June 2017 – Page 2 – Taxes Are Easy

The 1040A “U.S. Individual Income Tax Return” is the intermediate tax form the IRS provides to taxpayers, to report a more complicated Tax Story that cannot be accommodated on the form 1040EZ. The 1040A builds and expands on the features of the simpler 1040EZ form.

Click to open the 2-page IRS form 1040A into a new browser window, to refer to as we learn about the form. You can then toggle between the several 1040A blog posts and the 1040A form.

Click the link below for the 90-page form 1040A instruction booklet from the IRS, as form 1040A-Instructions. The explanations in these many form 1040A blog posts are substantiated by the Tax Laws explained in the IRS instruction booklet. The instructions are very well written and frequently give terrific examples to demonstrate the Tax Laws pertinent to the form 1040A.

There are (11) blog posts in the series that will explain the 1040A form. Just click the blue underlined hyperlink button at the bottom of each blog post, to progress to the next blog post in the series. We start with the top of page 1 of the form 1040A, then work through each line to the end of page 2 of the form 1040A.

If you have not viewed the two previous posts shown below that explain the form 1040EZ , please do so now. These will give you a solid tax form foundation upon which the form 1040A builds. Some tax history is also explained that is useful to know, before you learn the 1040A form.

The 1040EZ: Who Can Use this Form?

The 1040EZ: Payments, Credits and Tax

You can use the 1040A form if any of the following qualifications apply to you. The 1040A form accommodates many more Tax Story scenarios.

Filing Status: The first improvement the 1040A provides to taxpayers, is the Filing Status is expanded to all (5) available categories. If you remember, the 1040EZ was limited to just the Single and Married Filing Jointly filing status categories.

The five expanded filing status categories are:
- Single
- Married Filing Jointly (even if only one had income)
- Married Filing Separately
- Head of Household (with qualifying person)
- Qualifying Widow(er) with dependent child

The next Blog post will explain the (3) additional filing status categories, and describe in more detail the Single and Married Filing Jointly status.

Exemptions: The second improvement to the 1040A form, is to allow you to list your children and relatives, that you support and live with. These are called Dependents, and qualify you to take the Dependent Exemption deduction for each of them, worth $4,050 for the 2016 tax year. A Blog post will explain Qualifying Children and Qualifying Relatives, and what makes them eligible to be listed as your Dependent on the form 1040A. A blog post also explains the Personal and Dependent Exemptions.

No Age Limitations: Unlike the 1040EZ form, taxpayers 65 and older can use the form 1040A. These taxpayers – over age 65 – also benefit from a higher Standard Deduction, as they get an Additional Standard Deduction of $1,550 for unmarried taxpayers, and $1,250 for married taxpayers.

Taxpayers under the age of 65 must use the normal Standard Deduction for their particular Filing Status. You cannot use the Itemized Deduction feature on the form 1040A. Itemized Deductions can only be reported on the form 1040. Two later blog posts will explain the Standard Deduction and Itemized Deductions.

Income: There are (7) additional categories of income, that are added to the form 1040A, in addition to what is allowed on the 1040EZ. A Blog post will explain these in detail.

The (4) Income categories that carryover from the 1040EZ form are:
- Wages, Salaries and Tips
- Taxable Scholarships or Grants
- Taxable Interest – that can be over $1,500 on this 1040A form
- Unemployment Compensation

The (7) Income categories added to the 1040A form are:
- Tax Exempt Interest
- Ordinary Dividends
- Qualified Dividends
- Capital Gain Distributions
- IRA Distributions
- Pension & Annuity Distributions
- Social Security Benefits

Adjustments to Income: The 1040A introduces a new category of deductions called Adjustments. They are subtracted from your Total Income, to reduce your final Adjusted Gross Income (AGI) total. A Blog post will explain these in detail.

The (4) new Adjustments to Income are:
- Educator Expenses
- IRA Deduction
- Student Loan Interest Deduction
- Tuition and Fees Deduction

Nonrefundable Credits: These credits can reduce your tax liability to zero, but not below zero. Five have been added to the form 1040A. A Blog post will explain these in detail.

