Our approach to understanding the entire 1040 Individual Income Tax Return Form, was to Read through and highlight every term that was unfamiliar to us, and get the definitions for them. It turned out that we did not understand one word. Neither of us had ever take on the task of filling out a tax return form before. From our younger to present ages, getting money back from W-2 forms was magic. We handed the forms to our parents, and poof, we have money back from the government. This project is definitely going to be challenging, but hopefully our lack of knowledge will grow into expert knowledge.
Terms Defined:
Fair Market Value (FMV): Fair market value is the price at which you could have sold a piece of property. Includes IRS definition of fair market value, and its relation to charitable contributions.
Abusive Tax Scheme - an abusive tax scheme: a series of transactions designed solely to avoid income taxes.
Adjusted Gross Income - Your total income from all sources minus any adjustments.
Adjustments to Income - Certain expenses which directly reduce your total income.
Adoption Expenses - You may take a tax credit for expenses you paid to adopt a child.
Advance Child Tax Credit Payment - In 2003 the Internal Revenue Service issued advanced payments for people who were eligible to claim the Child Tax Credit.
Advance Earned Income Credit Payment - payments of part of your Earned Income Tax Credit received through your paycheck.
Alimony - : money received or paid to a former spouse under a divorce decree or separation instrument.
AMT: What is the Alternative Minimum Tax?The alternative minimum tax (AMT) is a separate method for calculating your income taxes. You are responsible for paying the higher of the AMT or the regular tax. If your AMT tax is higher, you add the difference between the AMT and the regular tax on your 1040 line 44.
Annuities - Annuities are a type of tax-deferred retirement plan.
Archer MSAs - : Medical Savings Accounts are tax-deductible savings accounts to save for medical expenses.
At-Risk Rules - Losses from a business operation are limited to the amount of money you can actually lose in the business.
Blindness - People who are blind receive a higher standard deduction.
Business Entities - A group of people organized for some profitable or charitable purpose.
Business Expense - an expense that is ordinary and necessary for carrying on a trade or business.
Business Income & Expenses - An individual person, conducting business as an independent contractor or as a sole proprietor, reports the income and expenses of the business activity on a Schedule C.
Business Use of Home - Employees who work out of their home or independent contractors who have a home office may be able to deduct part of their household expenses on their tax return.
Capital Gain Distributions - distributions from a mutual fund of capital gains on investments they have sold off.
Capital Gains - A capital gain is the difference between what you paid for an investment and what you received when you sold that investment. If you sold the investment for more than what you paid, then you have a capital gain.
Capital Losses - A capital loss is the difference between what you paid for an investment and what you received when you sold that investment. If you sold the investment for less than the price you paid, you have a capital loss.
Casualty & Theft Losses - Tax GlossaryDefinition of Casualty & Theft Losses: If you suffered a loss of personal property due to a casualty or theft, you may be able to deduct this loss as an itemized deduction on Schedule A.
Certified Public Accountant (CPA)- A CPA is a professional accountant licensed by the state. Best for corporate accounting, tax audits, and business consulting.
Charitable Donations - Tax GlossaryDefinition of Donation: giving cash or property to a qualified non-profit organization.
Child - a person 18 years old or younger who is in your care.
Child - Tax Rules Prior to 2005 - Tax GlossaryPrior to 2005 the IRS defined a qualifying child differently for each tax benefit. Find out who qualifies as a dependent or qualifying child under the old IRS rules.
Child and Dependent Care Expenses - You may take a tax credit for day care or child care expenses for your child or disabled dependent.
Child Tax Credit - You may take a tax credit if you have dependent children.
Children of Divorced or Separated ParentsGenerally, the parents should decide in advance who gets to claim the child as a dependent.
Community Property States-Married persons are considered to own their property, assets, and income jointly.
Contributions to Reduce the Public DebtYou may make a gift to help reduce this debt. Your gift may be tax deductible.
Corporations - Groups of people who have organized themselves with the intent to provide goods and services with the goal of making a profit.
Corrective Distributions - If you contribute more money to your 401k or IRA than you were supposed to, the plan administrator will send you a check for your excess contributions.
Cost Basis Definition- the original price of an asset, such as stocks, bonds, mutual funds, property, or equipment. Cost basis includes the purchase price and any associated purchase costs.
Currently Not Collectible - The Internal Revenue Service can declare a taxpayer "currently not collectible" if the taxpayer has no ability to pay his or her tax debts. The IRS reviews Not Collectible status every few years.
