Author: Michael D Meyer, EA

The 1040 – The Schedule C: Describe Your Business

This Blog post is about your Self-Employment Business and how you describe that business activity reported on the Schedule C form.

The IRS defines a business as:

“An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. For example, a sporadic activity or a hobby does not qualify as a business.”

You also will be considered Self-Employed if you receive Nonemployee Compensation income reported to you in Box 7 of the form 1099-MISC. This most often is how Freelance Income is reported to you, or to report income you earned outside your regular salary job – for miscellaneous jobs you complete for Individuals or Companies without being considered their salaried employee.

If someone pays you $600 or more in freelance or contract work income – they must send you a 1099-MISC form listing the total payments in box 7. They also are required to send a copy of the same 1099-MISC to the IRS.

Actors, performers, dancers and other entertainers are also often issued these 1099-MISC with Box 7 forms. We see this in NY City quite often, particularly when the Actors travel outside the City for Summer Stock Theatre work they book for themselves during the Broadway off-season.

You will report your Business Income on the 2-page form Schedule C. See also the 18-page Schedule C-Instructions. The main sections of the Schedule C we will learn in this and the next (4) Blog posts are:

  • Form Heading: Business information that describes the business
  • Part I – Income: Reports the gross income for the business
  • Part II – Expenses: Lists all expenses for the business; calculates the Business Use of Home costs, then calculates the Net Profit or Loss
  • Part III – Cost of Goods Sold: calculates the inventory cost for the year
  • Part IV – Vehicle Information: describes your Vehicle(s) used for business
  • Part V – Other expenses: list the other expense categories that cannot be described with the pre-determined categories listed in Part II – Expenses

A terrific IRS resource to learn about issues related to a small business and self-employment is Publication 334-Tax Guide for Small Business.

Business Entity classification:

Your business entity information is entered into the Form Heading at the top of the Schedule C. The three business entities that can be reported on the Schedule C are:

  • Sole Proprietorship (SP)
    • The simplest business form under which one can operate and own a business
    • The (SP) is not a legal entity separate from the owner
    • The (SP) is the person who owns the business and is responsible for its debts
    • A Sole Proprietorship is an unincorporated business with a single owner who pays personal income tax on profits earned from the business
    • A Sole Proprietorship is most often doing business under that same person’s name, as creating a separate business or trade name is not necessary
    • The Sole Proprietor is the single individual who acquires the benefits and risks of running an enterprise
    • There is no legal distinction between the assets and liabilities of the (SP) and those of its owner. All the personal assets of a Sole Proprietor are at risk.
  • Single-Member LLC (Limited Liability Company)
    • An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes)
    • A disregarded entity refers to a business entity with one owner that is not recognized for tax purposes as an entity separate from its owner
    • If a single-member LLC does not elect to be treated as a corporation, the LLC is a “disregarded entity,” and the LLC’s activities should be reflected on its owner’s federal tax return. If the owner is an individual, the activities of the LLC will generally be reflected on:
      • Schedule C – Profit or Loss From Business
      • Schedule E – Supplemental Income and Loss
        • Income from Rental Properties, Royalties, Partnerships, S-Corporations, Trusts, and Estates
      • Schedule F – Profit or Loss From Farming
    • An individual owner of a single-member LLC that operates a trade or business is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship.
    • The assets of the LLC (Limited Liability Company) are separate from the single-member. The personal assets of the single-member LLC owner are separate from the LLC. This Limited Liability is a prime advantage of choosing the LLC as your business entity, as compared to the Sole Proprietorship entity.
  • Qualified Joint Venture (Husband and Wife)
    • A qualified joint venture is a joint venture that conducts a trade or business where (1) the only members of the joint venture are a married couple who file a joint return, (2) both spouses materially participate in the trade or business, and (3) both spouses elect not to be treated as a partnership.
    • A Qualified Joint Venture, for purposes of this provision, includes only businesses that are owned and operated by spouses as co-owners, and not in the name of a state law entity (including a limited partnership or limited liability company)
    • Each Spouse is required to complete their own form Schedule C listing the Income and Expenses attributed to their share of the Qualified Joint Venture business activities. Each Spouse also pays their own Self-Employment taxes.

The top of the Schedule C contains the Form Heading, where the general information that describes the business entity is entered. See the image below. You must complete the lines A through J by providing the required information and by answering the Yes/No questions.

Name of Proprietor and Social Security Number is your name and SSN if your business does not have a separate name, and uses your name as the title of the business. This is most often considered a Sole Proprietorship.

  • lines C and D: Business Name is used if your business or single-member LLC has a name different from your personal name. The Employer ID number (EIN) can be obtained from the IRS website and issued immediately, which then can be used to open a business checking account, submit sales and payroll taxes, etc.
  • line E: Business Address is your own personal home address or the separate address of the business if located outside where you live.
  • line F: Accounting Method can be Cash, Accrual, or Other (Hybrid). Please consult with your Accountant or Bookkeeper as to what Accounting Method you should use, that is most appropriate to your Business activities. The person or company that manages your business books, will advise you on the Accounting Method they use for your business.
  • Cash Accounting is the typical accounting method for sole proprietors and single-member LLC’s – who do not have and sell from inventory. They typically only provide personal services, and do not sell products. You record cash when you receive it, and record expenses when you pay for them. Income is reported when constructively received during the tax year. Expenses are recorded when you pay for the expense during the tax year. Your payments are considered constructively received when you have access to the money by way of a check, or the deposit has been registered into your business bank account. You only report payments when you have been actually paid, and only list expenses after you paid for the expense item.

 

  • Accrual Accounting is most often used when the business keeps and sells from an Inventory of products. A home based business selling fashion accessories through the Internet is a good example of an inventory based business. You have to purchase the raw materials and fabrics to manufacture the finished goods, which then builds up the completed inventory you sell to customers with their online orders. Accrual accounting counts income when all the activities to complete the sale have been satisfied to earn the payment, even if you have not yet been paid for that sale. The expenses are counted when you have possession of the expense item, even if you have not yet paid the invoice for the purchased products. Accrual accounting works well when your customers take days or weeks to pay you, and likewise when you take days or weeks to pay your suppliers. It gives you a more up-to-date snapshot of your cash flow and financial activity, even if all your invoices or expense bills have not been paid.

 

  • Other, or Hybrid Accounting uses a combination of the Cash and Accrual accounting methods. For instance you could still meet the requirement to use the Accrual method to track your inventory, but use the Cash method for all the other transactions related to your business.

 

  • General Accounting Rules for a Self-Employed Business:
    • If you report income using the cash method, you must also report expenses using the cash method.
    • If you report income using the accrual method, you must also report expenses using the accrual method.
    • Income and expenses must be reported using the same method, whether it is cash or accrual.
    • If you have inventory, you need to report inventory sales and purchases using the accrual method.
      • You can record all other transactions with either cash or accrual accounting.
  • line G: Material Participation means you actively participated in the business during the tax year, and satisfy one of these seven IRS tests:
    1. You participated in the activity for more than 500-hours during the tax year. 500-hours divided by a typical 40-hr work week, gives 12 1/2-weeks or an equivalent to one, three-month quarter.
    2. Your participation in the activity for the tax year was substantially all of the participation in the activity of all individuals (including individuals who did not own any interest in the activity) for the tax year.
    3. You participated in the activity for more than 100-hours during the tax year, and you participated at least as much as any other person for the tax year. This included individuals who did not own any interest in the activity.
    4. The activity is a significant participation activity for the tax year, and you participated in all significant participation activities for more than 500-hours during the year. An activity is a “significant participation activity” if it involves the conduct of a trade or business, you participated in the activity for more than 100-hours during the tax year, and you did not materially participate under any of the material participation tests (other than this test 4).
    5. You materially participated in the activity for any 5 of the prior 10 tax years.
    6. The activity is a personal service activity in which you materially participated for any 3 prior tax years. A personal service activity is an activity that involves performing personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor.
    7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis for more than 100-hours during the tax year. Your participation in managing the activity does not count in determining if you meet this test if any person (except you):
      • received compensation for performing management services in connection with the activity
      • spent more hours during the tax year than you spent performing management services in connection with the activity (regardless of whether the person was compensated for the services).
  • line H: Started or Acquired Business in this tax year tells the IRS this is the first year this business is being reported on a Schedule C. This is important because in the first year you can deduct as direct expenses the first $5,000 of Organizational Costs and the first $5,000 of Start Up Costs. The IRS also checks for “Gaps” in your Schedule C filing history, particularly if it relates to prior assets you are Depreciating.
  • line I: Payments requiring 1099 forms to be issued relates to your responsibility to issue a 1099-MISC form to the IRS to report any person who provided $600 or more in personal services to your business.
    • For instance: You are a licensed Architect who hires a draftsperson to help you throughout the year to produce computer-generated drawings for your projects. If you pay that draftsperson $600 or more in fees they charged you for their personal services during the tax year, you must issue them a 1099-MISC form listing the total amount you paid them in Box 7 listed as Nonemployee Compensation. You must also file a copy with the IRS. The IRS then cross-references this reported 1099-MISC income with the draftsperson’s Individual tax return, and their records.
  • line J: Required 1099 forms filed with IRS? tells the IRS you indeed sent them the 1099-MISC forms you indicated by a Yes answer in line I. This then alerts the IRS to cross reference your 1099-MISC filings with their computers. They match them with your Social Security Number, or the Employer ID Number (EIN) for your Schedule C business.

