Patricia A. O'Malley
Social Policy & Programs Consulting    ~    Community Matters
P.O. Box 97803    ~    Pittsburgh, PA  15227   ~    412-310-4886    ~    info@patomalley-consulting.com
Copyright Patricia A. O'Malley    ~    All rights reserved
Established 1993

​Patricia A. O'Malley

Social Policy & Programs Consulting

​Training and Services for agencies working toward social and economic justice​​​​​​​​

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Understanding Your Income Tax Return
Our Schools Need to Teach This Stuff.
January 30, 2018

 

Congressional Republicans passed their colossal tax cut for billionaires and corporations on December 22.  They claim that it will help working Americans.  It actually hurts the public in the long run, but I’ll leave that discussion to others.

Today, we are at the beginning of a new income tax filing season.  As Americans tackle the annual ritual, millions will panic.  It’s confusing.  Most don’t understand it.  Some are afraid of it.  Relax.  Just slow down and read the forms, one line at a time.  It’s easier than you think.

As adults, we are all responsible for managing our own finances. Yes, you really do need to understand your income tax return.  It’s your money.  It’s your business.  It’s your responsibility.  
The more you know about your finances, the more you can control them.

I’m going to explain how a basic, personal income tax return works.  When we’re finished, you should be familiar with your own tax return, and able to do it yourself.  There’s nothing to be afraid of.  If you make a mistake, you can fix it easily.

U.S. TAX LAW
We can debate whether government should pay for this or that, or whether a program is necessary or appropriate, or whether billionaires need another tax cut.  But at its barest minimum, government has expenses: salaries, buildings, furnishings, supplies, infrastructure, equipment, construction, and maintenance.  So government needs money.  Government gets its money from taxes.

The U.S. Constitution specifically gives Congress the power ". . . to lay and collect taxes", and to make all laws necessary to execute that power. Congress established the Internal Revenue Service in 1862 to serve as the nation's tax collector.  The IRS is a bureau of the U.S. Treasury Department.

Some people like to claim that income taxes are unconstitutional.  They are not.  No one has ever won that argument in court. See for yourself.  Look at the U.S. Constitution, Article I, Section 8, Clauses 1 and 18, and at the Sixteenth Amendment.  The IRS response to those frivolous tax arguments is particularly interesting.  You can read it at the link listed below.

PAYROLL WITHHOLDING
Most people’s first encounter with the tax system is completing the W4 form on their first job.  Usually, we’re teenagers when we get that first job, and there is no one to explain it to us.  Your parents can’t teach you what they don’t know, and most folks are too embarrassed to ask for help from an employer. So we go through life wrestling with the intimidating little form. This is what it’s all about.

The best way to handle any form is to read each line, in order, one at a time.  Read the instructions.  If the line applies to you, fill in the information. If not, leave the line blank.

The W4 tells your employer how much money to withhold from each paycheck for Federal Income Taxes.  Again, read each line.  Read the instructions.  Fill in the blanks.  If you find out later that your employer is withholding too much or too little, you can file a new W4 any time you want.

Your employer must also withhold other amounts from your pay, for Social Security, Medicare, and state and local taxes.  These amounts are set by law, and you can’t change them.  Your employer might also withhold other amounts for health insurance, union dues, or other things.  Read your pay stub.  If you don’t understand what a deduction is for, then ask your employer, human resources department, or union steward.  One more time.  This is your money.  YOU have to know where it comes from and where it goes.

FORM 1040
IRS Form 1040 is the base form for a personal tax return.  It will help to download and print one or pull it up on your screen to follow along as I explain.  While completing your return, you should also have a copy of the IRS Form 1040 Instructions handy. You can download or print the 1040 and Instructions from the link below.  The Instructions contain IRS definitions of terms, list general rules, and give specific instructions for completing each line of the form.

In an effort to make things “easier” for people with simple finances, the IRS developed forms 1040-A and 1040-EZ.  Forget about them.  You need to be trained in tax law to know whether they’re the best for you.  The biggest mistake you can make is to use one of those forms.

