Michael D Meyer, EA – Page 4

The 1040A: (7) New Income categories

Seven new income categories are added to the form 1040A, and the $1,500 limit on Taxable Interest is removed.

Taxable Interest Cap removed:
- If you remember, the form 1040EZ limited the Taxable Interest you could report, to $1,500 or less. The 1040A removes that cap, so you can report Taxable Interest over $1,500. You must, though, report that greater than $1,500 Taxable Interest on the Schedule B form. You list each payer of Taxable Interest on the IRS Schedule B – so it matches the records on file with the IRS. If you earn over $10 in Taxable Interest, your bank or broker is required to send you a form 1099-INT that reports that interest. The 1099-INT form has all the information you need to include on your tax return. Taxable Interest is shown on line 8a of the form 1040A. Click this link form 1099-INT to see the form.
Tax-Exempt Interest
- Tax-Exempt Interest is typically paid if you own a Municipal Bond, or own a mutual fund that contains Municipal Bonds. The interest you earn on these types of bonds is not taxable on your IRS tax return. You still are required to report the Tax-Exempt Interest on your tax return, as a record-keeping match with the IRS computers. This type of interest is also reported to you on a 1099-INT form.
- Many States also do not tax interest earned from Municipal Bonds – provided the bonds are issued from their State. For instance, I live in New York City, and if I received interest from any Municipal Bonds issued within New York State, they would be tax free on my New York State tax return. If I owned Municipal Bonds from New Jersey, then they would be taxed on my New York State tax return. Your tax professional can help determine this for you – if your State will tax the interest you received from Municipal Bonds. Tax-Exempt Interest is shown on line 8b of the form 1040A.

Ordinary Dividends are the share of a company’s profits, passed onto the shareholders, usually paid on a quarterly basis. You could receive these if you own a stock that pays dividends, or from a mutual fund that contains dividend paying stocks in their portfolio. Dividends are reported to you on the form 1099-DIV. Click this link form 1099-DIV for the form.

Ordinary Dividends are included in your Total Income, and are taxed at one of the (7) regular Individual Income tax rates of 10%, 15%, 25%, 28%, 33%, 35% & 39.6%. Ordinary Dividends are shown on line 9a of the form 1040A. If you received over $1,500 in Ordinary Dividends for the tax year, these must also be reported on the Schedule B. You list each payer of Ordinary Dividends on the Schedule B, so the IRS can cross-match these with their computer records.

Qualified Dividends are eligible to be taxed a lower tax rate, called the Capital Gains tax rates – of 0%, 15%, or 20%. You pay substantially less tax if your dividends are eligible to be Qualified Dividends.

Taxpayers in the regular Individual income tax brackets of 10%/15% – pay a 0% Capital Gains tax rate.
Taxpayers in the 25%/28%/33%/35% regular Individual income tax brackets – pay a 15% Capital Gains tax rate.
Taxpayers in the 39.6% regular Individual income tax bracket – pay a 20% Capital Gains tax rate.

You must own the Stock that paid the dividends, for an IRS specified holding period, for those dividends to be Qualified Dividends. That is typically owning the Stock for more than 60 days during the 121-day period that began 60-days before the ex-dividend date. The ex-dividend date is the first day following the declaration of a dividend on which the purchaser of a stock is not entitled to receive the next dividend payment.

Fortunately you do not have to calculate this IRS holding period for yourself, because the stock company or brokerage firm will determine this for you, if your dividends are to be Qualified.

They then report those to you on the 1099-DIV form, usually by the end of February. Qualified Dividends are shown on line 9b of the form 1040A.

Capital Gain Distributions are typically paid to you, when a mutual fund you own shares in, sells a Stock or Asset for a profit. That sale of an asset for a profit – or gain – is called a Capital Gain. The mutual fund must pass that Capital Gain onto you, as a shareholder of the mutual fund. If the mutual fund held that underlying Stock or Asset for more than one year, the Capital Gain reported to you is a long-term gain, subject to the more favorable Capital Gain tax rates discussed earlier. If the mutual fund held the underlying Stock or Asset for less than one year, the gain to you is short-term. Short-term gains then are reported to you as an Ordinary Dividend, taxable at regular Individual income tax rates, as discussed earlier.

The brokerage firm or mutual fund company will send you a form called a 1099-Consolidated statement which lists these Capital Gain Distributions on line 2a and/or the Ordinary Dividends on line 1a. It has everything you need to report these transactions on your tax return. Click this link form 1099-Consolidated (TD AmeriTrade sample) for a sample of this form. Capital Gain Distributions are shown on line 10 of the form 1040A.