The IRS also matches this submitted 1099-MISC information with the Individuals you paid during the year, as reported on your 1099-MISC submitted forms. Those individual’s social security numbers or Employee ID Numbers (EIN) are listed on your submitted 1099-MISC forms. The IRS then reviews their Individual tax returns, to verify they reported this income listed on your submitted 1099-MISC forms.

Click the hyperlink below for the next blog post that explains how to list your Self-Employment Income reported on the Schedule C.

The 1040: The Schedule C: Part I – Income

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

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov

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 1040: The (8) New Income Categories

The (11) income categories from the forms 1040EZ and 1040A are carried forward and incorporated into the 1040 form. If you have not been able to read and study the (2) previous posts about these (11) income categories, please do that now so you are familiar with these Income types. Those blog posts are The 1040EZ: Who Can Use this Form? and The 1040A: (7) New Income categories. The (11) previous Income categories are:

  • Wages, Salaries and Tips
  • Taxable Scholarships or Grants
  • Taxable Interest – that can be over $1,500 on the 1040A and 1040 forms
  • Tax Exempt Interest
  • Ordinary Dividends
  • Qualified Dividends
  • Capital Gain Distributions
  • IRA Distributions
  • Pension and Annuity Distributions
  • Unemployment Compensation
  • Social Security Benefits

The (8) new income categories added to the form 1040 are:

  • line 10: Taxable refunds, credits, or offsets of state and local income taxes
  • line 11: Alimony received
  • line 12: Business income or (loss)
  • line 13: Capital gain or (loss)
  • line 14: Other gains or (losses)
  • line 17: Rental real estate, royalties, partnerships, S-corps., trusts, etc.
  • line 18: Farm income or (loss)
  • line 21: Other income

This blog post will give an introduction to these (8) new income categories. Subsequent blog posts will explain some in more detail.

Taxable refunds, credits, or offsets of state and local income taxes affects taxpayers who use the Itemized Deduction feature and also deducted State or Local taxes as a Itemized Deduction on line 5a of their Schedule A form. See the image below of the Schedule A line 5a:

If you receive a State tax refund in the same tax year that you deducted State and Local taxes on your Federal Schedule A, line 5a, as an Itemized Deduction, you most often have to report that State refund as ordinary income the following year on line 10 of your 1040 form.

This is because you received a federal income tax benefit – lower line 43 Taxable Income – due to you being able to deduct your State and Local taxes on the Schedule A. The IRS considers you then received a double benefit with that State refund, so they require you to report it as income the following year on their IRS 1040 tax return.

The State will mail you the form 1099-G that shows your previous year refund amount on line 2 of the form, or they will make the 1099-G available for download from their website. See the form 1099-G.

Pages 23 & 24 of the 1040 Instructions have the line 10 explanation and worksheet State and Local Income Tax Refund Worksheet that calculates if any of your previous year State refund(s) are taxable the following year on your Federal 1040 form.

If you received any State-specific credits in your State refund – those are not to be included as potentially taxable in the line 10 calculation. For example in New York City, some people receive a Rent-based credit/refund. This would not be part of the taxable New York State refund calculated by the worksheet.

This line 10 requirement does not apply to you if you took advantage of the Standard Deduction the previous year and did not Itemize your Deductions. It also does not apply if you instead used the General Sales Taxes itemized deduction value on line 5b. Taxpayers in States without an income tax, like Florida, use the General Sales Tax line 5b deduction.

All tax software calculates this line 10 Taxable Refund for you, but you have to give the details of your previous year’s Federal and State tax returns – so the software can determine if all or part of the previous year’s State tax refund is taxable on your current year IRS 1040 form.

Alimony received is income you received from a former spouse, per the stipulations of your divorce or separation agreement settlement. It is sometimes also referred to as Separation Maintenance.

This is considered by the IRS as ordinary income and must be reported on line 11 of the form 1040. You must also provide the payer of this Alimony with your social security number, as that payer can take a line 31a Adjustment deduction for paying that Alimony. Your social security number is then listed on line 31b of their 1040 tax return.

The IRS cross-references both of your social security numbers, most importantly to make sure the recipient of the Alimony reported it as ordinary income on their 1040 tax form. If the IRS cannot verify this, they might disallow the line 31a Adjustment deduction for the payer of the Alimony.

Business income or (loss) is income you received from Self-Employment. The IRS defines this Business Income as “If you operated a business or practiced your profession as a sole proprietor.” This is reported on the Schedule C form which lists your gross income and all expenses. Your Net Profit or Loss then flows from the Schedule C to line 12 of the form 1040. The next several blog posts will explain Self-Employment income, the Schedule C, and other tax forms related to your own business income.

Capital gain or (loss) are the proceeds or losses recorded when you sell a Capital Asset, such as a stock or bond. Most often these transactions need to be reported on the form 8949 – Sales and Other Dispositions of Capital Assets and the Schedule D. Your net profit or loss from these investments is then listed on line 13 of the 1040. A separate blog post will explain these.

Other gains or (losses) are the proceeds or losses recorded when you sold or exchanged assets used in a trade or business. These asset sales are listed on the form 4797 – Sale of Business Property. Your net profit or loss from these business-related asset sales is then listed on line 14 of the 1040. A separate blog post will explain these.

Rental real estate, royalties, partnerships, S-corps., trusts, etc. are reported on the Schedule E with the income reported to the taxpayer on various forms, like the 1099-MISC and the K-1 forms. The total gain or loss from these investments is then listed on line 17 of the form 1040. A separate blog post will explain these categories of income.

Farm income or (loss) are the proceeds or losses from operating a farm. This is reported on the Schedule F form. The Net Profit or Loss from the Farm Operation then flows from the Schedule F to line 18 of the form 1040. A separate blog post will explain this, and also what constitutes a Farm Operation.

Other income listed on line 21 of the form 1040 is any other category of income, not described on lines 7 through 20a of the form 1040, such as:

  • Prizes, Awards, Lottery and Gambling winnings
  • Jury Duty pay
  • Reimbursements of deductions you took in an earlier year, such as Medical Expenses, Real Estate Taxes, or Home Mortgage Interest.
  • Rental of personal property – not in the business of renting such property
    • For example, you rented your snow blower during last Winter’s blizzard
  • Hobby income, not engaged in for profit
  • A Net Operating Loss (negative value on line 21) from a Business, etc.

A separate blog post will explain these.

Click the hyperlink below to learn about Self-Employment and how that activity will generate a Business Income or Loss. You will begin learning about the Schedule C – the form used to report this sort of Business Income. The first step is to describe your business on the Schedule C.

The 1040 – The Schedule C: Describe Your Business

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

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov

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 1040: Who Can Use this Form?

The 1040 “U.S. Individual Income Tax Return” is the most complex tax form the IRS provides to Individuals, to report any and all Tax Stories. The 1040 builds and expands on the features of the intermediate 1040A form.

If you have not done so already, I suggest that you read and study the (2) blog posts that explain the form 1040EZ, and the (11) blog posts explaining the form 1040A. You can see those posts listed to the right, in the Recent Posts section. You need to verify if either of those two previous 1040-series forms can accommodate your Tax Story.

If they cannot, then you are required to use this form 1040 to file your taxes with the IRS – to report your more complicated Tax Story, that the previous 1040EZ and 1040A forms cannot accommodate.

Click to open the 2-page IRS form 1040 into a new browser window, to refer to as we learn about the form. You can then toggle between the several 1040 blog posts and the 1040 form. As a reminder, you can print or save any of these PDF tax forms – to use as a printed desktop reference.

Click the link below for the 106-page form 1040A instruction booklet from the IRS, as IRS form 1040-Instructions. The explanations in these many form 1040 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 1040.

There will be approximately 35 blog posts in this series to explain the form 1040 form ( in progress to be completed for late 2017, early 2018 ).

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 1040, then work through each line to the end of page 2. The form 1040 is very complicated, so it takes many, many blog posts to adequately explain each line of the form.

All of the features of the 1040EZ and 1040A forms, are carried forward and incorporated into this third 1040 form. If your Tax Story cannot be accommodated by those first two 1040-series forms – you must use the form 1040.

This first 1040-related blog post will outline the additional features of the form 1040, so you have an introduction to the complexity of the form. Subsequent blog posts will explain every form 1040 feature in detail.

