America’s Most Famous Tax Form

Are you familiar with or have you ever heard of Income Tax Form 1040? If you have or had someone process your income taxes in previous years, then this form might be very familiar to you. Now if you have never had or have had someone process your income taxes, the IRS definition of Form 1040 is that it is “to calculate their taxable income and tax on that income”. For the most part, this type of form is used by virtually everyone. Just keep in mind that Form 1040 is not the same as a W-2. Those are two separate forms. The W-2 is a form that is obtained from your employer if you are employed where that information will be included on Form 1040. Just so you know, there are many different uses for the Form 1040.

One use is that it can be used in calculating the Adjusted Gross Income, also known as AGI and this can be accomplished by reporting the total income followed by making a claim on any allowable adjustments. AGI is very important when filing income tax returns. The reason for this is because it is designed to determine the types of deductions and credits that a taxpayer is eligible for. Of course, there are certain calculations that are involved. An example would be if you are an employee, which is the most common one. With this, then your salary or wages, as well as an interest in a bank account and even stock dividends can be used as part of the calculations. However, if you are employed, there is a different calculation because the tax preparer would have to file a Schedule C Form for self-employment business income.

Another use is that it can be used to figure your itemized. With this, the tax preparer would have to file what is called a Schedule A Form. With most itemized deductions, but not always, the taxpayer’s federal taxes could possibly be less if the taxpayer selects the larger portion of their itemized deductions or their standard deductions. If the taxpayer selects to use their itemized deductions, the total itemized would then be subtracted from their taxable income. Not to be confused, the standard deduction definition as the IRS website states is “the portion of income not subject to tax that can be used to reduce your tax bill.” What this means is that the IRS will adjust your standard deductions each year due to inflation. Of course, it will depend on the taxpayer's filing status and other factors because there is no set amount clear across the board.

Of course, a lot of this information can be considered confusing. If you would like to learn more our team can work with you to offer more specific advice and help with a year-round strategy to maximize your returns.