If you only have Dividends and Capital Gain Distributions, the brokerage could just send you a 1099-DIV form, that also can list Capital Gain Distributions on line 2a of that 1099-DIV form. Most often, though, they will send you the 1099-Consolidated form.

IRA Distributions are payments to you, from any of your IRA retirement accounts. They are reported to you on the form 1099-R. Click this link form 1099-R for the form. Distributions from a regular IRA account are taxed as Ordinary Income. Distributions from a ROTH IRA are not taxed, but still have to be reported on your tax return. If you are under age 59 1/2, you most often have to pay a 10% early withdrawal penalty tax – unless you qualify for an exception. If you “Roll Over” another retirement account into your existing IRA, most often this is a tax-free exchange – providing you followed the IRS rollover rules. You list the total IRA distribution amount on line 11a of the form 1040A. If any of that amount is taxable, that is listed on line 11b of the 1040A.

Your broker should indicate with the proper code on the 1099-R form, if any of the IRA distribution is taxable. Your tax professional can also help you determine this – particularly if any of the distribution will be taxable.

Pension and Annuity Distributions are distributions to you from your retirement accounts, from the company or institution you worked for. These are reported on lines 12a and 12b of the form 1040A.

Pensions provide you a guaranteed monthly benefit upon your retirement, based on your years of service, your salary, your age at the time of retirement, and the distribution rules of the pension. Some pensions are tax free, others are partially taxable, and others are fully taxable. This depends on the rules of the pension, your situation as you worked, and when you retired. Your yearly pension distributions are reported to you on a 1099-R form, which will typically tell you how much of the pension is taxable. Many companies and institutions have stopped offering traditional pensions to their new employees, and instead offer them a 401(k) plan which more closely resembles a traditional IRA account.

Annuities are an Insurance contract, that also pays out a fixed monthly amount to you during your retirement. Sometimes an annuity is offered to older employees, instead of a lump-sum buyout of their traditional defined benefit pension. This might happen when a large Company needs to reduce their traditional pension exposure, and so in turn offers older employees an incentive to retire early – relieving the Company of the longer-term pension liability. An annuity will pay you a fixed monthly amount, typically throughout your entire retirement. Your yearly annuity distributions are reported to you on the same 1099-R form, which will also indicate if the annuity payments are taxable.

Social Security Benefits are paid to you upon your retirement. You can begin receiving benefits as early as age 62, and the latest when you turn 70. You will receive your “full benefits” if you wait to start until your full retirement age, as defined by this table Full Retirement Age Table for SS Benefits. You will receive less than your full benefits, if you begin receiving Social Security benefits before your full retirement age. You could receive much more, if you wait until age 70. The Benefits are reported to you on the SSA-1099 form. Click this link form SSA-1099 for the form.

Beginning in 1984, some of your yearly Social Security Benefits could be taxable – up to 50%. In 1993 that was increased to 85% that could be taxable. This was done in 1984 to “save” Social Security and was the agreement negotiated between President Reagan and House Speaker Tip O’Neal. That rule is still in effect today, with up to 85% taxable. Many taxpayers are not aware that Social Security Benefits can be taxed, and receive this unpleasant surprise at tax time.

If you only receive Social Security Benefits with no other income, none is taxable on your Federal Tax return. If you receive a taxable Pension, Annuity or other taxable Income, then up to 85% of your Social Security might have to be reported as taxable. An IRS formula and worksheet determines this for you on Taxable Social Security Benefits Worksheet. All of the tax software used today also automatically calculates this for you, and completes the worksheet.

This formula takes into account half of your Social Security Benefits, and then adds that to any other taxable income and tax-exempt interest you received during the tax year. For a Single, Head of Household, Qualifying Widow(er), or Married Filing Separately taxpayer, if that total is over $25,000 – then some of your Social Security Benefits would be taxable, up to a maximum of 85%. For a Married Filing Jointly couple, that total has to be over $32,000. All tax software automatically calculates this for you, to determine if any or up to 85% of your Social Security Benefits are reported as taxable income.

You list the total Social Security Benefits distribution amount on line 14a of the form 1040A. If any of that amount is taxable, that is listed on line 14b of the 1040A.

Click the link below for the next Blog post to learn about the (4) new Adjustments to income that have been added to the form 1040A.

The 1040A: (4) New Adjustment categories

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

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

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

The 1040A: Qualifying Children & Relatives

A Dependent is an IRS tax definition that means a Qualifying Child or a Qualifying Relative. The Dependents you claim on your tax return are listed on line 6c of the form 1040A. The IRS has tests each Dependent must meet – to qualify to be listed as your Dependent. See below.