The tax form 1040 can at times be incredibly complicated, because it is designed to encompass any and all circumstances relating to an Individual’s Tax Story. The many additional Income, Adjustment, Deduction, Credit and Tax categories make it very complicated. You will see that below as these many new features are listed and described.

The best way to initially learn the form 1040, is to only focus on the features of the form that affect your own Tax Story. As you progress through the blog posts for the first time, just concentrate on what is relevant to your own Tax Story.

The other information not related to your present Tax Story will be there to learn – if your Tax Story gets more complicated in the future. It is most often too overwhelming to attempt to learn every feature about the form 1040 – your first time through reading and studying these blog posts.

In the future you can learn about the new circumstances that might arise to change or complicate your particular Tax Story. At that point you could review the blog posts or use the search feature to find the new tax form features you need to learn. For instance, these are some circumstances that might happen to your Tax Story in the future – that you would then need to learn about, to properly report on your 1040 form tax return:

  • Self-Employment information for a new home-based business you started
  • How to report Rental Income for that beach house you started renting
  • How to take advantage of the Itemized Deduction feature to report large unreimbursed medical expenses or unreimbursed job-related expenses
  • How to take a credit, for that $35,000 Tesla Model 3 you are considering
  • How to file the taxes for the Nanny you hired, to care for your newborn
  • How to report your new HSA (Health Savings Account) contributions and distributions that your salary job now provides as a benefit to you
  • How to take the Adoption Credit for your new adopted child

One of the primary purposes of this entire “Taxes Are Easy” blog – is to be a complete reference for your Tax Story – which can explain every line on your tax return. To keep that promise, some of the blog explanations of the complex form 1040 features, by necessity, have to go into great detail.

The 1040 form might test your patience for that line-by-line level of detail – as explained in the blog posts.

If you get frustrated or overwhelmed with learning the form 1040 for your particular Tax Story, just submit a comment on any blog post with your question, or send me an email at Mike@TaxesAreEasy.com. I’ll help you create a “form 1040 lesson plan” that will explain your unique Tax Story, without the other 1040 information you do not need to learn at this point.

The goal is for you to understand your own Tax Story – by understanding every line on your tax return. With the 1040 form, though, there are many lines on the form – that could possibly never affect your Tax Story.

Ignore those for now, and just concentrate on what is pertinent to your current Tax Story. You can always come back to those tax details later, to learn more about the features of the form 1040 – as your evolving and more complicated Tax Story will dictate.

The Filing Status, Exemptions and Dependents sections at the top of page 1 of the form 1040 are exactly the same as introduced on the form 1040A. Please refer to these three 1040A blog posts that explain these topics, if you have not reviewed and studied these posts already.

The 1040A: Filing Status and The 1040A: Qualifying Children & Relatives and The 1040A: The Personal and Dependent Exemptions

The Income categories listed on page 1 are expanded on the form 1040, and include every income category brought forward from the forms 1040EZ and 1040A. See these previous posts that explained the Income categories from the forms 1040EZ and 1040A. They were The 1040EZ: Who Can Use this Form? and The 1040A: (7) New Income categories.

The (8) new Income categories on the form 1040 are:

  • line 10: Taxable refunds, credits, or offsets of state and local income taxes
  • line 11: Alimony received
  • line 12: Business income or (loss)
  • line 13: Capital gain or (loss)
  • line 14: Other gains or (losses)
  • line 17: Rental real estate, royalties, partnerships, S-corps., trusts, etc.
  • line 18: Farm income or (loss)
  • line 21: Other income

A separate Blog post will explain each of these in detail. I will also explain in the blog posts the general income producing categories shown below, and the particular forms and schedules required to report such income:

  • Self-Employment income reported on the Schedule C
  • Capital Gains and other Investment Income reported on the Schedule D
  • Rental Income reported on the Schedule E
  • Royalty, Partnership , S-Corp., Trust and Estate income that is reported to you on the various 1099-MISC and K-1 forms, and then reported on the Schedule E
  • Farm Income reported on the Schedule F

The Adjustment categories listed on page 1 are expanded on the form 1040, and include the (4) Adjustment categories brought forward from the form 1040A. You can review the (4) 1040A Adjustments on the previous blog post at The 1040A: (4) New Adjustment categories. The (10) new Adjustment categories on the form 1040 are:

  • line 24: Certain business expenses of reservist, performing artists, and fee-based government officials
  • line 25: Health savings account deduction
  • line 26: Moving expenses
  • line 27: Deductible part of self-employment tax
  • line 28: Self-employed SEP, SIMPLE, and qualified plans
  • line 29: Self-employed health insurance deduction
  • line 30: Penalty on early withdrawal of savings
  • line 31a: Alimony paid
  • line 35: Domestic production activities deduction
  • line 36: (10) miscelaneous write-in adjustments

A Blog post will explain these in detail.

The Itemized Deductions feature is added to line 40 on page 2 of the form 1040. You report these on the Schedule A form. Itemized Deductions can potentially give you a much larger deduction than the Standard Deduction. You can utilize either the Standard or Itemized Deduction on the form 1040, to give you the largest reduction of your final Taxable Income. A blog post will explain the Itemized Deduction feature and the Schedule A.

If you remember, the Standard Deduction was the only option on the forms 1040EZ and 1040A. You cannot use the Itemized Deduction feature on the forms 1040EZ or 1040A. Please review the blog post The 1040A: The Standard Deduction if you have not already studied this post.

Income Phaseout Levels for Itemized Deductions and Personal and Dependent Exemptions for higher-income taxpayers. These Phaseout Levels are a component of The Affordable Care Act, and limit these (2) deductions when your income rises above the defined threshold levels. A Blog post will explain these in detail.

The Nonrefundable and Refundable Credits are expanded on the form 1040. Please review these previous 1040A posts that explained the credits available on the form 1040A. All of these 1040A form credits are carried forward to and included in the form 1040. The 1040A: the (5) Nonrefundable Tax Credits and The 1040A: Payments and (4) Refundable Credits

Several Nonrefundable Credits have been added to the form 1040:

  • line 48: Foreign tax credit
  • line 53: Residential energy credits
  • line 54: Other (11) miscellaneous credits
    • General business credit
    • Credit for prior year minimum tax
    • Mortgage interest credit
    • Credit for the elderly or the disabled
    • Adoption credit
    • District of Columbia first-time homebuyer credit
    • Qualified plug-in electric drive motor vehicle credit
    • Qualified electric vehicle credit
    • Alternative motor vehicle credit
    • Alternate fuel vehicle refueling property credit
    • Credit to holders of tax credit bonds

Several Refundable Credits have been added to the form 1040:

  • line 72: Credit for Federal Tax on fuels
  • line 73: Other (4) miscellaneous credits
    • Notice to Shareholder of Undistributed Long-Term Capital Gains
    • Health Coverage Tax Credit
    • Credit for Repayments
    • Tax payments made during the year, that do not go on any other line

A Blog post will explain these in detail.

The many Regular Additional Taxes will be explained that can only be reported on the form 1040. All the tax categories introduced on the forms 1040EZ and 1040A carry forward to the form 1040. Some of the new taxes reported on the form 1040 are rarely used and imposed on your tax return, but they will be explained so you are aware of them. The many new regular tax categories are reported and combined onto line 44:

  • Tax on your normal taxable income above the $100,000 threshold that uses the Tax Computation Worksheet, instead of the Tax Tables used for the previous 1040EZ or 1040A forms.
  • Tax calculated using the Qualified Dividends and Capital Gains Tax Worksheet, to give you the lower Capital Gains tax rates on Qualified Dividends and Long-Term Capital Gain investments you were paid
  • Tax calculated using the Schedule D Tax Worksheet if you reported more sophisticated investment income on the Schedule D
  • Reporting tax on your child’s interest and/or dividends – form 8814
  • Reporting a child’s unearned income above $2,100 – form 8615
  • Tax on lump sum distributions – form 4972
  • Tax on section 962 election
  • Recapture of an Education credit from previous years – form 8863
  • Tax relating to a section 1291 fund
  • Tax on farming or fishing income averaging on the Schedule J
  • Foreign earned income tax worksheet if you claimed an exclusion for foreign income excluded from U.S. Taxation.

A Blog post will explain these in detail.

The Alternative Minimum Tax (AMT) on line 45 is explained in its own blog post, as this is by far the most confusing and misunderstood tax the IRS imposes on “higher-income” taxpayers.

The U.S. Congress passed the AMT in 1969 to ensure a few very high-income taxpayers at that time, paid a minimum amount of tax. An earlier report to Congress had documented that in 1967, 155 taxpayers with adjusted gross incomes above $200,000 – had paid no income tax, as they had maximized their legal deductions to create a zero tax liability for themselves. That $200,000 threshold would be equivalent to $1.17 million dollars today, adjusted for the succeeding many decades of inflation.

Congress deemed this unfair, and created an additional layer of taxes above the regular income tax rates – called the Alternative Minimum Tax. This was designed to force these 155 very high-income taxpayers to pay a certain minimum amount of tax, even if their regular tax liability was zero because they legally took enough deductions to zero out their tax bill.