Death of a Taxpayer -When a person dies, his surviving spouse or personal representative should file a tax return on behalf of the deceased.
Dependents-A dependent is someone you take care of. Claiming a person as a dependent on your tax return will increase your personal exemptions, and may help you qualify for other tax benefits. You can claim a dependent on your tax return if you meet five criteria.
Depreciation -an income tax deduction that allows a taxpayer to recover the cost of property or assets placed in service.
Direct Deposit of Refund- The IRS can deposit your tax refund directly into your bank account instead of mailing you a paper refund check.
Disclosure- Releasing your tax return information to a third-party. Disclosure may be authorized or unauthorized. Unauthorized disclosure is a crime.
Dividends - Dividends are a share of a company's profits that is divided among shareholders. Discusses how ordinary dividends and qualified dividends are taxed.
Enrolled Agent (EA) - a tax professional who has passed an IRS test covering all aspects of taxation.
Entity (Tax Concept) - a person or group of people who are subject to the tax laws.
Estates & Trusts - Estates report income after an individual person has died. Definition of a trust: A trust is created by an individual person to protect or to preserve the person's assets, and to distribute income to beneficiaries.
Estates and Trusts-Estates and trusts are types of tax entities. Estates report the income and assets of a deceased person. Trusts preserve the assets of a deceased person, and report distributions of income and assets to beneficiaries.
Filing Status-You have only one filing status for income tax purposes. Your filing status is determined by whether you were considered married at the end of the year.
Form 1120S - S Corporation - U.S. Tax Return for an S Corporation.
Form W-4- is used to figure the right amount of federal income tax to have withheld from your paycheck.
Form W9: What to Do if You Get a Form W-9 to Fill OutForm W9 is a request for your taxpayer identification number. Information about what the form means and how to fill it out.
Marginal Tax Rate - is the income tax rate paid on the last dollar of income earned.
S Corporation Definition & Requirements-a regular corporation that has between 1 and 100 shareholders and that passes-through net income or losses to shareholders.
Substitute for Return (SFR) - a formal way for the Internal Revenue Service to make an educated guess about how much taxes you might owe.
Tax Avoidance - aggressively minimizing taxes by using legal tax strategies.
Tax Evasion - aggressively minimizing taxes by using illegal tax strategies.
Taxes - a payment or fee paid to the government.
Voluntary Compliance - a system of compliance that relies on individual citizens to report their income freely and voluntarily, calculate their tax liability correctly, and file a tax return on time.
Overlooked Terms:
Exemptions: Personal tax exemptions reduce your taxable income on your tax return. Each personal tax exemption you claim on your 2005 tax return is the equivalent of a $3,200 tax deduction. Generally, you are allowed one tax exemption for yourself and, if you are married, one tax exemption for your spouse, and, if you have dependents, one tax exemption for each dependent on your tax return.
Taxable Interest: If your taxable interest income is $1,500 or less, you need to show that taxable income on Line 8a of form 1040. If your taxable interest income is more than $1,500 you must file Form 1040.Start by showing your interest income on Form 1040, Schedule B. FolIow the instructions and this will carry over the information to Line 8a of Form 1040
Dividends: Dividends are distributions of money, stock, or other property a corporation pays you because you own stock in that corporation. You also may receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. Most distributions are paid in cash. An individual may also receive distributions such as additional stock, stock rights, other property or services.
Ordinary Dividends and Qualified Dividends:Ordinary dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of the corporation. Ordinary dividends are taxable as ordinary income unless they are qualified dividends. Qualified dividends are ordinary dividends that meet the requirements to be taxed at the same maximum rates as net capital gains.
Taxable Refunds: ? Any suggestions?
"Offset of State": ? Any suggestions?
Pension: A sum of money paid regularly as a retirement benefit or by way of patronage.
Rental Real Estate: Income one recieves from renting out onwned property, which is taxable, you're allowed to reduce your rental income by subtracting expenses that you incur to manage, conserve, and maintain your rental property.
Health Savings Account:? Any suggestions?
SEP: A SEP is a simplified employee pension plan. A SEP plan provides employers with a simplified method to make contributions toward their employees’ retirement and, if self-employed, their own retirement. Contributions are made directly to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SEP-IRA).
SIMPLE: A SIMPLE IRA plan is an IRA-based plan that gives small employers a simplified method to make contributions toward their employees' retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an Individual Retirement Account or Individual Retirement Annuity (IRA) set up for each employee (a SIMPLE IRA).