NEVER use them.  ALWAYS use the full, long form 1040.  That way, you will never miss a deduction or a tax credit that can help you.  Many of the lines on the 1040 won’t apply to you; just skip them.

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The changes enacted by Congress in December do not apply to the 2017 tax returns.

The 2017 Form 1040 is the same as it’s been for a long time.
You’ll have to deal with the new changes when you do your taxes next year.

IDENTIFICATION
Form 1040 is a single, two-sided page.  The top part of the front side asks for information to identify you, your spouse, and dependents.  It asks for names, address, social security numbers, and filing status, Read the instructions to determine your filing status and whether you can claim a dependent.

INCOME
The next section asks you to list your income, by category.  Those categories are wages, interest, dividends, certain state tax refunds and credits, alimony, business income/loss, capital gains, IRA and pension distributions, rent and royalties, farm income/loss, unemployment compensation, Social Security, and other income such as gambling and lottery winnings, prizes, etc.

If you own a small business, you may need to list that information on Schedule C.  Again, read the form and the instructions.  It takes time, but it’s not difficult.

Your employer, the government, or whoever provided your income should send you forms – W2, 1099, 1098, etc. – listing the amount and source of each type of income, and all payroll deductions, by the end of January each year.  However, you must include the income on your return even if you don’t receive the forms.  Read the instructions for details.

Line 22 contains your total income from all sources. You will not pay taxes on this amount of money.

The next step is to deduct certain amounts from your income to calculate your taxable income.  The more money you deduct (subtract) from your total income, the lower your taxable income will be, and you’ll pay less in taxes.

ADJUSTMENTS TO INCOME
Income adjustments are expenses that you can deduct from your income whether you itemize deductions or not.  Some of these will disappear next year.  We’ll discuss Standard vs. Itemized Deductions a bit later.

For now, look at the adjustments section.  It includes such categories as Educator Expenses, Alimony Paid, IRA Contributions, and Student Loan Interest Paid.  Insert the expense amount on any line that applies to you.  Read the 1040 Instructions for details.

Subtract your total adjustments from your total income.  That’s subtract Line 36 from Line 22.  The result is your Adjusted Gross Income, or AGI.  The AGI is the figure that the U.S. Department of Education uses to calculate whether your family qualifies for federal student loan assistance on its FAFSA form.

STANDARD VS. ITEMIZED DEDUCTIONS
Look at page 2. Everyone is entitled to a standard deduction from income.  The amount is based on your filing status:

• Single taxpayers and married filing separately may deduct $6,350 for the 2017 return.
• Married Filing Jointly, $12,700
  
• Head of Household, $9,350
  

If your allowable deductions total more than the standard amount for your filing status, you can itemize deductions on Schedule A. That means that you can list them separately.  You can download and print a copy of Schedule A at irs.gov.  The Schedule A Instructions are in the 1040 Instruction Book.

Some allowable deductions include:

• A portion of certain medical expenses
• State and local real estate and personal property taxes
  
• State and local income or sales taxes
  
• Mortgage interest
  
• Charitable contributions
  
• Certain work expenses
  
• The price you paid someone else to complete your tax return
  

You may have to complete additional forms or worksheets in order to list expenses in some of these categories.  Read the Schedule A Instructions for details.

You can claim your Standard Deduction or your Itemized Deductions, whichever are greater, on Line 40. Again, the more deductions you can take, the less you’ll pay in taxes.

EXEMPTIONS
On Line 42, deduct $4,050 for each person listed on your 1040 – yourself, spouse, and dependents.
This will disappear next year, but the standard deduction will double. 

Whether it hurts or helps you depends on how many people are in your family.

TAXABLE INCOME AND TAX OWED
Line 43 is your Taxable Income. See how much lower that figure is than your total income on line 22.
Use the Tax Tables in the 1040 Instructions to find the amount of your tax due, and list it on Line 44.
But we’re not done yet. You still might qualify for some Tax Credits

TAX CREDITS
Tax Credits work just like credits on any of your other bills.  A credit is subtracted from the amount you owe.  