Congress, though, never properly indexed the AMT threshold amounts for inflation, so many upper-middle class taxpayers today are liable for this additional tax. The AMT was never intended to “capture” any middle-class taxpayer as it has done for many decades now. This is a huge revenue source for Congress, so there is strong resistance to repeal the AMT law, or adjust the income thresholds that trigger the AMT tax.

President Trump in 2017 has proposed through his Tax Reform agenda to eliminate the Alternative Minimum Tax (AMT). It will be interesting to observe the “battle” this will setup with a resistant Congress that never wants to repeal the AMT. Follow my “Tax Update” blog posts beginning in December 2017 for any news on this matter. See that blog post at Tax Law Updates & News.

The Other Taxes are reported on the form 1040 that encompass the remaining taxes Congress has written into the Tax Laws, including the high-income Affordable Care Act Taxes that begin in 2010. They are:

  • line 57: Self-Employment taxes reported on the Schedule SE
  • line 58: Unreported social security and medicare tax on tip income – form 4137, and Unreported social security and medicare tax on salary income – form 8919
  • line 59: Additional tax on IRAs and other qualified retirement plans
  • line 60a: Household employment taxes – schedule H
  • line 60b: First-time homebuyer credit repayment
  • line 62a: Additional medicare tax – form 8959
  • line 62b: Net investment income tax – form 8960
  • line 62c: the remaining (27) miscellaneous tax categories for seldom-used categories that only affect a small number of Taxpayers each year

A Blog post will explain these in detail.

One Payment category has been added to the form 1040:

  • line 71: Excess social security and tier 1 RRTA tax withheld

This happens typically to high-earner taxpayers who switch jobs during the year, when the multiple jobs combined withheld too much Social Security tax from their paychecks.

The wage income cap for regular wages subject to Social Security tax in 2016 was $118,500 – for a maximum withholding amount of $7,347.

If the taxpayer earned above $118,500 from their multiple jobs – the several employers combined often withhold above that $7,347 limit of Social Security tax. This line 71 will refund the excess Social Security tax withholding that was collected above that $7,347 limit. A Blog post will explain this in detail.

Click the hyperlink below to begin the blog post that will explain the (8) new Income categories added to the form 1040.

The 1040: The (8) New Income Categories

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

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov

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 1040A: Payments and (4) Refundable Credits

Payments and the (4) Refundable Credits are the last topics we need to discuss, to complete the 1040A form to the point you can determine if you get a refund, or if you owe a tax payment to the IRS.

As you recall from the previous blog post, your Total Tax liability is calculated on line 39 of the form 1040A. You can then offset this with any tax Payments you made during the year, and the positive refund values from any of the (4) Refundable Credits you might qualify for. If your Payments and Refundable Credits add up to be more than your Total Tax liability – you will get a refund. If your Total Tax liability is more than your Payments and Refundable Credits, you will owe a tax payment.

Payments shown on the form 1040A come from four possible sources:

  1. Taxes withheld from your paycheck, as shown on your W-2 form
  2. Taxes withheld from other income sources, shown on a 1099-form
    1. from Bank and Brokerage account income
    2. from IRA, Pension, Annuity and Social Security income
    3. from Unemployment Benefits income
  3. Taxes you paid quarterly to the IRS, as Estimated Payments
  4. Amount of your 2015 IRS tax refund, applied to 2016 tax payments

If you have a salary job, your company withholds Federal, Social Security, Medicare, State and Local taxes from each of your paychecks. They forward these to the IRS and the States, on your behalf, to be recorded in your tax accounts with the IRS and the States. This fulfills your obligation to pay your taxes as you earn the money – the “Pay As You Go” rule. This total Federal salary tax withholding value goes on line 40 of the form 1040A. The software calculates this from your W-2 entries.

If you instructed other payers of your income sources during the year to withhold IRS or State taxes – those appear on the 1099 forms, such as:

  • 1099-INT that reports the Interest you earned
  • 1099-DIV that reports the Dividends you earned
    • this 1099-DIV form could also show Capital Gain Distributions
  • 1099-Consolidated that reports Capital Gain Distributions and other brokerage income you earned from mutual funds, stock sales, etc.
  • 1099-G that reports Unemployment Benefits you received from your State
  • 1099-R that reports IRA, Pension and Annuity income you received
  • SSA-1099 that reports Social Security Benefits you received

The tax withholding values from any of these 1099 forms go on line 40 of the form 1040A. The software calculates this from your 1099 entries.

Some taxpayers prefer to just pay the IRS and the States directly on a quarterly basis, to cover their expected tax obligation from their various income sources. These are called Estimated Payments, and are mailed to the IRS and the States quarterly on April 15th, June 15th, September 15th and January 15th of each tax year. Estimated Payments can also be made electronically through the IRS and State’s websites. These have to be manually entered into the tax software, sorted by the quarterly payment dates and amounts sent for each quarterly payment. These are recorded on line 41 of the form 1040A.

Each year you can also instruct the IRS and/or the States to forward all or part of your tax refund – to be credited to your next year’s Estimated Payments total. Many taxpayers who regularly make quarterly Estimated Payments use this refund forwarding method. These are also recorded on line 41 of the form 1040A.

The (4) Refundable Credits can reduce your Total Tax liability to zero and then create a refund for you, with any remaining refundable credits they generate for you, after reducing your Total Tax liability to zero. They are:

  1. The Earned Income Credit (EIC) on line 42a
  2. The Additional Child Tax Credit on line 43
  3. The American Opportunity Credit on line 44
  4. The Net Premium Tax Credit on line 45

The Earned Income Credit (EIC) was discussed in (2) previous blog posts, as indicated by the two blue hyperlinks below. If you have not reviewed these two posts previously, please do so now, as they give a good introduction to the Earned Income Credit. Just scroll down into each post until you reach the discussion of the Earned Income Credit in the posts.

The 1040EZ: Payments, Credits and Tax

The 1040A: Who Can Use this Form?

Refer to Publication 596-Earned Income Credit (EIC) for the IRS publication that explains in detail the requirements and rules to qualify for the Earned Income Credit.

The Earned Income Credit requires that all people listed on the tax return must have valid Social Security Numbers that are eligible for work. This includes the taxpayer, parents, and any children listed on the tax return.

The main enhancement to the Earned Income Credit (EIC) on the form 1040A is you can qualify for more of the credit, based upon you having up to three Qualified Children listed as Dependents on your form 1040A. The maximum levels of the Earned Income Credit (EIC) you can receive are:

  • $506 if you have no Qualifying Children
  • $3,373 if you have (1) Qualifying Child listed as a Dependent
  • $5,572 if you have (2) Qualifying Children listed as a Dependent
  • $6,269 if you have (3) Qualifying Children listed as a Dependent

For each of the EIC Credit levels there is an ideal income level which gives you the maximum credit, based on your filing status. See those ideal income levels in the lists below, based on your Filing Status.

  • Single, Head of Household, Qualifying Widow(er) filing status
    • $506 credit with no Qualifying Child: between $6,600 and $8,300
    • $3,373 credit w/ (1) Qualifying Child: between $9,900 and $18,200
    • $5,572 credit w/  (2) Qualifying Children: between $13,900 and $18,200
    • $6,269 credit w/(3) Qualifying Children: between $13,900 and $18,200
  • Married Filing Jointly filing status
    • $506 credit with no Qualifying Child: between $6,600 and $13,850
    • $3,373 credit w/ (1) Qualifying Child: between $9,900 and $23,750
    • $5,572 credit w/ (2) Qualifying Children: between $13,900 and $23,750
    • $6,269 credit w/ (3) Qualifying Children: between $13,900 and $23,750
  • Married Filing Separately filing status
    • The Earned Income Credit is not allowed for Married Filing Separately

Above a certain income level, you cannot take the Earned Income Credit, based on your Filing Status and the number of Qualifying Children you list as Dependents on your tax return. Refer to the below table.

If you claim Qualified Children for your Earned Income Credit, you have to also submit the Schedule EIC which lists their information:

  • the Child’s name
  • the Child’s social security number
  • the Child’s year of birth
  • the Child’s status as a student and/or their disability status
  • the Child’s relationship to you
  • the number of months the Child lived with you during the current tax year

Click this hyperlink to see the Schedule EIC.

The Earned Income Credit has a massive amount of fraud, as some taxpayers list false income numbers, and claim children who are not their actual children. All paid tax preparers have to complete a Due Diligence checklist that is submitted to the IRS with your tax return. The paid tax preparer has the responsibility to verify that all Earned Income Claims are legitimate – or they are fined $550 per fraudulent EIC tax return. Click this link to see how extensive the questions are on this form, we as paid tax preparers have to complete Paid Preparer’s Due Diligence Checklist.

The Earned Income Credit is reported on line 42a of the form 1040A.