This link for Publication 501-Exemptions, Standard Deduction & Filing Information gives the IRS definitions and explanations for:

Filing Status
Filing Requirements
Definitions of Dependents
Personal and Dependent Exemptions
Standard Deduction

It is a terrific resource for this and the next several Blog posts.

Qualifying Children are defined by five IRS tests they have to meet. If the Child you are attempting to claim as a Dependent on your tax return meets all (5) of these tests – then you can claim them, listed as a Qualifying Child on your tax return.

Relationship to you, the taxpayer claiming them as a Dependent
- Son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendent of any of them, for example your grandchild, niece or nephew
Age on December 31st of the tax year
- Under age 19 at the end of the tax year and younger than you, or your spouse if filing jointly
- Under age 24 at the end of the tax year, a student, and younger than you, or your spouse if filing jointly. A student is your Child who during any part of 5 calendar months of the tax year, was enrolled as a full-time student at a qualified school.
Support provided by the Child
- The Child cannot provide over half of his/her support during the tax year. Support is generally defined as living expenses.
Residency
- The Child must have lived with you, for more than half of the year. This includes “temporary absences” like attending college, as long as the student’s belongings and permanent residence is still with you.
Joint Filing
- The Child you are claiming as a Dependent, cannot file a Joint tax return with their spouse, except for one exception. That Child can only file a Joint tax return with their spouse, to claim a refund of withheld tax.

Qualifying Relatives are defined by four IRS tests they have to meet. If the Person you are attempting to claim as a Dependent on your tax return meets all (4) of these tests – then you can claim them, listed as a Qualifying Relative on your tax return.

Not a Qualifying Child of you or any other taxpayer
- The person you are attempting to claim as a Qualifying Relative, cannot satisfy all the tests as a Qualifying Child of any other taxpayer, including yourself – even if you or another taxpayer do not claim them.
Relationship to you, the taxpayer claiming them as a Dependent
- Son, daughter, stepchild, foster child, or a descendent of any of them, for example your grandchild
- Brother, sister, half sister, or a son or daughter of any of them, for example your niece or nephew
- Father, mother, or ancestor or sibling of either of them, for example your grandmother, grandfather, aunt or uncle
- Stepbrother, stepsister, stepmother, stepfather, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, sister-in-law
- Any other person (other than your spouse) who lived with you for the entire 12-months of the year, as a member of your household.
Gross Income test
- The income of the Qualifying Relative must be below the Personal Exemption amount for that tax year. This was $4,050 for the 2016 tax year. This amount typically increases each year for inflation. Some income like Social Security Benefits, does not count towards this Gross Income test. The IRS gives clear instructions what to include.
Support test
- You must provide over half of the person’s support. Support is generally defined as living expenses. The IRS provides worksheets to help properly determine if you indeed provided more than 50% of the Support for this Qualifying Relative you are attempting to claim.

Most of the relatives listed above in the Relationship category, do not have to live with you – to still be listed as your Qualifying Relative. For example, your parents can live separately from you, but you provide over 50% of their support. You can therefore claim them as Qualifying Relatives, provided they also meet the other tests. Only a Qualifying Relative that is not defined as your relative from the lists above – must live in your household for the entire year. For example, your Cousin or other distant relative, your Girlfriend or Boyfriend, or Friend.

See page 19 of the Publication 501-Exemptions, Standard Deduction & Filing Information for the list of “Relatives who don’t have to live with you” in your household – to still qualify them as one of your Dependents.

Click the link below for the next Blog post to learn about the (7) new income categories added to the form 1040A.

The 1040A: (7) New Income categories

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

The 1040A: Filing Status

Filing Status tells the IRS what category of taxpayer you are – as defined by your marital status on December 31st of each tax year. Filing Status can also be affected by your household situation – if you support children or relatives living in your home. Each tax year, you have to tell the IRS if you are considered Single, Married, or Unmarried supporting a household. The (5) Filing Status categories define these scenarios.

Filing Status is important because the Standard Deduction, the Tax Rate Tables and many Adjustments, Deductions and Credits are based on your Filing Status. You might qualify for more than one Filing Status, so you would choose the one that gives you the best tax benefits. For example, some people can file as Single or Head of Household. Head of Household usually gives the taxpayer a more favorable tax treatment.

This link for Publication 501-Exemptions, Standard Deduction & Filing Information gives the IRS definitions and explanations for:

Filing Status
Filing Requirements
Definitions of Dependents
Personal and Dependent Exemptions
Standard Deduction

It is a terrific resource for this blog post, and the next several Blog posts.