The (5) new Nonrefundable credits are for the:
- Credit for Child and Dependent Care Expenses
- Credit for the Elderly or the Disabled
- Education Credits
- Retirement Savings Contributions Credit
- Child Tax Credit

Refundable Credits: These credits can produce a refund for you, even if your tax liability is zero. Three have been added to the form 1040A, in addition to the Earned Income Credit that was introduced with the 1040EZ form. A Blog post will explain these in detail.

The (1) refundable credit that carries over from the 1040EZ form is the:
- Earned Income Credit
- This has been expanded on the form 1040A, to include an additional Earned Income Credit value if you can claim one, two, or up to three Qualified Children on your tax return. The maximum credit you can receive if you have three children is $6,269 – if you are in the most advantageous income range – that would qualify you for the maximum credit. The maximum credit with one child is $3,373, and $5,572 if you can claim two children.

The (3) new refundable credits added to the 1040A form are for the:
- Additional Child Tax Credit
- American Opportunity Credit
- Net Premium Tax Credit

Additional Taxes: One additional tax category is added to the form 1040A, in addition to the Health Care Individual Responsibility tax penalty, that was introduced with the form 1040EZ. It is called the Excess Advance Premium Tax Credit Repayment. A Blog post will explain this in detail.

Disqualifications: You cannot use the form 1040A if you have any of the following in your Tax Story. If these apply, you must use the tax form 1040. If you remember, the 1040 is the most complicated of the (3) tax forms, because it can accommodate any and all Individual tax scenarios – no matter how complex the Tax Story might be.

Alimony income received from a former spouse
Business income or loss, typically from self-employment
Capital gain or loss from investments
Rental real estate income, partnership income, royalties, trust income, estate income, or income from an S Corporation
Farm income
Other income not defined by any previous income category
Health Savings Account (HSA) contributions or distributions
Moving expenses
Self-employment tax, self-employment health insurance or pensions
Penalty on early withdrawal of savings
Alimony paid to a former spouse
If you qualify to Itemize your Deductions
If you owe the Alternative Minimum Tax
If you take the Foreign Tax Credit
If you qualify for any of the Credits not allowed on the form 1040A
Many of the additional taxes not reported on the 1040EZ or 1040A

Click the link below for the next Blog post to learn about the (3) new categories of Filing Status added to the 1040A.

The 1040A: Filing Status

Feel free to comment on these blog posts, or send me an email at Mike@TaxesAreEasy.com

Legal Disclaimer: Nothing written or expressed in this Blog shall be construed as legal, accounting, or tax advice. This Blog is for informational purposes only, to inform Individuals about the IRS tax forms required to file an individual tax return, and the instructions that accompany such IRS tax forms.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any tax transaction or filing any tax form.

The US Tax System is based on what is called the “Pay As You Go” rule. That means taxes are withheld from each of your paychecks as you earn your salary throughout the year. Your company then periodically remits these withholding taxes to the IRS and the States, on your behalf. Your bank might also withhold Federal Income Tax from the Taxable Interest you earned during the year – if you gave the bank instructions to do that tax withholding. Federal and State tax might also be withheld from any Unemployment Compensation Benefits you received – again if you instructed them to do that tax withholding.

The (5) tax categories typically withheld from your paycheck are:
- Federal Income Tax
- Social Security Tax
- Medicare Tax
- State Tax
- Local Tax

The Federal Tax withheld, on your behalf throughout the year, is what is shown on line 7 of the form 1040EZ. The Social Security and Medicare taxes withheld from your paycheck, are forwarded to those programs that support current retired citizens who collect Social Security payments, and receive Medicare coverage. You cannot get a refund of the Social Security or Medicare taxes withheld from your paychecks. These are called FICA taxes (Federal Insurance Contributions Act), or Payroll Taxes. Social Security started in the 1930’s, and Medicare began in the 1960’s. Currently you pay a 6.2% Social Security tax, and a 1.45% Medicare tax.

These FICA payments are also noted as associated to your own Social Security account, because once you contribute to these programs for 40-quarters, or 10-years, you qualify for Social Security payments and Medicare coverage upon your retirement. The final cumulative amount of Social Security/Medicare taxes you contributed into the system during your working career – determines the eventual monthly Social Security benefits you will receive upon your retirement.