The Additional Child Tax Credit is the refundable portion of the line 35 $1,000 Child Tax Credit that was leftover after your line 37 Tax liability was reduced to zero. You could qualify for this $1,000 Child Tax Credit for each Qualified Child under the age of 17, listed as a dependent on your tax return. See this blog post The 1040A: the (5) Non-Refundable Tax Credits for the Child Tax Credit explanation.

You calculate the Additional Tax Credit on the IRS form 8812-Additional Child Tax Credit. For instance, maybe only $600 of the $1,000 Child Tax Credit was used to reduce your line 37 Tax liability to zero. That leaves $400 of credit still unused. You then could receive that extra $400 as a refundable refund credit – if you qualify for the Additional Child Tax Credit. The same income limitations apply for this Additional Child Tax Credit – as could limit your original Child Tax Credit. See the form 8812-Additional Child Tax Credit-Instructions.

The point to remember is for each Qualifying Child under the age of 17 listed on your tax return as a Dependent, you could qualify for this up to $1,000 per Child Tax Credit / Additional Child Tax Credit combination.

The taxpayer, parents, and children can still qualify for this Additional Child Tax Credit, if they only have ITIN’s (Individual Taxpayer Identification Numbers), not Social Security Numbers. See the IRS page for ITIN’s at IRS ITIN information.

They will not, though, qualify for the Earned Income Credit, as that credit requires that all people listed on the tax return must have valid Social Security Numbers that are eligible for work.

The Additional Child Tax Credit is reported on line 43 of the form 1040A.

The American Opportunity Credit (AOC) is the $1,000 refundable portion of the total $2,500 AOC credit you could qualify for as a deduction related to your Undergraduate education expenses. See this blog post The 1040A: the (5) Non-Refundable Tax Credits for the entire explanation of the American Opportunity education credit. The first $1,500 of the credit can be used to reduce your Total Tax liability to zero. The remaining $1,000 of the AOC credit can be refunded to you, even if your Total Tax liability has been reduced to zero.

The refundable, up to $1,000 American Opportunity Credit, is reported on line 44 of the form 1040A.

The Net Premium Tax Credit is a refund of the final Premium Tax Credit you qualified for, after taking into account your final income total, and if you received any of the Advance Premium Tax Credits towards your monthly health insurance premiums. This was explained in this blog post The 1040A: Affordable Care Act issues as part of the larger discussion of The Affordable Care Act and how it can affect your tax return each year.

The Net Premium Tax Credit is reported on line 45 of the form 1040A.

Line 46 on the form 1040A adds up the following Payments and Credits:

  • line 40: Federal Income Tax withheld from your W-2’s and 1099’s
  • line 41: 2016 Estimated Tax Payments and amount of 2015 refund applied
  • line 42a: Earned Income Credit
  • line 43: Additional Child Tax Credit
  • line 44: American Opportunity Credit
  • line 45: Net Premium Tax Credit

You will receive a refund if these line 46 Total Payments, are larger than your line 39 Total Tax liability. The refund is shown on line 47. You can have your refund directly deposited into your checking or savings account, or have the IRS mail you a refund 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. Line 49 lets you instruct the IRS how much of your refund, you would like to be credited to your next year’s Estimated Tax payment totals.

You will owe a tax payment, if your line 39 Total Tax liability is more than your line 46 Total Payments. The tax owed is shown on line 50. You can instruct the IRS to directly debit the tax owed from your checking or savings account, or you can mail them a check with a payment voucher. Line 51 calculates any Estimated Tax Penalty you owe, if your taxes owed are more than $1,000. This is included in the total line 50 tax owed value. The software automatically calculates this penalty for you.

Congratulations! You have completed the (11) blog post lessons that explained the form 1040A. Click the hyperlink below to begin the blog posts that will explain the form 1040 – the most complicated tax form.

The 1040: Who Can Use this Form?

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

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov

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 1040A: the (5) Nonrefundable Tax Credits

The form 1040A adds five tax credits that can reduce your tax liability to zero, but not below zero. These reduce your line 30 Initial Tax Liability value, which is the sum of the line 28 Initial Tax, and any line 29 repayments of the Advance Premium Tax Credit you had to return.

These (5) credits are called “Nonrefundable” because they can only reduce your tax liability to zero. They cannot produce a refund for you, beyond their ability to reduce your tax liability to zero. They are:

  • Line 31 – Credit for Child and Dependent Care Expenses
  • Line 32 – Credit for the Elderly or Disabled
  • Line 33 – Education Credits
  • Line 34 – Retirement Savings Contribution Credit
  • Line 35 – Child Tax Credit

These types of tax credits have many rules, tests, and qualifications you must meet to take advantage of their tax saving features. The explanations below give a general overview of the credits – so you can determine if you might qualify for them. You can click the blue hyperlinks for each credit to see its associated IRS tax form and the instructions for the form.

A 100% full explanation of these sorts of credits – is beyond the scope of this Blog, as it is already a rather long Blog post in its current form. Feel free to post a comment, or email me at Mike@TaxesAreEasy.com, if you have questions or need further explanations of any of these (5) credits.

The Credit for Child and Dependent Care Expenses is a deduction for the costs you incurred for child care for your Qualifying Child under the age of 13. It also applies to care provided to a disabled spouse or other disabled dependent you support and claim on your tax return.

The child and/or dependent care services thus allowed you to work, or look for work – as you did not have to care for the child or disabled dependent during your work day. This work requirement is the key.

A married couple must have both spouses working, or looking for work, to qualify for this credit. Or one or both spouses can be a full-time student. The credit is not allowed if one spouse serves as the full-time homemaker and does not work outside the home. Both married spouses must have “earned income” from a job or self-employment to qualify for this credit, unless they can be qualified as a student.

A Married Filing Separately taxpayer cannot use this credit unless the following conditions apply. They would then be considered “Unmarried” and would qualify for this credit.

  1. You lived apart from your spouse the last six months of the tax year
  2. Your home was the qualifying child’s or disabled dependent’s main home for more than half of the year.
  3. You paid more than half of the costs of keeping up this home for the year

You can pay the Child Care or Dependent Care facility directly, or your employer might have given you money for the care, or the employer paid the facility directly. Employer dependent care benefits are shown in box 10 on your W-2. These are typically a non-taxable fringe benefit to you. Click this link form W-2 with Box 10 to see a W-2 with Box 10 highlighted.

You must use the IRS form 2441 to exclude those employer-provided child care or dependent care benefits from your salary income. Click the links IRS form 2441-Child and Dependent Care Expenses and form 2441-Instructions. The form 2441 is submitted to the IRS with your tax return, and list the one or more child and/or dependent care facilities you used. It lists your one or more children or disabled dependents who received the care, and the amounts spent on their behalf. It also lists the total amounts you paid these providers, and calculates your credit.

You can list up to $3,000 of qualified care expenses for each child or disabled dependent, and up to a total of $6,000 spent on two or more children or disabled dependents. Your credit of the expenses you incurred is then based on your line 22 Adjusted Gross Income (AGI), multiplied by a percentage associated with that AGI value, from the table shown below. The credit percentages range from 35% down to 20%.

This credit does not phase out based on income, so even taxpayers with their Adjusted Gross Income of over $43,000 can take the minimum credit of 20% of their child or dependent care expenses. For instance, if they could take advantage of the total $6,000 in expenses for two children, their 20% tax credit would still be $1,200 – which would reduce their tax liability by that $1,200 amount. This is one of the few tax credits that Congress did not impose an Income Cap upon.

As expected, all tax software will complete the calculations for you, and submit the properly completed form 2441 to the IRS on your behalf. The Credit for Child and Dependent Care Expenses is shown on line 31.

Credit for the Elderly or Disabled is a deduction for taxpayers over the age of 65, and for taxpayers who retired on permanent and total disability – and had taxable disability income. Schedule R is used to calculate the credit and prove to the IRS you passed the (2) main tests for the credit. See the links IRS form Schedule R and form Schedule R-Instructions.

The first test is the Income Limits for the credit. Your line 22 Adjusted Gross Income cannot be over the following amounts, for each of the filing status categories listed. If your income is above these limits, you cannot take the credit. You will notice the income levels are very low.

The second test is a limit on the amount of nontaxable payments you received from Social Security, and nontaxable pensions, annuities or disability income payments. These amounts are low also.

  • Single, Head of Household, Qualifying Widow(er)
    • Adjusted Gross Income of $17,500 or more disqualifies you
    • You received $5,000 or more of nontaxable Social Security Benefits, or other nontaxable pensions, annuities or disability income. This will disqualify you for the credit.
  • Married Filing Jointly (when only one spouse is eligible for the credit)
    • Adjusted Gross Income of $20,000 or more disqualifies you
    • You received $5,000 or more of nontaxable Social Security Benefits, or other nontaxable pensions, annuities or disability income. This will disqualify you for the credit.
  • Married Filing Jointly (when both spouses are eligible for the credit)
    • Adjusted Gross Income of $25,000 or more disqualifies you
    • You received $7,500 or more of nontaxable Social Security Benefits, or other nontaxable pensions, annuities or disability income. This will disqualify you for the credit.
  • Married Filing Separately (and you lived apart from your spouse all of the tax year)
    • Adjusted Gross Income of $12,500 or more disqualifies you
    • You received $3,750 or more of nontaxable Social Security Benefits, or other nontaxable pensions, annuities or disability income. This will disqualify you for the credit.