Single is the first filing status the IRS lists on the form 1040A. It means that you were not legally married on December 31st of the tax year. The scenarios that define you as Single are:

You were never married in that tax year.
You were legally separated or divorced by December 31st
You were recently widowed and did not remarry in the tax year immediately following the year your spouse died.
- Typically you would have the filing status of Married Filing Jointly or Separately, in the year your spouse dies. It is the following year you could be considered Single.
You did not support children or relatives in your household

Married Filing Jointly (even if only one had income) is the filing status where you and your spouse combine both of your Incomes and Deductions onto one tax return. You also are both equally liable for any tax due on the jointly filed return. You can also lists dependent Children or Relatives on your tax return, with this filing status. The many scenarios are:

You were married as of December 31st of the tax year, and lived together the entire tax year. Both of you had income to report.
You were married and lived together the entire year, and only one spouse had income to report.
You were newly married in the current tax year, and remained married as of December 31st. You have to file as a Married couple, even though you weren’t married the entire year. Your status on Dec. 31st is what counts.
You were married as of December 31st of the tax year, even if you didn’t live with your spouse on December 31st. You both still can choose to file jointly and report your combined Income and Deductions to the IRS.
Your spouse died in the tax year, and you did not remarry in the tax year.
You were married as of December 31st, but your spouse died early in the following year before the April 15th tax filing deadline. You still file as Married Filing Jointly or Separately, as that was your marital status on December 31st, of the year prior to the death of your spouse.
- You will also file as Married Filing Jointly or Separately, in the year your spouse died, as explained earlier. So long as you did not remarry in the year your spouse died.

Married Filing Separately is the filing status where you and your spouse report your Income and Deductions separately. This is essentially each married spouse filing as a Single person, except you are not allowed to use the Single filing status – if you are legally married. A married couple can only file Jointly or Separately, except under special circumstances when children are involved, and the spouses have not lived together the last six months of the year. In that case, one spouse could possibly qualify to use the Head of Household filing status, and claim the children as dependents on their tax return.

Married Filing Separately is the least advantageous filing status, because many Adjustments, Credits and Deductions are not allowed when you use this filing status. Congress wrote these restrictions into the Tax Laws, as they frequently write tax law to be more advantageous to a Married couple, in this case to a Married Filing Jointly couple.

Politicians use the tax code to influence behavior:

Tax rules that do not favor the Married Filing Separately filing status is a good example of how Presidents and Congress write the Tax Laws to influence behavior – in agreement with their political views. This has been happening for many decades, and is a tactic equally employed by both Democrats and Republicans.

It will happen again in 2017/2018, as President Trump and the new Republican Congress will put their mark on the tax code. To be fair, the same thing happened during President Obama’s first term in 2009/2010, when he and the Democrats controlled the White House and the Congress. They passed the Affordable Care Act – which created an enormous influence of change to Individual and Business taxes.

Head of Household (with qualifying person) is the filing status where you are considered “Unmarried”, and you also financially support one or more Dependents in your household. You could be supporting a friend, relative, or child – as they live in your household – and you provide for their living expenses. These Dependents are either Qualifying Children and/or Qualifying Relatives. A separate blog post defines Dependents.

The (3) tests you must meet to use the Head of Household filing status:

You are unmarried, or considered unmarried, on the last day of the tax year, on December 31st.
You paid more than half of the cost of keeping up your home for the tax year. The IRS provides a worksheet to calculate this.
A qualifying person, that you list as a Dependent on your tax return, lived with you for more than half of the tax year, including temporary absences like a child at college. A dependent parent does not have to live with you.

In some circumstances the Dependent does not have to live in your household, and you can still qualify to use the Head of Household filing status. For example, your parent can be living in a nursing home, but you still provide the majority of their support, or their living expenses. You could claim them as a Qualifying Relative – which would allow you to use the more advantageous Head of Household filing status, versus for example the Single filing status. The parent would just have to meet all (4) of the IRS tests, to still qualify as your Qualifying Relative. For example, their taxable income could not exceed the Personal Exemption amount each year. This is called the Gross Income test. There are (3) other IRS tests they must meet.

A spouse of a married couple could be considered “Unmarried”, if the couple did not live together the last six months of the year. That “Unmarried” spouse could then possibly list Qualifying Children as Dependents on their tax return, and qualify to use the Head of Household filing status, instead of the less advantageous Married Filing Separately filing status. The children would just have to meet all of the (5) IRS tests that would define them properly as Qualifying Children.

This is by far the most complicated, and abused, Filing Status category. Many taxpayers try to qualify for the Head of Household filing status, only to have the IRS disallow it after they are audited. Competent tax preparers will help you with this, to make certain you meet all the requirements.

