How to Read Your Tax Return

Are you one of those individuals who cringe at the thought of reading through your tax return? Maybe the whole process seems like eating your financial vegetables - necessary but not enjoyable. Well, fear not! In this episode, Shannon simplifies the daunting task of reading your tax return to empower you through knowledge.

Shannon begins by acknowledging the common anxiety associated with understanding tax returns and emphasizes the importance of individuals taking charge of their financial story. She stresses that understanding and being comfortable with the information in your tax return is crucial, as it represents your unique financial narrative.

The episode focuses on guiding listeners through the process of reading their tax return, rather than filling it out. Shannon recommends allocating five to ten minutes to review and comprehend the crucial components of the tax return, debunking the myth that the entire document needs to be dissected.

She advises individuals to start by reading any cover letter included in the tax return package. This letter provides a clear summary of the financial outcome, including the taxes owed to the federal government and state, along with instructions on how to make payments. Additionally, it offers estimates for the upcoming year, facilitating a quick understanding of the financial status.

Shannon emphasizes the significance of locating the 1040 form, which serves as the crux of the tax return. Despite the numerous supplementary documents, she reassures listeners that the 1040 form is only two pages, containing the essential numbers out of the multitude of supporting documents.

Moving on to dissecting the 1040 form, Shannon simplifies the process by categorizing the information into three main sections. The initial part predominantly consists of personal and profile information, such as name, address, filing status, and dependents. Next, Shannon discusses the various sources of income reflected on the form, including business profits, W-2 wages, interest income, and dividends, which culminate in the calculation of total income.

Further, Shannon delves into the intricacies of deductions and tax brackets, stressing the importance of understanding the significance of standardized or itemized deductions. She mentions that while the tax return may reference schedules, worksheets, and statements for detailed information, grasping the fundamental components of income and deductions plays a pivotal role in deciphering the tax return.

Shannon briskly navigates through the calculation of total tax liability and the subsequent deductions for taxes withheld and estimated payments. She elucidates that comprehending these fundamental calculations provides individuals with the confidence to query any discrepancies or errors before signing the return.

In line with her mission to simplify money, Shannon encourages listeners to proactively engage with their accountants, seeking clarification on any ambiguous numbers or information within the tax return. She highlights the importance of being informed and involved in the tax process, as it paves the way for financial empowerment and understanding.

To provide additional support for individuals grappling with tax intricacies, Shannon references her program, CFO on Demand, designed to offer guidance and clarity on tax-related matters. She highlights the value of seeking the right help to navigate through the complexities of tax returns and emphasizes the need for accountants to effectively communicate and demystify the tax process for their clients.

In summary, Shannon reiterates that understanding and actively involving oneself in the tax return process is pivotal for making informed financial decisions. She emphasizes that embracing and learning the basics of tax returns is essential, as it not only impacts individual finances but also enables individuals to assist others in understanding this crucial aspect of financial management.

Tax returns need not be daunting. Armed with the knowledge shared in this episode, individuals can approach their tax return with confidence, deciphering and understanding the key elements to make informed decisions about their financial story.

What you'll hear in this episode:

05:47 Calculate income, deductions, and taxable income.
06:42 Taxable income determines tax bracket and rate.
10:52 Clear, patient finance guidance for non-experts.

If you like this episode, check out:

How to Play in the Gray When it Comes to Your Taxes

Minimizing Tax Season Anxiety with Three Simple Steps

Determining the Appropriate Salary for an S Corp Owner

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The information contained in this podcast is intended for educational purposes only and is not individual tax advice. Please consult a qualified professional before implementing anything you learn.