A tax return is the form or forms used to report income and file income taxes with the IRS. They allow taxpayers to calculate their tax liability and remit payments or request refunds. Tax returns must be filed every year for any individual that received income during the year. This can be through wages, interest, capital gains, dividends, or other such measures. In the United States, individuals use the Form 1040 to file their taxes.
Breaking down the tax return
Report your income
The first page of the Form 1040 is used to calculate adjusted gross income (AGI). In the first section, you enter all information pertaining to sources of income, including:
- Wages and salary
- Taxable state and local refunds
- Capital gains
- Business income
- Unemployment income
- IRA and pension distributions
- Social Security benefits
There will be an additional box labeled “other income” where you can list any additional income you received that doesn’t come from one of the other categories. All income received must be reported unless it’s tax exempt. Sum up all these items to get your total income.
Deduct from your AGI
You are able to claim specific deductions or adjustments to get your AGI. These adjustments include:
- One-half of self-employment tax payments
- IRA contributions
- Payment of student loan interest
- Health savings plan contributions
- Alimony payments
Many deduction limitations are affected by your AGI.
Deductions and exemptions
The second page of the Form 1040 allows you to reduce your AGI further through the standard deduction or itemizes deductions. Itemized deductions can include:
- Mortgage interest
- Unreimbursed business expenses
- Excess medical expenses
If your total itemized deductions are less than the standard deduction for your filing status, your taxable income will be lower if you choose the standard deduction. After choosing the best deduction for you, you can reduce your taxable income even more by claiming an exemption for yourself and each of the dependents you claim. Your taxable income is the amount the is subject to income tax.
Calculate tax and claim credits
Reference the tax tables in your instructions to find out the amount you owe. Comparing your total tax withholding to your tax bill at the bottom of the form will tell you whether you need to make an additional payment or if you will receive a refund. If you are eligible for any tax credits, make sure you reduce the amount of tax owed before completing your return.