Qualifying Widow(er) (with dependent child) is the filing status to use when your spouse died the year before the current tax year, and you still are supporting your young children. You can qualify to use this Filing Status for the two tax years after the year your spouse died. It gives you the best tax treatment, as it uses many of the values for the Married Filing Jointly filing status. It is more advantageous than using the Head of Household filing status.

For example, your spouse died in 2015 and you are still raising two young Children. For the 2015 tax year your spouse died, you would still use the Married Filing Jointly filing status. For the tax years 2016 and 2017, you would use the Qualifying Widow(er) filing status. Then for the tax year 2018 and beyond, you would use the Head of Household filing status. It is designed to give you an extra financial buffer, for those first two years after your spouse died, and you remained unmarried supporting your children.

Click the link below for the next Blog post to learn about which Dependents you can list on your tax return.

The 1040A: Qualifying Children & Relatives

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

The 1040A: Who Can Use this Form?

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

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

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

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

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

The 1040EZ: Who Can Use this Form?

The 1040EZ: Payments, Credits and Tax

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The 1040A: Filing Status

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

The 1040EZ: Payments, Credits and Tax

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The 1040A: Who Can Use this Form?

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

The 1040EZ: Who Can Use this Form?

The 1040EZ is titled by the IRS as the “Income Tax Return for Single and Joint Filers with No Dependents.” Click this hyperlink to open the IRS form 1040EZ into a new browser window, to refer to as we learn about the form. You can then toggle between the blog posts and the 1040EZ form.

Click the hyperlink below for the 46-page form 1040EZ instruction booklet from the IRS, as form 1040EZ-Instructions. The explanations in these blog posts are substantiated by the Tax Law explained in the IRS instruction booklet. The instructions are very well written and frequently give terrific examples to demonstrate Tax Laws pertinent to the 1040EZ.

The first requirement to use the 1040EZ is your Filing Status must be only Single or Married Filing Jointly. You must be younger than age 65 at the end of the year on December 31st. You also cannot claim your dependent children or relatives as a deduction, who you might support and live with. To list these Dependents as a deduction on your tax return, you must use either the 1040A or 1040 form.

Income category is the next qualification to use the form 1040EZ. You are limited to income only from Wages, Salaries, Tips, Taxable Scholarships or Grants, Taxable Interest of not over $1,500, Tax Exempt Interest, Unemployment Compensation, and non-taxable Social Security Benefits. These are listed separately in that order on lines 1, 2 & 3 of the form 1040EZ. Three income categories do not have a corresponding line on the 1040EZ form, but they do not disqualify you from using the form.

Taxable Scholarships or Grants
Tax-Exempt Interest
Non-Taxable Social Security Benefits

Taxable Scholarships or Grants are listed in the margin to the left of line 1 and are included as ordinary income. These amounts typically cover room and board, travel and other education-related living expenses that cannot be used to qualify for the (1) Education adjustment deduction and/or the (2) Education tax credits. These are sometimes reported to you on your W-2 from your salary job, as included in your wages.

The amounts of Tax-Exempt Interest you received is listed in the margin to the left of line 2. These amounts are not taxable, but are reported to the IRS on the 1040EZ to match their computer records of interest you received. Tax-Exempt Interest is also included in the formula that determines if any of your Social Security Benefits are taxable.

You could have received Social Security Benefits and still use the form 1040EZ – but none of the benefits can be taxable. A worksheet on page 12 of the instructions helps you determine this. If the worksheet indicates that some of your Social Security Benefits are taxable, you must use the tax form 1040A or the 1040 form. The worksheet is included in all tax software, so this requirement will automatically be verified for you.

The sum of these Income categories is called your Adjusted Gross Income, or (AGI) for short. The AGI appears on line 4 of the form 1040EZ.

On the form 1040EZ, the Standard Deduction and Personal Exemption for your filing status are combined into one deduction number. That value is $10,350 for a Single filer, and $20,700 for Married Filing Jointly filers. This value appears on line 5 of the 1040EZ form. Later blog posts will explain the Standard Deduction and Personal Exemption, as part of the form 1040A explanations.

