Section 7.5: FORM 1040 AND SCHEDULES A AND B OBJECTIVES

Transcription

1 Section 7.5: FORM 1040 AND SCHEDULES A AND B OBJECTIVES File Form 1040 with itemized deductions. Understand the difference between a tax credit and a tax deduction. Key Terms voluntary compliance Form 1040 Schedule B Interest and Dividend Income Schedule A Itemized Deductions tax credit tax avoidance tax evasion Section 7.5: Form 1040 & Schedules A & B 1

2 Tax Evasion vs. Tax Avoidance Video What is the difference? Tax avoidance occurs when a taxpayer uses a tax rule to his/her advantage to lower the tax burden. It is not against the law to apply tax laws to your advantage and minimize taxes. Tax evasion happens when a taxpayer lies about items such as reporting all income or overstating deductions on his/her tax return. It is a crime to lie on your tax return. Tax Evasion vs. Tax Avoidance Taxpayers do not enjoy paying taxes, however taxes are a necessity to raise money for government services. Taxpayers cooperate with the tax collection procedure which is known as voluntary compliance. Taxpayers can lower their tax burden by learning the rules and ways to save money in taxes. Deductions lower your taxable income, which means you pay a lower income tax. Section 7.5: Form 1040 & Schedules A & B 2

3 Form 1040 Form 1040 is often called the long form. It allows taxpayers to the opportunity to itemize deductions on an additional form called Schedule A Itemized Deductions. Examples of deductions: Medical expenses Property taxes paid State and local taxes paid Casualty and theft losses Moving expenses Business expenses Alimony paid Mortgage interest paid Charitable contributions including cash and non-cash items Gambling losses Job-seeking expenses Tax preparation fees Real estate taxes Miscellaneous expenses Form 1040 Form 1040 also allows taxpayers to report other types of income on tax returns. Schedule B Interest and Dividend Income is used to list sources of interest and dividend income. It tells the IRS who paid you interest and dividends and how much you received from each. Who fills out Schedule B? Interest or dividends over $1,500 Accrued interest from a bond Received interest from a sellerfinanced mortgage and the buyer used the property as a primary residence Financial interest in a foreign account in a foreign country Section 7.5: Form 1040 & Schedules A & B 3

4 Example 1 Monica Gellar and Chandler Bing are married and completed Form 1040 in the year They have two children, Erica and Jack. Their had combined wages of $118,654. They also had interest of $812 from Chase Bank and $877 from Apple Savings Bank. They received stock dividends of $444 from GM stock and $1,200 from Williams Sonoma stock. During the year, Monica won $500 in the lottery. Write the total income on line 22. Example 2 Monica teaches a cooking course at the local college and had $225 in educator expenses. Chandler also had $3,009 worth of student loan interest. Monica and Chandler each made a deposit to their IRA for $2,500. Write their adjusted gross income on line 37. Example 3 Monica and Chandler had $18,800 in medical expenses last year. Medical insurance covered 80% of these expenses, so they only had to pay 20% of the medical bills. The IRS allows medical and dental expenses deductions for the amount that exceeds 10% of a taxpayer s adjusted gross income. How much can they claim as a medical deduction using Schedule A Itemized Deductions? Write the amount on line 4 of Schedule A. Example 4 Monica and Chandler paid $3,298 in state income taxes, and $3,567 in real estate taxes. They paid $3,096 in mortgage interest. What is the total amount they paid in state income and real estate taxes? Write the amount on line 9 of Schedule A. Section 7.5: Form 1040 & Schedules A & B 4

5 Example 5 Monica and Chandler gave $987 to different charities. The highest amount they gave to any single charity was $100. They also donated $450 worth of old clothes to different charities. The most they gave to any single charity was $120. Find the total of their gifts to charity and write it on line 19 of Schedule A. Schedule A Form: Casualty and Theft Losses On Schedule A, in almost every section, there are directions for the taxpayer to determine if certain expenses are eligible for a tax deduction, except for the Casualty and Theft Losses section. Here are the steps to determine if any loss is tax deductible: 1. Calculate 10% of the AGI (line 38). 2. Subtract $100 from the casualty/theft loss amount paid by taxpayer. 3. Compare the two amounts. If 10% of AGI is greater than loss amount (less $100) from step 2, then the expense is not tax deductible. If 10% of AGI is less than loss amount (less $100) from step 2, then the expense is tax deductible. Amount of Eligible Deduction: Difference between 10% of AGI and loss amount (less $100) *Note: The entire loss is NOT the amount of the eligible deduction. Section 7.5: Form 1040 & Schedules A & B 5

6 Example 6 Monica and Chandler had $13,256 worth of flood damage from a storm that was not covered by insurance. Find their casualty and theft losses deduction and write the amount on line 20 of Schedule A. Example 7 Chandler had $2,345 expenses for job travel. (*Note: This is not from driving to work because that is not tax deductible. This is traveling as part of work. It is based on the miles covered.) He also took two classes related to his job for a total tuition of $2,815. Monica and Chandler also pay $105 annually for a safe deposit box at their bank. Find their job expenses and certain miscellaneous expenses deduction on line 27 of Schedule A. Example 8 Find Monica and Chandler s total itemized deductions on line 29 from Schedule A. Section 7.5: Form 1040 & Schedules A & B 6

7 Example 9 Once Schedule A is completed, Monica and Chandler return to line 40 on Form 1040 to finish computing their taxes. If their itemized deduction amount is greater than their eligible standard deduction amount, write the itemized deduction on line 40. If not, write the standard deduction amount on line 40. Example 10 Each exemption from the total number of exemptions on line 6d allows them a deduction on Form The amount can change from year to year, and usually increases. In 2016, the deduction for each exemption was $4,050, find the total amount Monica and Chandler can deduct and write it on line 42 (For higher income families, this deduction may be reduced). Then, calculate their taxable income on line 43. Example 11 Using the 2016 tax table, determine the tax amount that Monica and Chandler and obligated to pay and write the amount on line 43. Example 12 Monica and Chandler both work, and they pay for child care while they are at work. They can get a tax credit for child care expenses of $780 (line 49). They installed some energy saving items in their home, and can receive a $133 tax credit for that (line 53). What is their tax obligation after the tax credits are subtracted (line 56)? Section 7.5: Form 1040 & Schedules A & B 7

8 Example 13 Monica and Chandler also earned a first time homebuyer credit for $1,000 (line 60b). What is their total tax obligation after this tax credit is subtracted (line 63)? Example 14 Using their W 2 forms, Monica and Chandler determined the total federal income tax they paid in 2016 was $19,678 (line 64). Next, determine if Monica and Chandler will receive a tax refund or will owe money. Section 7.5: Form 1040 & Schedules A & B 8