net income tax you owe. 

Child tax credit

Tax cuts and jobs act came into existence on December 22, 2017, it brought lots of changes in the U.S. tax code. The change made the taxpayer a bit difficult to adjust and understand the tax returns. The big change brought by the act was the child tax credit.

New rules were applied by TCJA for the child tax credit from the year 2018 to 2025. 

The maximum credit per child

Till the year 2017, the maximum child tax credit was $1000, after introducing new form 1040 and with the existence of TCJA, it got increased to $2000 per child from 2018. There are terms and conditions applied to this as well

Qualifying child

For a  child to qualify for the credit, the child must be under the age of 17 on the last day of the year and the child must be related to the taxpayer. The relation can be biological, stepchildren, foster children living in your care, siblings, step-siblings or a child of any of these individuals.

The Child Tax Credit (CTC) is designed to give an income boost to the parents or guardians of children and other dependents. It only applies to dependents who are younger than 17. The credit is worth up to $2,000 per dependent, but your income level determines exactly how much you can get. You need to have earned at least $2,500 to qualify for the CTC. Then it phases out for income above $200,000 for single filers and $400,000 for joint filers. The most you can get is a partial credit if your earned income is above that threshold.

The CTC is also refundable up to $1,400. That means if you qualify for the CTC and it brings your tax liability (how much you owe) below zero, the IRS will still send you the remaining amount of the credit, up to $1,400.

From line 14 to 15 is the calculation of total tax

Line 17:- Federal Income Tax Withheld

It is the part of your paycheck which is withheld by the employer depending on the gross income made in the form of wages for the year. Any pre-tax deductions have to be subtracted before taxes are calculated

There are withholdings with employers that are taken from an employee’s paycheck to calculate the federal income tax withheld. Employee file form W-4 to choose withholding allowance and the employee should submit the form to the employer.

Add the amounts shown as federal income tax withheld on your Forms W-2, W-2G, and 1099-R. Enter the total on line 17. The amount withheld should be shown in box 2 of Form W-2 and in box 4 of Form W-2G or 1099-R. Attach your Form(s) W-2 to your return. Attach Forms W-2G and 1099-R to the front of your return if federal income tax was withheld.

Line 18:- other payments and refundable credits

18a:-  Earned Income Credit (EIC)

Earned income child tax credit was created by the federal government in 1975 to lower the tax for taxpayers for their hard-earned income. Firstly it was a temporary provision, but it’s still going on till this date, EITC is a refundable credit if you have any tax debt then it balances the difference with the credit and refunds it after balance is left.

There are rules provided by TCJA for EITC, it depends on the taxpayer’s income and how many dependents do they  have.

There limits for filing the EITC

  • $6,557 IF YOU HAVE 3 OR MORE QUALIFYING CHILDREN
  • $5,828if you have 2 children
  • $3,526 if you have 1 child
  • $529 if you have no children

 Claiming EITC

You must attach Schedule EIC to your form 1040 to claim for qualifying child or children for the purpose of the earned income tax credit. Once you qualify for it, it’s a valuable tax credit that can make a big difference in what you owe the IRS or in the amount that you will be refunded.

Line 18b: Additional Tax Credit

The additional child tax credit was the refundable portion of the child tax credit. It could be claimed by families who owe the IRS less than their qualified child tax credit amount. Since the child tax credit was non- refundable, the additional child tax credit refunded the unused portion of child tax credit to the taxpayer. This provision was eliminated from 2018 to 2025 by the 2017 tax bill. However, the new form of the child tax credit includes some provisions for refundable credits.

Line 18c:- American opportunity tax credit

The American opportunity tax credit (AOTC) is credit for qualified education paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 eligible students. If the credit brings the amount of tax you owe to zero, you can have 40% of any remaining amount of the credit ( up to $1,000) refunded to you.

 The amount of the credit is 100% of the first $2,000 of qualified education expenses you paid for each eligible student and 25% of next $2000 of qualified education expenses you paid for that student but, if the credit puts your tax down to zero, you can have 40% of the remaining amount of the credit ( up to $1000) refunded to you.

Refund 

In line 20, you should figure it out that whether you have overpaid any tax or not by comparing the line 16 and line 19.if the amount of line 19 is more than line 16 then you should enter that amount in line 20 asking for refund and should enter the required information like routing number and account number. If you have no refund then you should let that refund section blank.

The following information after the refund section is general and has to be entered carefully like third-person designee, signature, etc.

Bottom Line

Form 1040 is the basic form for filing your federal income taxes. No matter what your financial situation, you need to use this form for your 2019 taxes. The form walks you through calculating your AGI and then helps you claim the credits and deductions for which you qualify. The form ends with helping you to calculate your refund (or how much you owe).