Single taxpayer = $10,350 combined deduction
- $6,300 Standard Deduction
- $4,050 Personal Exemption
Married Filing Jointly taxpayers = $20,700 combined deduction
- $12,600 Standard Deduction
- $4,050 Personal Exemption for each spouse

If you are a Dependent listed on another Taxpayer’s tax return, you cannot take your Personal Exemption value for that tax year. The Taxpayer claiming you as their Dependent – gets to use your Personal Exemption as a deduction on their tax return. Your Standard Deduction is calculated using the worksheet on page 2 of the form 1040EZ, based on your income. This situation is common when Dependent children have jobs that withhold taxes from their paychecks. They still file a tax return to most often get back those withheld taxes as a refund – even though they are listed as a Dependent Child on their parent’s tax return. All the tax software calculates this for you, and recognizes you said you are a Dependent of another Taxpayer. The software knows you cannot use your Personal Exemption, but will calculate your Standard Deduction and refund accordingly. This is all part of the “software interview” process.

The next step is to subtract this line 5 combined deduction from your Adjusted Gross Income (AGI) line 4, to arrive at what is called Taxable Income, shown on line 6. Taxable Income is the income total that the IRS uses to calculate your yearly tax liability, for your particular Tax Story.

To qualify to still use the form 1040EZ, your Taxable Income must be below the $100,000 threshold. That means the total of all your Income categories, minus the combined Standard Deduction and Personal Exemption(s) value for a Single person or Married Filing Jointly couple – must still be below the $100,000 threshold to use the form 1040EZ.

In Summary, these are the requirements to be able to use the form 1040EZ
- Your filing status must be Single or Married Filing Jointly
- You must be younger than age 65, on December 31st
- You cannot claim children or relatives as dependents
- Your income categories are limited to Wages, Salaries, Tips, Taxable Scholarships or Grants, Taxable Interest of not over $1,500, Tax-Exempt Interest, Unemployment Compensation and Non-Taxable Social Security Benefits.
- All of your Tip income was reported on your W-2 form(s)
- None of your Social Security Benefits can be qualified as taxable
- You must use the Standard Deduction
- You do not claim any Adjustments to Income
- Your final Taxable Income must be below the $100,000 threshold
- The only Tax Credit you can claim is the Earned Income Credit (EIC)
- You cannot use the form 1040EZ if you qualified for health insurance with the Premium Tax Credit through any of the Marketplace exchanges
- You cannot use the form 1040EZ if you received any Advance Premium Tax Credits to help pay for your monthly health insurance premiums

The next Blog post explains how to report and calculate the Payments, Credits and Tax, on the form 1040EZ. Click that link below to continue.

The 1040EZ: Payments, Credits and Tax

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

What Tax Form Should I Use? (2016 & 2017 tax years)

The IRS announced in June 2018, that they will retire the forms 1040EZ, the 1040A, and the long form 1040, for the upcoming 2018 tax year. There will be only one form, the single-page 1040 form. Six new Schedules will now support the new single-page 1040 form.

For the tax years 2016 and 2017, the following explanations still apply, to explain the older forms 1040EZ, the 1040A and the long 1040.

The IRS provides taxpayers with (3) 1040-series Individual tax forms with which they can file their taxes. The 1040EZ, the 1040A, and the 1040. The simplicity or complexity of your Tax Story, determines which form to use.

To understand the full range of tax reporting possibilities, I recommend you study the (3) forms separately, to understand what type of Tax Story each form can report. The entire Blog is setup to begin your tax study with the 1040EZ form, then the 1040A form, and finally the 1040 form. This study strategy will build your tax knowledge logically, from the simple 1040EZ form through to the complex 1040 form.

When you or your tax professional use tax software to prepare your taxes, the software will automatically determine which of the (3) 1040-Series tax forms to use, that most efficiently matches your Tax Story.

The tax form explanations below list the requirements to use each form, and what types of Income, Adjustments, Deductions, Credits, Taxes and Payments – that can be reported on each of the (3) tax forms.

There is also a recommendation about being truthful when submitting your Tax Story to the IRS. When you sign and submit your tax return, you give your word – that you told the truth about your Income and Deductions listed and submitted with your tax return.

The IRS form 1040EZ is the simple, one page form, that only Single and Married Filing Jointly filing status taxpayers can use, provided they have no children or dependents they support in their household. You must also be under the age of 65 at the end of the tax year – to use this 1040EZ form. Your Taxable Income cannot exceed $100,000 and you can only report income from Wages, Salaries, Tips, Taxable Scholarships or Grants, Taxable Interest of not over $1,500, Tax-Exempt Interest, Unemployment Compensation and nontaxable Social Security Benefits. You must use the Standard Deduction and can only take advantage of one tax credit – the Earned Income Credit.

You can receive Taxable Scholarships or Grants, Tax Exempt Interest and Social Security Benefits – and still qualify to use the form 1040EZ – even though there are no lines on the form 1040EZ to report these (3) categories of Income.

