1040 Tax Form Reviews & Tips

The 1040 tax form should be your starting point for your personal IRS income tax returns. It’s designed to help you calculate the amount of tax you need to pay based on the amount of income you’ve declared.

By using this form regularly as your income changes, you’ll be more aware of whether you need to take steps to reduce your potential tax penalty or you might actually calculate that you’ll receive a return.

This is the ‘long form’ or the more complete version and should be used if you have complicated tax issues to calculate. Things like investment income or loss, capital gain or loss or multiple itemized deductions should be entered individually on your 1040 tax form to help you get a clearer idea of the amount of tax you should be paid or withholding.

Although the form could be only 2 main pages, they have 11 different attachments or schedules that follow with it. Each different schedule covers a specific aspect of your tax return, so that you may not need all.

1040A Tax Form

The 1040A Tax Form is the form that helps you to estimate tax return for the fiscal year. If you do not have complex tax toting up for the year as capital gains or deductions on individual itemized, then the short form will be ideal for you.

1040EZ Tax Form

The 1040EZ tax form is a more simplified version of the longer form of 1040 and is still able to help you determine what your tax bill could be the end of the year very quickly. Again, this is ideal for those with no tax issues not complicated to explain.

1040NR Tax Form

The 1040NR tax form designed to facilitate non-resident aliens to calculate the total of IRS tax return. For non-resident alien who has been in the United States for less than five years and has an income on which tax must be paid has to use this form.

This form shows the IRS the original figures you submitted and then highlights what those figures should have been according to your calculations. In some cases the irs help can help you to increase the amount of tax refund you were due or it might even reduce a pending tax penalty you might incur.

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Reporting Your Child’s Income on Your Return

For any year the kiddie tax applies to your child, you may be able to report the child’s investment income on your tax return. (The kiddie tax applies to certain children with investment income above a threshold amount, as explained here.) This may cause the total amount paid to be higher or lower, but most people think about doing this mainly because of the convenience: it means preparing and filing one less tax return. You’re never required to do this, so you shouldn’t make this election if it will cost you more than the benefit you get from avoiding paperwork.

The amount of paperwork you avoid by doing this isn’t much. If you make the election you have to fill out a special form and attach it to your own tax return. That’s likely to be about the same amount of work as preparing a separate return for the child.

Who can do this

Not everyone can make this election. You can do this only if all of the following are true:

• The kiddie tax applied to your child for the year. The kiddie tax can now apply to students up to age 24.
• The child’s only income was from interest and dividends, including capital gain distributions and Alaska Permanent Fund dividends. If your child has any other income, such as a capital gain or loss from selling shares of stock, the election is not available.
• The child’s gross income for the year was less than $9,500. (This is the number for 2009; it is adjusted from time to time for inflation.)
• The child is required to file a tax return for the year. If the child’s income is too low to require a tax return, you probably don’t want to report the income on your tax return, but even if for some strange reason you want to do so, the IRS says it isn’t allowed.

Probably the key point here is that the election isn’t available if your child has capital gains or losses, other than capital gain distributions. Many people wonder if they can use this rule to move a child’s capital losses to the parents’ return, but this isn’t possible. (Click here for more on capital losses of minors.)

How it’s done

You don’t simply add the child’s income to your own income on your tax return. Instead, you report the child’s income on a special form and attach it to your return. Click here to download the form and instructions.

Effect of the election

If you make this election, you still get the benefit of the child’s $950 standard deduction. You also get to apply the child’s tax rate to the next $950 of income. (The tax rate at this level is 10%.) It’s only when the child’s investment income exceeds $1,900 that the parents’ tax rate applies.

Example: In 2009 your child has $2,900 of interest income and no other income. The first $950 of investment income escapes taxation: your child’s standard deduction takes care of that. The next $950 is taxed at the child’s rate of 10%. That leaves $1,000 to be taxed at whatever rate would apply if this income were added to the income reported on your tax return. Suppose you’re in the 28% tax bracket. The tax on your child’s income would be 10% of $950 plus 28% of $1,000, for a total of $375.

This is the same example we used in explaining the kiddie tax, because you end up with the same result either way. As explained below, however, there are some ways you can end up paying more tax (or possibly less tax) as a result of reporting this income on your return instead of a separate return for the child.