The State and Local taxes are remitted to your State, if they have an income tax. Here in New York City, we pay State Tax to New York State, and Local Tax to New York City. Seven States currently have no income tax, and Tennessee and New Hampshire only tax interest and dividend income. Not having a State income tax is a big attraction for these States – as a benefit for new residents to move into their State. Florida and Texas in particular have benefited from this status.

The only tax Credit allowed on the form 1040EZ – is the Earned Income Credit, or (EIC) for short. This appears on line 8a of the form 1040EZ. This credit begin in 1975 for lower income taxpayers, as an incentive to encourage work, and to be rewarded for that earned income. It is one of the U.S. Government’s longstanding anti-poverty programs. It has the effect of lowering the tax liability for those taxpayers who qualify for the credit. For the 2016 tax year, the maximum EIC credit that could be taken on the form 1040EZ was $506. A Single person could make up to $14,880 before the credit is phased out, and a Married Filing Jointly couple could make up to $20,430 before they are phased out of the credit. The credit is calculated from the EIC Table. Click the hyperlink form 1040EZ-EIC Table to see in a separate browser window. You can then see the income levels that generate the maximum credit of $506. For instance, a Single taxpayer earns the full $506 credit when their income is between $6,600 and $8,300. The credit for that Single taxpayer is then gradually lowered and totally phases out as their income reaches the top $14,880 threshold.

Line 9 on the form 1040EZ, adds the Federal Income Tax withheld from line 7, and any Earned Income Credit you are entitled to, from line 8a. This sum is your Total Payments and Credits value.

Your yearly Income Tax Liability is calculated by looking up your Taxable Income value in the tax table, for your filing status of Single or Married Filing Jointly. That Income Tax Liability value is then entered on line 10 of the form 1040EZ. Click the hyperlink form 1040EZ-Tax Table to see the Income Tax Liability values for the various Taxable Income levels from $5 to $99,999. Remember your Taxable Income must be below the $100,000 threshold to use the form 1040EZ. The tax software automatically calculates your Income Tax Liability for your Tax Story, based on your Filing Status and Taxable Income value.

Line 11 of the form 1040EZ calculates the additional penalty tax, if you did not have health insurance coverage for all 12-months of the year. The penalty is called the Individual Shared Responsibility Payment, and is a component of the Affordable Care Act. It affects any tax year after and including tax year 2014. The IRS provides form 8965 Health Coverage Exemptions-Instructions which contains worksheets that begin on page 15 to calculate that penalty tax. All tax preparation software includes the worksheets and automatically calculates this penalty, if it applies to your Tax Story.

Line 12 of the form 1040EZ is your Total Tax liability. It adds the Federal Tax liability from line 10, and any line 11 Shared Responsibility Payment.

If your line 9 Total Payments & Credits, is larger than the line 12 Total Tax, then you will receive a tax refund from the IRS. This refund is shown on line 13a of the form 1040EZ. You can instruct the IRS to directly deposit your refund into your checking or savings account, or you can instruct the the IRS to mail you a paper check. You can also split the refund between several accounts using the form 8888 Allocation of Refund. For instance, some can go into your IRA account, some into Savings, and the rest into Checking. You can also use this form 8888 to instruct the IRS to purchase U.S. Savings Bonds with your refund.

If your line 12 Total Tax, is larger than your line 9 Total Payments & Credits, then you owe the IRS a tax payment. This tax owed to the IRS is shown on line 14 of the form 1040EZ. The IRS can directly debit the tax payment from your checking or savings account – up to Tax Day – usually April 15th each year. Or you can mail the IRS a payment voucher and check to pay your tax due, also typically by April 15th each year. All tax software will print the payment voucher for you – if you mail in your payment.

Congratulations! You have now learned most everything you need to know about the form 1040EZ – from if you qualify to use the form – to if you receive a refund or owe taxes.

Blog #4 begins the explanation of the IRS form 1040A. Click the link below to go to that blog post.

The 1040A: Who Can Use this Form?

Feel free to comment on these blog posts, or send me an email at Mike@TaxesAreEasy.com