The amount of Taxable Scholarships and Grants you received, if not included in your W-2 salary income, is noted to the left of line 1 on the form 1040EZ.

The Tax Exempt Interest you earned, is noted to the left of line 2 on the form 1040EZ. It is also used in the formula to determine if any of your Social Security Benefits are taxable.

None of your Social Security Benefits can qualify to be reported as taxable income, if you use the form 1040EZ. The IRS provides a worksheet to determine this, and it is built into all the tax software.

The Affordable Care Act tax reporting issues:

If you did not have health insurance for any month(s) of the year, the 1040EZ form can also calculate the Health Care Individual Responsibility penalty tax. A requirement of the Affordable Care Act – is that everyone has to have qualified health insurance – or you pay a penalty tax. Some taxpayers might qualify for an exemption to this penalty, but generally all taxpayers must have qualified health insurance – or you pay a penalty tax.

You cannot use the 1040EZ form if you purchased or received qualified health insurance through the Marketplace, and also qualified for the Premium Tax Credit. The Marketplace is the State or Federal insurance web site designed to provide health insurance that can be subsidized by tax credits provided by the Affordable Care Act. These are called Premium Tax Credits – because they can help you pay for your monthly health insurance premiums. If you choose to have these credits forwarded to the health insurance company on your behalf every month, they are called Advance Premium Tax Credits. Taxpayers can also choose to just receive the total amount of the Premium Tax Credit they qualified for when they file their tax return each year.

This type of Government subsidized health insurance has to be reported on the form 1040A or form 1040. You must reconcile (or compare) any Advance Premium Tax Credits you received during the tax year to help pay for your monthly health insurance premiums – to your final total-year Premium Tax Credit value calculated on your tax return. All tax software will complete this reconciliation process for you.

Update: The penalty for not having qualified health insurance will still be in effect for the 2018 tax year. The “Tax Cuts & Jobs Act” then reduces this penalty to zero, starting with the 2019 tax year, and all tax years after that.

The IRS form 1040A is the 2-page intermediate form, that allows taxpayers to claim children and any dependents they support that live within their household. All (5) of the Filing Status categories are supported on this 1040A form. You also can be over the age of 65 to use this form.

The taxable income is still limited to $100,000, but you can report many more types of income, such as Taxable Interest over $1,500, Tax-Exempt Interest, Dividends and Capital Gain Distributions from stocks and mutual funds, IRA and Pension distributions, and Social Security Benefits.

The 1040A form also allows you to reduce your taxable income with (4) deductions called Adjustments. These are Educator Expenses as a teacher, an IRA Contribution Deduction, the Student Loan Interest Deduction, and the Tuition and Fees Education Deduction. You must again use the Standard Deduction, but several more tax credits are available to you.

The 1040A form offers you (5) non-refundable and (4) refundable tax credits. These can reduce your tax liability to zero, and can also possibly increase your refund. These build on the Earned Income Credit – the only tax credit that was available on the simple 1040EZ form.

Non-refundable tax credits on the form 1040A – those that can reduce your tax liability to zero – are the Child and Dependent Care Credit, the Elderly or Disabled Credit, two more Education Credits, the Retirement Savings Contribution Credit, and the Child Tax Credit.

Tax credits that are refundable to you on the form 1040A – even if you have no tax liability – are the Earned Income Credit, the Additional Child Tax Credit, the American Opportunity Credit, and the Net Premium Tax Credit. These can substantially increase your refund each year.

The 1040A can report any circumstance you had regarding your health insurance coverage, except contributions to, and distributions from an HSA (Health Savings Account).

The IRS form 1040 is also a 2-page form. It is the most complicated of the (3) tax forms because the 1040 can handle any Tax Story. It is designed to report all possible types of Income, Adjustments, Deductions, Credits, Taxes and Payments. Many additional schedules and worksheets are added to the 1040 form – to help explain your more complicated Tax Story.

You can also report Itemized Deductions on the form 1040, which further reduces your taxable income, as compared to using the Standard Deduction. These include Medical Expenses, State, Local and Real Estate taxes, Mortgage Interest, Charitable Contributions, Casualty and Theft Losses, and Unreimbursed Business and related Education Expenses.

If you are self-employed or have rental income, you must use the 1040. You must also use the 1040 if you received income from a Partnership, an S-Corporation, Trust or Estate. It can also show the profit or loss you had on your more sophisticated investments, such as Stock Sales or the Sale of your Primary Residence.

If you owe any of the many additional taxes, you can calculate those with the form 1040. These include the Alternative Minimum Tax, and the many additional Affordable Care Act taxes for high-income taxpayers.