Certain benefits not available

Some benefits that might be claimed on a child’s separate income tax return are not available if you report the child’s income on your tax return. Here are some examples:

• If your child forfeits interest for withdrawing money from making an early withdrawal from a savings account, a deduction is allowed on a separate tax return but not if you report the child’s income on your tax return.
• If your child has itemized deductions such as investment expenses and charitable contributions that add up to more than $950, tax savings from those itemized deductions would potentially be available, but only on a separate tax return for the child.
• If your child is blind, a larger standard deduction is available, but only on a separate tax return for the child.

In addition, the tax on the child’s income may be somewhat higher if the child received capital gain distributions. You get the benefit of the capital gains rate on any portion of the child’s income that is taxed at your rate, but lose the benefit on any portion that is taxed at the child’s rate. The maximum amount that is taxed at the child’s rate is $950, and at this income level the difference in rates is 10% (the regular tax rate is 10% and the capital gains rate at this level is 0%), so the difference can be as much as $95.

Investment interest expense

There’s one place where you can come out ahead by including the child’s income on your tax return. When you determine how much investment interest expense you’re allowed to deduct, the IRS says you can add the child’s investment income to your own. Having a larger amount of investment income sometimes allows you to claim a larger deduction for investment interest expense. If you have investment interest expense that isn’t deductible because you don’t have enough net investment income, you may benefit by making the election to include your child’s investment income on your tax return.

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Estimated Taxes 101

An overview of rules for making payments of estimated tax.

The federal income tax system is a “pay as you go” system. In general you’re required to pay tax over the course of the year rather than waiting until April 15. Most people meet this requirement without really thinking about it because of tax that’s withheld from their wages. But if you have significant amounts of investment income (or other types of income that aren’t subject to withholding) you may incur a penalty if you don’t make quarterly payments of estimated tax.

Who must pay

The general rule is you have to pay estimated tax if your withholding doesn’t cover 90% of your tax liability. But there are exceptions:

• No estimates are required if the amount due after subtracting withholding and credits will be less than $1,000.
• In general, no estimates are required if your withholding and credits add up to at least as much as your prior year’s tax.

The second exception is particularly important. If you receive a large amount of investment income in one year — for example, you sell stock at a large gain or make a rollover to a Roth IRA — you may not be required to pay estimated tax even though you owe a great deal of tax that year. You may be able to delay your tax payment until April 15 because of the exception for the prior year’s income.

You won’t get this free ride the following year, though. Now you’ll be looking back at a year in which your income was higher. If you have two years in a row when you have income that isn’t subject to withholding, you probably have to make estimated tax payments for the second year.

How much to pay

You figure the amount you need to pay the same way you determine whether you need to pay. It’s the difference between the amount of withholding and credits you would need to have to avoid making payments, as described above, and the amount of withholding and credits you actually have, with one exception: you don’t get the benefit of the $1,000 rule mentioned above once it’s determined that a payment is required..

The amount you have to pay is usually pretty easy to determine if you’re basing your payments on the prior year’s tax liability. Figuring the payment based on 90% of the current year’s tax liability is more difficult — which is why most people try to avoid that approach.

Voluntary payments

Some people choose to make estimated tax payments even when the payments aren’t required. This approach deprives you of the opportunity to earn interest on the amount you prepaid, but assures that you won’t have a crushing tax bill on April 15.

Increasing your withholding

In many cases where you would otherwise be required to make estimated tax payments, you can avoid that process by increasing your withholding. Request the appropriate form from your employer and fill it out in a way that will cause an additional amount to be withheld from your paycheck.

Making the payments

If you’re unfamiliar with this process, you’ll be pleased to learn how easy it is. You don’t have to explain to the IRS how you arrived at the amount you’re paying. The form you fill out is minimal, basically telling the IRS who you are and what you’re paying. The only parts that are sometimes hard:

• Figuring out how much to pay.
• Coming up with the cash.
• Remembering to send it in on time.

Your payments for each year are due on the 15th day of April, June, September and the following January. Notice that although they’re considered quarterly payments, they’re not all three months apart. Any payment that falls on a weekend or holiday is due the first non-holiday weekday after that date.

Reminder: If you’re required to pay federal estimated tax, you may also be required to pay state estimated tax.