If your values are below the limits as described above, you will receive a 15% credit on the qualifying Social Security, pension or disability income you received. The tax software completes all the calculations for you, and submits the completed Schedule R with your tax return to the IRS.

This credit is seldom used, because the income levels are so low to qualify.  The Credit for the Elderly or Disabled is shown on line 32.

The Education Credits are the American Opportunity Credit, and the Lifetime Learning Credit. These qualify you for a tax credit, based on the amounts of Tuition, Fees, Books and Supplies you spent during the tax year for an education at a qualified education facility. Undergraduate expenses are reported for the American Opportunity Credit for the first four years of college. Graduate work and adult learning courses are reported for the Lifetime Learning Credit, for the rest of your life. Form 8863 is used to calculate these credits. See the links IRS form 8863-Education Credits and form 8863-Education Credits-Instructions.

Your school or education facility will issue you a 1098-T Tuition Statement form each year electronically or by mail. This will show the total of Tuition and Fees you paid that tax year for your education. Click this link form 1098-T for the form.

You can also use expenses for Books, Labs and Fees not shown on the 1098-T form. It is good practice to save these other receipts, in case the IRS audits you to prove these expenses that qualified you for the Education Credits.

The American Opportunity Credit can reduce your tax liability by up to $1,500, and produce a refundable tax credit of up to $1,000. You only need $4,000 in qualified education expenses to qualify for the maximum credit. You can take this credit for yourself, and any other dependent you claim on your tax return, that also is a qualifying student. This is a “per eligible student” tax credit. This means you can claim up to the full $2,500 credit for yourself, and also for your dependent students. Each can reduce your tax liability by the $1,500, and give you a refundable credit of $1,000 per qualified student – for yourself and/or your dependent students listed on your tax return. Each person can use their own $4,000 of qualified education expenses to qualify for the credit. There are income limits, that begin to phase out the credit over certain income levels, shown below.

  • Single, Head of Household, Qualifying Widow(er)
    • When your Modified Adjusted Gross Income reaches:
      • $80,000 – the credit begins to phaseout
    • When your Modified Adjusted Gross Income is above:
      • $90,000 – the credit is no longer allowed on your tax return
  • Married Filing Jointly
    • When your Modified Adjusted Gross Income reaches:
      • $160,000 – the credit begins to phaseout
    • When your Modified Adjusted Gross Income is above:
      • $180,000 – the credit is no longer allowed on your tax return
  • Married Filing Separately
    • No American Opportunity Credit is allowed

The Lifetime Learning Credit can reduce your tax liability by up to $2,000. This is a “per return” credit, which means $2,000 is the maximum credit you can claim for yourself or dependent students. It is a 20% credit for up to $10,000 of combined qualified education expenses for yourself and your dependent students. No part of the credit is refundable, meaning the entire $2,000 credit can only be used to reduce your Tax Liability to zero, but not below zero. The Lifetime Learning Credit is for education expenses you or your dependent incurred, for Graduate School and Adult Learning classes. There is no age limit on this credit, as any qualified education classes you take, for the rest of your adult life, can qualify. Even if you only take one qualified night course, you qualify for this credit.

There are income limits, that begin to phase out the credit over certain income levels, shown below.

  • Single, Head of Household, Qualifying Widow(er)
    • When your Modified Adjusted Gross Income reaches:
      • $55,000 – the credit begins to phaseout
    • When your Modified Adjusted Gross Income is above:
      • $65,000 – the credit is no longer allowed on your tax return
  • Married Filing Jointly
    • When your Modified Adjusted Gross Income reaches:
      • $111,000 – the credit begins to phaseout
    • When your Modified Adjusted Gross Income is above:
      • $131,000 – the credit is no longer allowed on your tax return
  • Married Filing Separately
    • No Lifetime Learning Credit is allowed

Click this link Table to compare Education Credits to see a table comparing the features and benefits of each of these (2) Education credits.

All tax software will optimize for you, which of the (1) Education Adjustment or (2) Education Credits will give you the best tax benefit.

  • Tuition and Fees Adjustment – 1040A page 1, line 19
  • American Opportunity Credit – 1040A page 2
    • line 33 (nonrefundable credit)
  • Lifetime Learning Credit – 1040A page 2
    • line 33 (nonrefundable credit) and
    • line 44 (refundable credit)

The Retirement Savings Contribution Credit is a tax credit available to you if you made contributions to a retirement plan during the tax year. $2,000 of those retirement contributions are used for the credit, which ranges from 10%, 20%, or 50% of that $2,000 level of contributions. The amount of the credit is based on your filing status and Adjusted Gross Income level from line 22 of the form 1040A. See the table below:

The IRS form 8880 is used to calculate this tax credit. See the following link for the form and instructions IRS form 8880-Savers Credit.

The income limitations for each filing status are:

  • Single, Qualifying Widow(er), Married Filing Separately
    • if the Adjusted Gross Income is over $30,750 – the credit is not allowed
  • Head of Household
    • if the Adjusted Gross Income is over $46,125 – the credit is not allowed
  • Married Filing Jointly
    • if the Adjusted Gross Income is over $61,500 – the credit is not allowed.

You cannot take advantage of this credit, if any of the following apply:

  • The person who made the retirement contribution is age 18 or under on December 31st of the tax year.
  • The person who made the retirement contribution is claimed as a dependent on another taxpayer’s tax return
  • The person who made the retirement contribution is a student

The tax software calculates the credit and submits the form 8880 with the tax return filed with the IRS. The Retirement Savings Contribution Credit is shown on line 34.

The Child Tax Credit is an up to $1,000 per child credit, for each Qualifying Child listed on your tax return as a dependent, and who also was under the age of 17 on December 31st of the tax year.

This $1,000 credit can be used to reduce your tax liability to zero, but not below zero. If all of the possible $1,000 Child Tax Credit is not used after your tax liability is reduced to zero – you might also qualify for the refundable Additional Child Tax Credit. This can refund the remaining amount of the initial Child Tax Credit – that was leftover after reducing your tax liability to zero. We will cover that in the next blog post that discusses the (4) refundable credits used on the form 1040A.

The IRS has (6) tests to make certain the Qualifying Child listed as a dependent on your tax return, also qualifies for the Child Tax Credit.

  1. Age: the child must be under the age of 17, on December 31st
  2. Relationship: they must be your Son, Daughter, Stepchild, Foster Child, Brother, Sister, Stepbrother, Stepsister – or a descendent of any of these, like a Grandchild, Niece, or Nephew. An Adopted Child also qualifies.
  3. Support: the child cannot provide over half of their support.
  4. Dependent: you must claim the child as a dependent on your tax return
  5. Citizenship: the child must be a U.S. Citizen, U.S. National, or U.S. Resident Alien with a Green Card, or per the substantial presence test.
  6. Residency: the child must have lived with you, for over half of the year. Temporary absences like school or hospital stays count.

The taxpayer, parents, and children can still qualify for this Child Tax Credit, if they only have ITIN’s (Individual Taxpayer Identification Numbers), not Social Security Numbers. See the IRS page for ITIN’s at IRS ITIN information.

They will not, though, qualify for the Earned Income Credit, as that credit requires that all people listed on the tax return must have valid Social Security Numbers that are eligible for work.

There are also income limitations above which the credit begins to phase out and eventually is reduced to zero credit.

  • Single, Head of Household, Qualifying Widow(er)
    • phaseout begins when Modified Adjusted Income is over $75,000
    • credit not allowed when income is $95,000 or over
  • Married Filing Jointly
    • phaseout begins when Modified Adjusted Income is over $110,000
    • credit not allowed when income is $130,000 or over
  • Married Filing Separately
    • phaseout begins when Modified Adjusted Income is over $55,000
    • credit not allowed when income is $75,000 or over

For every $1,000 of income above these thresholds, the Child Tax Credit is reduced by $50. So once your income is $20,000 over the threshold, you will no longer qualify for any of the credit.

See this link Child Tax Credit Worksheet for the worksheet that calculates the Child Tax Credit. See this link IRS Publication 972-Child Tax Credit for the IRS Publication 972 that explains the Child Tax Credit in full. There are no IRS instructions for this credit, as that is all covered in the IRS Publication 972. The IRS often issues publications instead of instructions, for a more in-depth and specific explanation of tax matters.

The Child Tax Credit is shown on line 35.

Calculation to determine your final Total Tax liability value:

Line 36 of the form 1040A adds any of the (5) nonrefundable credits you qualified for to result in your Total Credits value. This value is then subtracted from your line 30 Initial Tax Liability value, to determine if you still have any tax liability – or the credits reduced that to zero. This appears on line 37, but cannot be below zero.

