Filing a Tax Return Lesson 3-2

FILING A TAX RETURN Every year, individuals are required to file a report that states their income and other financial information. Remember that in the previous lesson we used the given information to estimate the withheld amount of federal taxes for an employee’s paycheck. A federal income tax return, determines the exact amount of taxes owed to the federal government.

Tax returns are due to the IRS (Internal Revenue Service) by April 15th each year. The return reports the income received from the previous calendar year January 1st through December 31st. The IRS manages, oversees, and enforces this process.

An employee has already had federal withholding taken out of their paycheck over the year and the employer has sent that money to the government. When a tax return is completed, you compare how much has been given with what is actually owed. The difference results in you either owing the government more money, or the government issuing a tax refund for the overpaid amount.

TAX RETURN PREPARARER Tax returns can be very complicated and sometimes fairly simple depending on the circumstances. There are a lot of forms to be completed. If your income is straight-forward and you have no dependents, you may be able to do your own taxes. For many individuals however, more assistance is needed. A tax return preparer is any person who completes the tax return process/papers for others. Tax preparers gather information and complete the forms necessary. It is important to use a qualified tax preparer. The cost of tax preparation varies with individuals and franchises. In 2010, the cost ranged from $150 to $250, depending on complexity.

Using an online or software tax preparation program is another option if you have some basic knowledge of your income and the tax process. TurboTax is a popular example of such a program. No matter who prepares your taxes, you are ultimately legally responsible for what is reported on the form. You must provide accurate and truthful information. The IRS performs audits on individuals and businesses whenever they see any oddities or discrepancies in returns. They also audit at random to ensure accuracy.

TAXABLE INCOME In January, employees receive a W-2 form that summarizes an employee’s earnings and withholdings from their paychecks for the year.

Form 1040 is the individual tax form that is completed and sent to the IRS. This tax form requires that all income from the calendar year be reported on separate lines. These amounts are totaled to arrive at the gross income, which is the annual total or your earned and unearned income. GROSS INCOME INCLUDES: oWages, salaries, commissions, bonuses, and tips oSavings or bank account interest oStock and investment dividends oAlimony received oPersonal business income/profits oRental profit oUnemployment compensation

Example: Jason’s W-2 form shows that he made $32,540 from his job. He also made $550 interest from his savings account. He rented the extra room in his house to a friend for $450 per month and refurbished a classic car which he sold for a $2300 profit. What is his gross income?

ADJUSTED GROSS INCOME (AGI) Adjustments are then made to your gross income. You can subtract government-approved deductions so that there will be less income to tax. ADJUSTMENTS INCLUDE: Educator expenses Certain business expenses Health savings accounts Moving expenses Self-employment related costs Alimony paid IRA deductions (Individual Retirement Agreement) Student loan interest Tuition and fees (college) / Student loan interest Domestic production activities

Example: Larry had a gross income of $46,780. He had adjustments to his income that included $6,300 of alimony paid to his ex- wife, $12,400 college tuition for his daughter, and $1,500 for the solar panels he put on his house. What is his adjusted gross income?

DEDUCTIONS There are additional items to be adjusted to income after AGI is determined. Certain expenses qualify as deductions. Contributions to Charities or Non-Profit organizations are common deductions. When something is able to be deducted from your taxes, you will hear it referred to as being tax deductable. Your deductions can be added together and are called itemized deductions. This means they are listed on a separate tax form SCHEDULE A and totaled. The total is subtracted from the AGI.

To Itemize or Not… If you don’t want to itemize, or you do not have enough deductions, you can choose to take the standard deduction. The standard deduction is the fixed amount that can be claimed instead of listing individual deductions. Itemized Deductions include: Medical and dental expenses State income tax paid, real estate, property tax Interest paid on mortgages, investments, insurance premiums Gifts to charity or non-profit groups (donations) Casualty or theft loses (vandalism, flood damage) Unreimbursed employee expenses Tax preparation fees

STANDARD DEDUCTIONS Single or Married, filing separately: $6,300 Married, filing jointly or a qualifying widower: $12,600 Head of Household: $9,250

Example: Jenny is married but filing separately. She donated $2,500 to the non-profit, Hope for Children this year. She also kept track of the used items she donated to Goodwill and it was about $900 in stuff. Should she itemize her deductions or take the standard deduction.

EXEMPTIONS You can claim an exemption for each person who relies on your income… your dependents. Similar to the withholding allowances we learned about in the previous lesson. You can claim one exemption for yourself unless you are a dependent. Married couples claim 2 exemptions, each child is another exemption. Multiply $4000 by each exemption and subtract from AGI.

Example: Matt and Julie are filing taxes jointly. They are married and have three children living at home. Their adjusted gross income is $135,740. They are claiming a standard deduction. What is their taxable income?

TAXABLE INCOME….. Now we have calculated the final taxable income and can determine the tax due on that income amount TAXABLE INCOME = Gross income (earned/unearned) – Adjustments – Deductions - Exemptions

FILING STATUS Everyone who files taxes has to determine their filing status. This affects how much tax is to be paid on their taxable income. Each status carries a different standard deduction and tax rate. SINGLE – For unmarried people who do not qualify as head of household. MARRIED FILING SEPERATELY – For married people with separate tax returns MARRIED FILING JOINTLY – For married people who file taxes together. HEAD OF HOUSEHOLD – For unmarried people who can claim a dependent and have cared for a dependent for more than half a year.

We can then use a tax table, finding the taxable income row and filing status column to determine how much tax is Due. Amount Withheld – Amount Due = (refund if +, additional owed if - )

Example: Jeremiah’s taxable income for last year was $17,430. He is single and works as an animal scientist. His W-2 form shows that a total of $2,100 in federal tax was withheld from his paychecks. Calculate the amount that he owes or will be refunded.

Example: Mary Beth is divorced and has full custody of her daughter. Last year her taxable income was $20,900. Her W-2 indicates that $3,125 was withheld for federal taxes.

Example: Putting it all together 1) Calculating the W-2 Howard is a corporate executive, married with 1 daughter. He is paid $1670 biweekly. He had $180 withheld from each paycheck for Federal taxes. Complete his W-2 form. Form1 Wages, tips, other compensation: 2 Federal income tax withheld: W-2

2) Find Gross Income Howard made $_____ from his corporate executive job. He also rented his second house at $1,400 per month and his stock in Microsoft did very well, earning him $925 this year. What is his gross income? Gross Income:

3) Calculating the AGI Howard’s gross income was $_______. His 1040 adjustments included a deduction of $3,245 in moving expenses when he relocated for work. He also received a IRA deduction of $870. What is his adjusted gross income? Adjusted Gross Income:

4) Calculating Taxable Income Howard’s adjusted gross income was $_____. He is filing jointly with his wife and has 1 daughter. He is going to take a standard deduction of $______. He is also entitled to _____ exemptions for himself and his family (_____ x $4000= _______) What is his taxable income? Taxable Income:

5) Finding the amount of Tax Due Howards’s taxable income is $_____. Remember He is married with 1 daughter. How much tax is due? (tax table) Tax Due:

Owe or Refund? Howard had $_____ withheld from his paychecks for the year. After completing his 1040 form, he found that he had $____ in tax due. What is the result of his tax return? REFUND OF ________ or OWES ________ MORE