If you underpay

Don’t panic if you have an underpayment. The penalty is equivalent to interest on the amount of the underpayment. It’s best to avoid the penalty, but the penalty will be minimal if the underpayment is small or is corrected within a short period of time.

If you have any question regarding your estimated tax deposits, call our firm (877) 530-6505.

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Stop soaking the not-so-rich!

President Obama has said he’d like to lower the tax load on families making less than $250,000 and to raise it on people who make more than that.

This concept is hardly new; all kinds of taxes aimed at the highest-earning Americans have been enacted in the past. But many of those provisions haven’t been adjusted for inflation for decades.

The result: They have morphed into traps for middle- and upper-middle-income earners – and Congress hasn’t done a thing about it. Check out these three examples…

Taxes on social security:

In 1984, when the Social Security system faced a funding crisis, Congress enacted a law to make the wealthiest recipients pay income taxes on their benefits. Specifically, up to 50% of Social Security benefits became taxable when half of them, plus a retiree’s other income – including retirement-plan payouts and investment income – exceeded $25,000 a year ($32,000 for couples.)

Back then, only about 10% of retirees had incomes that topped those levels (In 1994, yet another level of Social Security taxation was put in place, so that 85% of your Social Security benefits became taxable if half of your Social Security benefit plus your “other” income topped $34,000, or $44,000 as a couple).

Today the Social Security tax still kicks in at $25,000. The result: Thirty-three percent of retirees are now paying it, and 45% are expected to be doing so less than a decade from now.

Alternative minimum tax:

Congress designed the AMT in 1969 to prevent the super-rich from taking too many deductions. In 1970 the law affected just 20,000 taxpayers.

But the AMT’s income thresholds have never been adjusted for inflation. True, each year Congress passes legislation known as the “AMT patch” to limit the number of middle-class Americans who get hit. But the patch has holes. By 2007 a whopping 4.1 million people owed the tax, according to estimates by the Tax Policy Center – including 800,000 people who made less than $200,000. Of that group, 125,000 made less than $100,000.

In fact, today the very richest Americans make up a tiny sliver of those who get zapped. In 2007, says the Tax Policy Center, only 4.9% of all AMT payers had incomes of $1 million or more.

Capital-loss carry-forward:

As you probably know, if the realized capital losses on your investments far exceed your gains in any one year, you can carry them forward to reduce your ordinary income in the future – to the tune of $3,000 a year, after you’ve applied them against any future capital gains. What you might not know is that the $3,000 limit hasn’t budged since 1978.

If the limit were adjusted for inflation, it would be about $10,000 today. To the super-rich, whether the limit is $3,000 or $10,000 doesn’t make much difference. But to plenty of middle-class folks who got hammered by the market, it sure does.

Now, I’m not arguing that any of this can be fixed cheaply, or even that it can be fixed completely, given the burgeoning budget deficit. But I do suggest that once the financial crisis passes and Congress and the Obama administration start serious discussions about the tax code, they give these outdated provisions a good hard look

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Sales tax deduction extended through 2009

If you live in one of the nine states without an income tax, be happy.

You can continue to claim a deduction for the sales taxes you pay in 2008 and 2009.

Taxpayers in states with an income tax can deduct state and local taxes paid if more than their sales-tax deductions.

There are only seven states with no income taxes whatsoever: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. In addition, New Hampshire and Tennessee collect income taxes only on dividends and interest income.

Say you and your spouse each earn $45,000 and have investment income of $10,000. If you live in Washington state and have three kids, that should produce a standard sales-tax deduction of roughly $1,300, assuming you base your deduction on the state’s 6.5% sales tax rate. You can add local sales tax as well.

That could mean as much as $467 more in your pocket, not counting any sales taxes paid on a car, boat or airplane, which would be added to the standard amount.

You can get even more if you keep records of your actual sales taxes paid.

The law says that you can take a deduction for state and local sales taxes or state and local income taxes but not both.

Residents of Alaska, Delaware, Montana, New Hampshire and Oregon do not have any state sales taxes.

To take this deduction, you must itemize deductions on Schedule A (.pdf file) of Form 1040.

The IRS has a sales-tax deduction calculator.

For more information, consult IRS Publication 600: State and local general sales taxes (.pdf file)

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