If you made Estimated Payments during the tax year, or made a payment when you submitted an Extension to file your tax return, you can report these advanced payments on the 1040 form.

Any and all Individual tax scenarios that you could imagine – can be solved with the form 1040. It is the dean of tax forms!

All tax software will manage these rules and qualifications for you as your Tax Story is entered into the software. It is useful, though, to understand the tax logic that defines your Tax Story. That will give you the confidence the software properly created an accurate tax return, that exactly matches your Tax Story – for that tax year.

As an Enrolled Agent, I have the experience to know what the final output of your tax returns should look like, before they are even entered into the software. My job then, is to manage the tax software to produce that correct, accurate tax return – as expected. By studying tax theory explained in these Blog posts, you will acquire that same knowledge to also understand every line of your tax return.

Filing a tax return is then just a simple annual report of our finances, we as citizens have to complete each year, and submit to the IRS and the State(s).

Through that yearly tax return, we self-declare our tax obligation, based on our income and deductions. We then receive a refund, or owe tax, based on our tax payments credited to the IRS during the year, compared to that self-declared tax obligation.

If our payments and credits are more than the tax obligation, we get a refund when we file the tax return. If the tax obligation is more than our payments and credits, we owe the IRS a tax bill when we file the tax return.

You must tell the Truth about your sources of income for each tax year!

The IRS rule for income is “You must report all income, except income that is exempt by law.” This includes Cash income and tips that you earn, that is not reported to you on a W-2, 1099-MISC or other income reporting form.

Each of the (3) Individual tax forms have the perjury statement shown below, at the bottom of their last page in the section labeled Sign here. Each taxpayer has to “sign” their tax return, either with a pen if the tax return is mailed in, or with an electronic signature if the tax returns are e-filed. By signing your IRS Individual tax return, you are agreeing to the following statement, under penalty of perjury to the IRS.

“Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.”

Your paid tax preparer also is part of this perjury statement, in that he or she is declaring they prepared the tax return with the information you provided them. They also are declaring they took into consideration all the knowledge of which the preparer had of your tax situation, at the time they prepared your tax return for a fee. Paid preparers also have to sign this perjury statement, either by pen, or through the e-filing process.

Please take this perjury statement seriously, as the IRS expects you to be truthful in all ways, when you file your yearly tax returns. The States also hold you to the same level of truthfullness – regarding your Tax Story.

Cash Business IRS Audit Warning!

You should be particularly diligent if you own and run a cash-based business. You should regularly deposit ALL of your cash earnings into a business bank account, so you can prove to the IRS the cash-based income you report on your tax return. Keep detailed records of the legitimate expenses you incurred to run the business, including the business use of your home or apartment – if that applies to you.

The IRS frequently audits self-employed businesses reported on the form Schedule C, that they suspect have not reported all their cash earnings. To pass the audit, you MUST show the IRS proof of your cash receipts and expenses. Otherwise you will incur penalties, interest, and taxes owed.

Tax professionals, including myself, cannot help you file your tax return, if we have valid suspicions you are hiding and not reporting cash income.

Many people have challenged this perjury clause as unconstitutional, with limited success. The IRS – through the U.S. Tax Courts, U.S. District Courts, U.S. Court of Federal Claims, and Bankruptcy Courts – has convicted many people of misdemeanors and felonies – as a result of them lying on their tax returns, and were thus found guilty by submitting false tax documents to the IRS.

See this PDF file, authored by the IRS, explaining the legal tax law arguments, against taxpayers filing Frivolous Tax Claims. IRS-The Truth About Frivolous Tax Arguments (March 18, 2018).

This is what happened to Al Capone in 1931, as the IRS convicted him of Income Tax Evasion. He went to Federal prison, ending his control as a Chicago crime boss.

The original and most famous incarnation of Studio 54 was shut down in the early 1980’s because the two owners of the club did not report all of the cash earnings from this very famous Disco. One of the owners even bragged about this to friends, saying “Only the Mafia makes more money than Studio 54”. The IRS did not take kindly to this, subsequently audited them, and they both were convicted of tax evasion and sentenced to prison terms. The IRS literally found bags of unreported cash in the Club.

Please do not lie to the IRS. It will never end well.

This is why the IRS or the States audit taxpayers to prove tax compliance. They see an irregularity or inconsistency in the tax returns, and audit you – to make you prove to them that your tax return is indeed “true, correct, and accurately lists all amounts and sources of income I received during the tax year.”

Click the hyperlink below for Blog #2 that begins the 1040EZ explanation.

The 1040EZ: Who Can Use this Form?

Feel free to send me an email at Mike@TaxesAreEasy.com