Line 38 adds any Health Care Individual Responsibility penalty tax if you did not have health insurance coverage for the entire year. This was discussed in the blog posts about the form 1040EZ. See that blog post at The 1040EZ: Payments, Credits and Tax and scroll down for the explanation of this penalty tax, at the line 11 explanation.

Your Total Tax liability shown on line 39 of the form 1040A is then calculated – as it adds the line 37 and 38 values.

Click the link below for the next blog post that explains the Payments and (4) Refundable Credits on the form 1040A. This will be the last blog post in the series for the form 1040A – that will then determine if you get a refund or you owe tax.

The 1040A: Payments and (4) Refundable Credits

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

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov

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 1040A: Affordable Care Act tax issues

The Affordable Care Act was passed in 2010 by the Congress and signed by President Obama on March 23rd, 2010. One of the features of the Affordable Care Act was to create insurance Marketplaces, where citizens could purchase health insurance and possibly qualify for tax credits to help pay the monthly premiums. Those tax credits are called Premium Tax Credits – as they help pay the monthly insurance premiums.

If your household income is at or below 400% of the Poverty Level – you could qualify for these Premium Tax Credits – when you enroll for Marketplace-provided health insurance each year during the open enrollment period – usually from November through January. Part of the enrollment process is you estimate what your total income will be for the upcoming tax year. Then the Marketplace calculates how much Premium Tax Credit you would be eligible for, when your new health insurance policy starts each January. You can choose to have the Premium Tax Credit paid directly to your insurance company each month, to reduce or eliminate the cost to you, of your monthly premiums. This is called the Advance Premium Tax Credit.

The health insurance Marketplace will mail you the form 1095-A by January 31st each year, which will show the amount of the Advance Premium Tax Credit you received during the tax year, that was forwarded to your health insurance company – towards payment of your monthly premiums. Click form 1095-A for the form.

You have to reconcile these Advance Premium Tax Credits on your tax return each year – to determine the exact amount you should have received – based on your final income amount for the tax year. This process compares the full-year amount of the Premium Tax Credit you were eligible for, with the amount of the Advance Premium Tax Credit that was actually forwarded to your insurance company to pay premiums.

If you overestimated the income you would make for the tax year, you could receive a larger than anticipated Premium Tax Credit as an additional refund on your tax return. That is because your income was less than you expected, so you would receive more Premium Tax Credits, to help pay for your insurance premiums, to compensate for your lower income for the year.

If you underestimated your total income for the year, you might have to give back, or repay, some of the Advance Premium Tax Credit you received during the tax year. This is because you made more money than you had anticipated, and therefore could have afforded to pay more of the monthly insurance premiums yourself – without the financial aid of the Advance Premium Tax Credit.

This calculation to see if the Advance Premium Tax Credit you received was appropriate to your final Premium Tax Credit – is called the reconciliation process. You must complete this process each year you receive any Advance Premium Tax Credits to help pay for your monthly health insurance premiums.

The IRS form 8962 – Premium Tax Credit (PTC) calculates this for you. It will analyze the insurance information from the Marketplace reported on the 1095-A, and compare that to your final, yearly Income for the tax year. Click form 8962 for the form, and the form 8962 Instructions.

If you qualify to receive even more of the Premium Tax Credit, because your final income was below what you estimated to the Marketplace upon enrollment, then that is refunded to you as the Net Premium Tax Credit, on line 45 of the form 1040A.

If the form 8962 calculates that you received too much of the Advance Premium Tax Credit during the year, because your final income was higher than what you estimated to the Marketplace upon enrollment, then you have to repay some or all of that credit. That is reported on line 29 of the form 1040A, as the Excess Advance Premium Tax Credit Repayment.

As you might expect by now after reading many of these blog posts, all the tax software will properly calculate this for you, based on the information on the 1095-A form from the Marketplace, and your final total income for the year. Your tax professional should also be able to help you with this. The 8962 form is submitted with your taxes when you e-file the return.

I believe it is useful for each taxpayer to understand the logic behind the potential tax credits they each could receive, to help pay for health insurance policies they purchase from the Marketplace.

People can disagree about the politics of the Affordable Care Act – but these Advance Premium Tax Credits – have helped to make health insurance more affordable for many, many citizens. The merits of the Affordable Care Act are for the Politicians to debate.

My job as an IRS Enrolled Agent – is to describe these tax matters with a clear explanation – so taxpayers can take advantage of the Credits if they legitimately and legally qualify for them.

Click the link below for the next Blog post that explains the (5) Nonrefundable Tax Credits of the form 1040A – that could reduce your Initial Tax Liability to zero, but not below zero.

The 1040A: the (5) Nonrefundable Tax Credits

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

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov

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 1040A: The Initial Tax Liability

Page one of the form 1040A determines your Filing Status and any Exemptions and Dependents you can claim. It also lists your sources of Income for the tax year, and qualifies you for any of the (4) Adjustments to your Income. Line 21 then calculates your Adjusted Gross Income value. The first (5) blog posts related to the form 1040A explained page one and how you arrive at your Adjusted Gross Income value on line 21.

Page two of the form 1040A carries that Adjusted Gross Income value from page one to line 22. Your Standard Deduction and the Personal and Dependent Exemptions are then calculated on lines 24 and 26 respectively – as explained in the (2) previous blog posts about these two deductions.

Taxable Income is the next task for the 1040A form to calculate. The following formula is used to calculate this value:

  • Begin with the Adjusted Gross Income on line 22
  • Subtract your Standard Deduction value, shown on line 24, from the Adjusted Gross Income value on line 22. That result goes on line 25.
  • Subtract your total Exemptions value shown on line 26, from line 25, to generate your resulting Taxable Income value shown on line 27.

This line 27 Taxable Income value, is used to determine your Initial Tax Liability listed on line 28. The Income Tax Tables used for the form 1040A can be seen by clicking this link form 1040A-Tax Tables. You look up your taxable income value in the table, listed under your Filing Status. Then you can see the Income Tax liability, you have for that Taxable Income.

See the example from the Tax Tables at the left, for a Single taxpayer, who has a Taxable Income of $75,535. Their Income Tax Liability would be $14,653. Their Taxable Income is between $75,500 and $75,550 in the table.

Fortunately, all tax software automatically calculates the tax liability for any taxpayer.

You can see for example, the same Taxable Income for a Married Filing Jointly couple would only have a tax liability of $10,424. The Tax Tables are calibrated for the (5) Filing Status categories.

If you listed Qualified Dividends or Capital Gain Distributions in your Income categories on page one of the 1040A form, the IRS uses a special tax worksheet to calculate your Initial Tax Liability – that would be shown on line 28. This is because the IRS taxes these two types of investment income using the lower Capital Gains Tax Rates. This worksheet is built into all tax software, and automatically calculates the correct tax liability for your situation – reduced by the lower Capital Gain tax rates. Click this link IRS Qualified Dividends and Capital Gain Tax Worksheet.

Your Initial Tax Liability, from the above Tax Tables, is listed on line 28 of the form 1040A. Notice, though, that your Total Tax liability value is not determined until line 39 on the form 1040A. This is because there are (5) Tax Credits available to you, that can possibly reduce your Initial Tax Liability to zero. There are also (2) additional taxes related to the Affordable Care Act – that could increase your tax liability. These Credits and Taxes are calculated and displayed on those lines 29 through lines 38. We will discuss these in the next several blog posts.

Line 29 is a tax, or repayment, of any excess health care Advance Premium Tax Credits you might have received from the Marketplace – to help you pay your monthly insurance premium. If you received too much of the Advance Premium Tax Credit, for the tax year, you have to give back, or repay some of the credit. The next blog will explain how to calculate this line 29 value.

Click the link below for the next Blog post that explains the Excess Advance Premium Tax Credit Repayment tax on line 29 of the form 1040A. This next blog post also explains other Affordable Care Act tax issues that would be reported on your form 1040A.

The 1040A: Affordable Care Act tax issues

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

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov

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 1040A: The Personal and Dependent Exemptions

The Personal and Dependent Exemptions date all the way back to 1913 when the Income Tax first began. The intention was to give each taxpayer, spouse and their dependents a yearly deduction for a minimal subsistence – enough money for food, clothing, shelter, etc. Minimum subsistence at that time, is what is sometimes called the Poverty Level today. Click this link Exemption & Dividends from 1913 thru 2006 to see a table of the Personal and Dependent Exemption amounts from 1913 through 2006. This Personal and Dependent Exemption money would then not be subject to the Income Tax.

For the 2016 tax year, each Personal Exemption is worth $4,050. If you listed Dependents in line 6c on page one of the form 1040A, you also get a Dependent Exemption of $4,050 for each Dependent Child and/or Dependent Relative. Each spouse of a Married Filing Jointly couple is entitled to their own $4,050 Personal Exemption. The total Personal and Dependent Exemption amount is listed on line 26 of the form 1040A.

