Filling Out Your Tax Return
Purpose: This assignment asks you to complete a 1040 federal government income tax form & all necessary additional Forms & Schedules needed for your family. After completing the tax forms and schedules, you should fill in all the data requested in Parts II and III in your “Prototype Summary” worksheet of your Master Spreadsheet.
Resources: BKH, Chapter 6, Witte & Gulley Taxes presentation (including completed tax forms for Sean & Marie), irs.gov and Betty Febo' web site for the course.
This assignment asks you to complete a 1040 federal income tax form and all necessary additional forms & schedules needed for your family. Click here to go to the IRS site and get the IRS 1040 that you need to complete. Note: this form is a "fillable" pdf file. This means that you can type entries directly into the form & then save the completed form. Click here to obtain the instructions for completing form 1040. Print out pp. 12 & 13 (pp. 13- 14 of the pdf file) of the 1040 Instructions. These pages tell you exactly where you will find information on how to fill out each line item on the 1040.
You can obtain fillable pdf files for other schedules (e.g., Schedule A-Schedule D) and forms (e.g., form 8812 for the Child Tax Credit) by typing the name of the Schedule (e.g., Schedule A) or the topic covered by the form (e.g., child credit) in the IRS search box.
Filling Out Form 1040 & Additional Forms & Schedules
Begin at the top of page 1 on Form 1040. Fill in the "Label", "Filing Status" & "Exemptions" sections.
Skim the "Income" section of Form 1040. Determine which types of income your family has & complete any forms needed. For example, if you family has interest and dividend income, you will need to complete Schedule B. If any member of your family is self employed, you will need to complete Schedule C (Schedule F if the family farms or Schedule E if the family has rental or royalty income). If your family has capital gains, you will need to complete Schedule D.
Record "Income Subject to Income Tax" (from Pay Stub) on Line 7 of Form 1040 & total income/net profit from each source on the appropriate line in the "Income" section on p. 1 of Form 1040.
Next go back to the Prototype Summary worksheet in your master Excel spreadsheet for you family & record the income information requested in "Part II: Summary Income Data"(obtain the infromation from the Form 1040 that you just completed).
Skim the "Adjusted Gross Income" section of Form 1040. Determine which types of adjustments your family has & complete any Forms and Schedules needed. For example, if members of your family are self employed, you will need to complete Schedule SE.
Fill in the "Adjusted Gross Income" section on p. 1 of Form 1040. This is where you record tax deductible health contributions (Health Saving Accounts) & retirement savings (e.g., Traditional IRA contribution).
NOTE: HSA's and Traditional IRAs are items that you pay for & then report on your tax return to get a deduction. They are separate from any health or retirement programs that you have through your employer.Your employer-based health insurance premiums & retirement savings (e.g., 401 (k) contributions) appear on your pay stub. They do not appear on your tax return. You manage the health and retirement funds that appear on your tax return. Your employer manages the health and retirment funds that appear on your pay stub.
Continue filling out Form 1040 on p.2. When you get to line 40 on p. 2 of Form 1040, you will need to decide whether your family will take: (1) standard deductions or (2) itemize deductions on Schedule A. A family will generally choose to itemized deductions if any of the following is true: (i) the family had large medical or dental expenses, (ii) the family paid a large amount in state & local income tax, sales or property tax, (iii) the family paid a large amount of interest (other than credit card interest which is not deductible), (iv) the family made large gifts to charity or (v) the family had a large casualty or theft loss (e.g., hurricane damage). If you family itemizes deductions, you will need to complete Schedule A.
If you family owns its home, the family will have to pay property taxes (also called real estate taxes) to the local government where they reside. Go to the web site for the city where family resides and obtain information on the city's property taxes.
Note: Search for the city where you family resides using the formula www.ci.[name of city].[state abbreviation].us. (For example, www.ci.boston.ma.us.) Search for property taxes. You may also fine the Tax Foundation's summaries of property taxes useful.
