Lesson 3.2 Filing a Tax Return Learning Objectives LO 2-1 List and define basic tax terminology. LO 2-2 Prepare tax form 1040EZ. Chapter 3 © 2016 South-Western, Cengage Learning  

Filing Status Filing status describes your tax-filing group. You must choose one of the following as your filing status: Single person (not married) Married person filing a joint return Married person filing a separate return Head of household (can be married or single, as long as you provide a home for a dependent) Qualifying widow(er) Chapter 3 © 2016 South-Western, Cengage Learning  

Exemptions An exemption is an amount you may subtract from your income for each person who depends on your income to live. Each exemption reduces your taxable income and thus your total tax. Chapter 3 © 2016 South-Western, Cengage Learning  

Exemptions—Who Qualifies Yourself, unless someone else claims you on their return Your spouse, if you are filing jointly Your dependents A dependent is a person who lives with you and for whom you pay more than half of the living expenses. Chapter 3 © 2016 South-Western, Cengage Learning  

Gross Income Gross income is all the taxable income you receive. Earned income refers to money you earned from working. Unearned income refers to money you received from passive activity (other than working). Chapter 3 © 2016 South-Western, Cengage Learning  

Forms of Income Wages, salaries, and tips Interest income Dividend income Unemployment compensation Social security benefits Alimony and child support Chapter 3 © 2016 South-Western, Cengage Learning  

Adjusted Gross Income The law allows you to subtract some types of spending from gross income. You can “adjust” your income by subtracting such things as contributions to individual retirement accounts, student loan interest, and tuition and fees. These adjustments are subtracted from gross income to determine adjusted gross income. Adjustments reduce income that is subject to tax. Note that these adjustments are not available on Form 1040EZ. Only on longer forms, 1040A or 1040 Chapter 3 © 2016 South-Western, Cengage Learning  

Adjusted Gross Income Gross income – Adjustments Adjusted gross income Chapter 3 © 2016 South-Western, Cengage Learning  

Try it… If your Gross Income for the year is $45,000 and you have $2,500 worth of adjustments – what is your adjusted gross income? Chapter 7

Taxable Income Taxable income is the income on which you will pay tax. Your taxable income determines your tax liability, which is the amount of total tax you owe on a year’s income. Chapter 3 © 2016 South-Western, Cengage Learning  

Taxable Income Gross income – Adjustments Adjusted gross income (continued) Gross income – Adjustments Adjusted gross income – Deductions – Exemptions Taxable income Chapter 3 © 2016 South-Western, Cengage Learning  

Deductions Itemized deductions Standard deductions Chapter 3 © 2016 South-Western, Cengage Learning  

Itemized Deductions Itemized deductions are expenses subtracted from adjusted gross income to determine taxable income. Examples include: Medical and dental expenses beyond a specified percentage of income State and local income taxes Property taxes Home mortgage interest Gifts to charity Losses from theft or property damage Some moving expenses Chapter 3 © 2016 South-Western, Cengage Learning  

Standard Deduction If you do not have many deductions, your tax may be less if you take the standard deduction. The standard deduction is a stated amount that you may subtract from adjusted gross income instead of itemizing your deductions. This amount changes each year. Chapter 3 © 2016 South-Western, Cengage Learning  

Tax Credits A tax credit is an amount subtracted directly from the tax owed. It is different from a deduction. A deduction is subtracted from adjusted gross income. A deduction reduces your tax by reducing the amount of income on which the tax is figured. A tax credit reduces the tax itself. The government allows tax credits for certain education expenses, child-care expenses, and other special reasons. Chapter 3 © 2016 South-Western, Cengage Learning  

Try it…Taxable Income *Solve Math Minute on Page 68* (continued) Gross income – Adjustments Adjusted gross income – Deductions – Exemptions Taxable income Chapter 3 © 2016 South-Western, Cengage Learning  

Preparing a Tax Return Who must file? – Anyone who received income Which form to use? – depends on amount of income and dependents Where to begin? – save, save, save (receipts, W-2 forms, etc.) Filing electronically: Tax preparation software Chapter 3 © 2016 South-Western, Cengage Learning  

Form 1040EZ – Turn to page 72 of your textbook Step 1: Enter name, address, and Social Security number Step 2: Report income Step 3: Compute tax Step 4: Calculate refund or amount owed Step 5: Sign the return Chapter 3 © 2016 South-Western, Cengage Learning