The Essential Numbers to Review on Your Tax Return
Apr 14, 2023I am breaking down how to read your federal tax return and understand what it all means. Of the most important aspects of your tax return is understanding what taxable income is and how it's calculated, understanding the differences between itemized and standard deductions, and knowing how to determine how much you actually owe in taxes versus what you've already paid in.
The goal of this episode should help you understand the meat of your tax return and help you formulate questions to ask your accountant about anything that doesn't quite look right or that you do not understand.
In this episode, you will be able to:
1. Grasp the concept of taxable income for precise tax calculations.
2. Examine diverse income streams on your tax return.
3. Recognize the adjustments, deductions, and credits that impact your taxes.
4. Evaluate your total tax liability and payment status.
5. Efficiently communicate with accountants to achieve financial transparency.
What you'll hear in this episode:
[3:33] What is contained on the first half of the first page of your 1040?
[5:35] What is contained in the income section of your 1040?
[7:10] Should I take itemized or standard deductions?
[11:34] What goes into your total income?
[15:25] Where is your total tax shown on the 1040 and what goes into it?
[16:11] How to figure out the difference between what has already been paid in taxes and what you owe.
[19:18] If you are short on time, these are the keys to understanding the meat of your tax return.
[20:44] Challenge your accountant to explain any questions to you.
Here are some brief snippets from this episode:
00:03:10 - Shannon explains that the first half of the form is basic profile information about the taxpayer, including name, social security number, and address. She encourages listeners to make sure that the standard deduction and dependent sections are answered correctly.
00:05:11 - Income Section, Shannon explains that the bottom half of the first page is the income section and that the most important number is taxable income on line 15. Taxable income is what the IRS thinks you are taxed on and is used to compute your taxes. She also explains the standard deduction or itemized deductions on line 12 and how it determines the tax advantage of itemized deductions.
00:07:25 - Standard or Itemized Deductions, Shannon explains that taxpayers can either take the standard deduction or itemized deductions. She explains that the sum of all itemized deductions must be greater than the standard deduction to get a tax advantage. The host encourages listeners to be aware of whether or not their charitable contributions will benefit them from a tax standpoint.
00:09:49 - Summary, Shannon summarizes the episode by reminding listeners to understand their tax return form 1040 and identify potential issues. She encourages listeners to be aware of their taxable income, standard or itemized deductions, and the tax advantage of itemized deductions, including charitable contributions.
00:12:55 - Understanding Your Tax Return, The taxable income is the money you made after deductions. Business income or other earned income shows where the profit came from. Lines 1 to 8 break down how much money you made from different channels.
00:14:54 - Computing Total Tax, Tax is computed based on taxable income and tax brackets. Line 24 displays the total tax you owe for the year. Payments between lines 25-33 show how much you’ve already paid in taxes. Line 34 or 35 shows how much you owe or will receive as a refund.
00:16:27 - Reconciling Tax Bills, The total tax shows the bill you have to pay. Compare it to what you’ve paid already in line 33. Subtract the total tax from the payments to get the refund or how much you owe.
00:20:13 - Ask Questions, Accountants should teach and explain tax returns to their clients. Challenge your accountant to explain your return to you. Ask questions and understand your tax return better.
Related episodes:
Listen to This Before Shopping For a New Tax Pro
Investment and Retirement Planning for Business Owners with Pat Darby
Resources:
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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.