Determine your family's taxable income. Put your families taxable income on line 43 of Form 1040 & in the appropriate place in Part II of the worksheet entitled "Prototype Summary (Assign#1) in your Master Excel Spreadsheet for you family.
Using the Tax Tables on pp.68-79 of the Instructions for Form 1040 (if your family's taxable income is less than $100,000) or the the correct Tax Computation Worksheet on p. 80 of the Instructions for Form 1040 (if your family's taxable income is $100,000 or more), determine the amount your family owes in Federal Income Tax. Assume that your family is not subject to the Alternative Minimum Tax (put 0 on Line 45).
Skim the credits available (Lines 47-55 & Lines 69-70) of Form 1040. Determine which credits your family has & complete any Forms needed. Remember that credits lower your tax $ for $ so you want to take as many as your family is eligible for.
Complete any lines that are relevant for your family in the "Other Tax" section of Form 1040.
In the "Payments" section of Form 1040 record the amount that was withheld from the wages & salaries received by your family (remember that withholding is on your pay stub).
Note: You will not have Forms W-2 (report of wages & salaries paid that your employer sends you & the IRS) or Forms 1099 (report of amounts paid to individuals that are not employees (e.g., the self employed) sent people that are not employees & the IRS). Simply report the amount of withholding (from your pay stub) that would have been reported on these Forms. In general there is no withholding on Forms 1099. People with From 1099 income generally pay estimated taxes each quarter.
Record any estimated tax payments that your family has made on line 63. Complete any Forms required & enter amounts of any other payments (e.g., Sean & Marie's additional child tax credit & Form 8812).
Complete the "Refund" or "Amount Your Owe" sections as appropriate.
Determine your family's Average Federal Income Tax Rate & Marginal Federal Tax Rate. The average tax rate is simply taxes paid (Line 60 of Form 1040) divided by total income (Line 22 of From 1040). The marginal tax rate is the extra taxes you would pay if you earned an extra $ of income. If you use the tax tables, you can calculate the marginal tax rate by dividing the increase in taxes that would result if your family moved to the next higher tax bracket (e.g., $14 for a single person moving from the $95,000-$95,500 to the $95,050-$95,100 bracket) by the size of the brackets, $50 (so the marignal tax rate for the single tax payer would be 28%). If you use the a Tax Computation Worksheet on p. 80 to determine the amount of taxes, than the marginal tax rate is simply the "multiplication amount" for that level of income.
Put the average & marginal tax rates in the appropriate rows in "Part III: Summary Tax Rates" of the worksheet entitled "Prototype Summary (Assign#1) in your master Excel spreadsheet for you family. Fill in all other items in Part III of the worksheet entitled "Prototype Summary (Assign#1) in your Master Excel Spreadsheet for you family using work you completed for Assignment 4, Assignment 5 & this Assignment.
For guidance on calculating the "Marginal Tax Rate on Wages/Salaries /Net Profits" and "Marginal Tax Rate onTaxable Interest & non-Qualifying Dividends" see cells B71 and B72 of our revised "Prototype Summary-Assign #1...." template which is in the Prototypes folder in the First Class Conference. For hyperlinks needed to determine the "Marginal Federal Tax Rate on capitla Gains & Qualified Dividends", see cell B73 of our revised "Prototype Summary-Assign #1...." template.
Note: You will have to use the relevant revenue department sites or summary information of state & local tax rates to determine average & marginal state & local income tax rates. For additional links on taxation see the tax section of Betty's web page for Econ 223.
Calculate Your Family's After Tax Income
Calculate your family's After-Tax and After-Tax Pay Stub deductions income and place it in row 54 of your Prototype Summary worksheet at the end of Part II. Note: This is the amount that you will have available to spend & invest.
Upload your family's completed 1040 Form and all needed additional Schedules and Forms to the Assignment 6 folder in the Econ223-Drop conference in FirstClass before class on October 21. Be Sure that you put your name in each of the files that you upload!!!!
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© Ann Dryden Witte, 2006