The more credits you have, the less you have to pay.

You may qualify for child care expenses, education, retirement savings, and residential energy tax credits.  There’s even a tax credit just because you have children under age 17.  List your credits on the appropriate lines.  

Subtract your total credits from your tax amount.

OTHER TAXES
This section lists other taxes that apply to relatively few taxpayers.  I won’t describe them here.  If it looks like they might apply to you, read the 1040 Instructions.  If there is an amount here, add it to your Tax Due from above.  That gives you your Total Tax.

PAYMENTS
This is where you subtract tax payments that you have already made.  This includes the tax amount that your employer withholds from every paycheck – based on your W4 form.  That total amount is listed on your W2 Form.  This section also includes the Earned Income, Additional Child, and American Opportunity Credits. Again, read the 1040 Instructions for details.

REFUND/AMOUNT YOU OWE
When you subtract your total credits and payments from your total tax, you will get one of three possible results:

• You will break even – you will neither owe money nor receive a refund.
• Your total payments and credits are more than your tax – you will get a refund.
  
• Your total payments and credits are less than your total tax – you will have to pay the difference.
  

FILING YOUR TAX RETURN
You have six filing options:

• Complete your return on paper and mail it to the IRS.
  
  
• Use the IRS “Free File Fillable Forms” software on the IRS website to complete your return and file it electronically.  It’s free for everyone.  This is the one I use.
  
  
• If you qualify, you can get free tax return preparation services from the IRS Volunteer Income Tax Assistance (VITA) service. I was an IRS-trained VITA tax preparer for eight years.
  
  
• Purchase tax preparation software and complete your return by yourself.
  
  
• If you qualify, use one of the tax software programs through the IRS website for free.
  
  
• Pay a professional tax preparation company.  
  Be careful. This one can be dangerous.  There are a lot of scam outfits out there.  Even some of the biggest names aren’t any good.  They can NOT file your return without your W2.  Their TV ads are lies.  And those “instant/rapid/right now/magic/whatever” refunds are actually high-interest LOANS.  Yes, really, Read the contract BEFORE you sign it.
  

Do not file your return until you have all of your documents – every W2 and other income statement, mortgage and student loan interest statements, pension, Social Security and Unemployment Compensation statements, property taxes, charitable contribution receipts, etc. You must be able to prove every number on your return. Even if you pay someone to complete your return, YOU are responsible. Don’t make anything up.

Please read this part carefully. A lot of people get this wrong.

Your TAX RETURN is the set of forms that you file with the IRS.
The money you get back is called your TAX REFUND.
They are not the same thing.

Whether you file by mail or online, you must file your return by midnight, Monday, April 16.
You can pay or get your refund by paper check in the mail.  
You should get your refund within six weeks of filing.

If you prefer, you can list your bank account information on the 1040 form.  

The IRS will deposit your refund or take your payment directly to/from your account.  

You should receive your refund within two weeks of filing.

See.  You made it this far.  And it didn’t even hurt.  It’s really not so scary.
Just take your time.  
Read the forms and the instructions.  
You can call the IRS with questions at 800-829-1040.  But be prepared to sit on hold for a long time.

I was an IRS-trained VITA income tax preparer for eight years.  I’m not making this stuff up.

This is in no way a complete income tax return preparation course.  It’s just a brief overview of the process.  Rules for capital gains and other investments, self-employment, foreign income, and other topics are much more complicated, and I’m not going to try to explain them here.  If those situations apply to you, read the IRS Instructions or consult a reputable tax professional.

There’s plenty of detailed information at IRS.GOV.  Take advantage of it.

For more information:
Internal Revenue Service
IRS Forms and Publications
IRS Free Tax Preparation Service - VITA
IRS Free Filing Options
The Truth About Frivolous Tax Arguments
CNN:  34 Things You Need to Know About the Incoming Tax Law
Read the Constitution

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