Later in 1944, the Standard Deduction was added, to further set aside money for personal expenditure deductions, that would not be subject to the Income Tax. This combination survives to this day. Each year taxpayers can take advantage of the Personal Exemption and Standard Deduction, to subtract from their income, as not subject to Taxes.

The IRS refers to this as the Filing Threshold – the combination of the Standard Deduction and Personal Exemption amounts for your Filing Status. If your total yearly income was not above this combined value – you are not required to file a Federal Income Tax return. All the States have their own Filing Threshold levels – that are often different from the Federal levels. For the 2016 tax year, the Federal Filing Thresholds were as shown below for each of the (5) Filing Status categories:

  • Single
    • $10,350 if under age 65
    • $11,900 if over age 65
  • Married Filing Jointly
    • $20,700 if both under age 65
    • $21,950 if one spouse over age 65
    • $23,200 if both spouses over age 65
  • Married Filing Separately
    • $4,050 if any age
  • Head of Household
    • $13,350 if under age 65
    • $14,900 if over age 65
  • Qualifying Widow(er) with dependent child
    • $16,650 if under age 65
    • $17,900 if over age 65

Even if a taxpayer is not required to file a Federal Income Tax return – because their total income for the year is below their Filing Threshold – many taxpayers will still file a tax return, to get back a refund of the Federal and State taxes withheld from their paychecks.

Click the link below for the next Blog post that explains how to calculate the Initial Tax Liability you have on the form 1040A.

The 1040A: The Initial Tax Liability

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

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov

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 1040A: The Standard Deduction

The Standard Deduction was created in 1944 by Congress, to give every taxpayer a fair deduction for some of their living expenses, for your particular life situation. It let you deduct 10% from your Taxable Income. That lasted for 20-years, when in 1964 Congress changed the Standard Deduction to a fixed dollar amount. Then in the 1970’s, Congress started increasing the Standard Deduction each year for inflation – which was high in the 1970’s. That method survives through today, as the IRS almost every year increases the Standard Deduction by a small amount, to account for inflation. The Standard Deduction amounts for the 2016 tax year were:

  • Single:  $6,300
  • Married Filing Jointly:  $12,600
  • Married Filing Separately  $6,300
  • Head of Household  $9,300
  • Qualifying Widow(er)  $12,600

The Additional Standard Deduction: If a taxpayer is over the age of 65 on December 31st, and/or if they are blind, they receive an extra amount added to their normal Standard Deduction, for each qualification:

  • Single: $1,550 extra for age and/or blindness
  • Married Filing Jointly:  $1,250 extra for age and/or blindness, for each spouse who qualifies for an Additional Standard Deduction
  • Married Filing Separately:  $1,250 extra for age and/or blindness
  • Head of Household: $1,550 extra for age and/or blindness
  • Qualifying Widow(er): $1,250 extra for age and/or blindness

For example, a Single taxpayer of age 70, would receive the normal Standard Deduction of $6,300. They also would add an extra $1,550 to that as an Additional Standard Deduction – for a total of $7,850.

The Standard and Additional Deduction are listed as one total amount on line 24 of the form 1040A.

Click the link below for the next Blog post to learn about the Personal and Dependent Exemption deductions you can take for yourself, your spouse, and for any Dependents listed on your tax return – to further reduce your Taxable Income.

The 1040A: The Personal & Dependent Exemptions

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

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov

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 1040A: (4) New Adjustment categories

Adjustments are deductions for expenses you incurred during the year, that qualify to be deducted from your Total Income. This is where the term “Adjusted Gross Income” comes from. Four Adjustment categories have been added to the form 1040A form you might qualify for.

Educator Expenses is an up to $250 Adjustment deduction for teachers, defined by the IRS as an Eligible Educator. It is a deduction for unreimbursed ordinary and necessary expenses you paid in the tax year, related to your educator duties. An Eligible Educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide – who worked in a school for at least 900 hours during the school year. That works out to be about 23 weeks based on a 40-hr/week job as an Educator. If both spouses are Educators and use the Married Filing Jointly filing status, both can take the $250 deduction for a total of $500 for this Adjustment.  The expenses are:

  • The cost of professional development courses you have taken related to the curriculum you teach or to the students you teach.
  • In connection with books, supplies, equipment (including computer equipment, software, and services), and other materials purchased to be used in your classroom – that you were not reimbursed for.

The Educator Expenses deduction is listed on line 16 of the form 1040A.

IRA Deduction is an up to $5,500 per year Adjustment deduction you can take if you contributed that sum to a traditional IRA (Individual Retirement Arrangement). That deduction value rises to $6,500 per year if you are age 50 or older. Once you turn age 70 1/2, you can no longer contribute to a traditional IRA account. Each spouse can contribute the full $5,500 or $6,500 amount for their own IRA account, depending on their respective ages. This then gives the Married Filing Jointly couple a double benefit from the IRA Adjustment deduction.

A traditional IRA is called a tax-advantaged retirement plan, because you benefit from a tax deduction now, while at the same time the earnings accruing in the account – are not taxable until you take distributions during your retirement. Banks and brokerages can help you setup your traditional IRA account into which these contributions are deposited. You have to make the deposit into the IRA account by the due date of the tax return year you are filing, on which you are claiming the IRA deduction. That is usually April 15th of the following year. For example, the 2016 year tax returns were due on April 18th, 2017. Your IRA contribution, to count on your 2016 tax return, had to be deposited by April 18th, 2017.

If you have a retirement account at your job, like a 401(k) plan, and you and your company made contributions into that 401(K) plan, your allowable traditional IRA contribution amount may be limited if your salary is high enough. The IRS provides a worksheet to calculate the limitation, that is also built into all the tax software. See on page 17 of Publication 590A – Contributions to IRAs.

The IRA Contribution deduction is listed on line 17 of the form 1040A.

Student Loan Interest is an up to $2,500 Adjustment deduction available to taxpayers who are personally liable to repay the student loan amount. The loan must be for qualified higher education expenses including tuition, fees, room and board, and related expenses such as books and supplies. Eligible institutions include most colleges, universities, and certain vocational schools. Married couples can only take the $2,500 deduction, not $2,500 each. You should receive a form 1098-E from the Bank or Government Agency that holds your loan, that list the amount of Student Loan Interest you paid for that tax year. Click form 1098-E for the form.

Once your modified Adjusted Gross Income rises above a certain level, the deduction begins to phase out, and is not allowed above a threshold level. These are:

  • Single, Head of Household, Qualifying Widow(er) filing status:
    • above $65,000 the deduction begins to phase out
    • above $80,000 the deduction is no longer allowed
  • Married Filing Jointly filing status:
    • above $130,000 the deduction begins to phase out
    • above $160,000 the deduction is no longer allowed
  • Married Filing Separately
    • The deduction is not allowed at any income level, because Congress wrote this restriction into the Law. Many credits and deductions are not allowed when you file as Married Filing Separately.

The Student Loan Interest deduction is listed on line 18 of the form 1040A.

Tuition and Fees is an up to $4,000 Adjustment deduction you can take if you had up to $4,000 of qualified Tuition and Fee payments for the tax year. The same income phaseout limits apply, as were the case with the Student Loan Interest deduction. You also cannot take this Adjustment if you take any of the other two Education Credits, which will be explained in a later blog post. Those are the American Opportunity Credit and the Lifetime Learning Credit. All tax software will optimize your situation, to recommend which of the three Education Adjustment and Credits – will give you the best tax benefit. You will receive a form 1098-T from the Education Institution, that list the amount of Tuition and Fees you paid for that tax year. Click form 1098-T for the form.

Once your modified Adjusted Gross Income rises above a certain level, the deduction begins to phase out, and is not allowed above a threshold level. These are:

  • Single, Head of Household, Qualifying Widow(er) filing status:
    • below $65,000 the deduction is $4,000
    • between $65,000 and $80,000 the deduction is $2,000
    • above $80,000 the deduction is no longer allowed
  • Married Filing Jointly filing status:
    • below $130,000 the deduction is $4,000
    • between $130,000 and $160,000 the deduction is $2,000
    • above $160,000 the deduction is no longer allowed
  • Married Filing Separately
    • The deduction is not allowed at any income level.

Click form 8917 – Tuition & Fees deduction for the form and instructions used to calculate the credit. The Tuition and Fees deduction is listed on line 19 of the form 1040A.

The (4) Adjustments are added together and listed on line 20 of the 1040A, which is called your Total Adjustments. This line 20 value is then subtracted from your line 15 Total Income value, to generate your Adjusted Gross Income value shown on line 21 of the form 1040A.

Click the link below for the next Blog post to learn about the Standard Deduction, and bonus amounts that can be added to the Standard Deduction for taxpayers over the age of 65 and/or blind.

The 1040A: The Standard Deduction

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

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov

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.