If you’re like most people, taxes feel mysterious. You see money leaving from your paycheck, but when it’s time to file taxes, you never know what to expect. Owing extra money is never fun — especially when you didn’t plan for it. If you are eager to avoid future mistakes, learning the basics may go a long way. Here’s a step-by-step guide to calculating your federal tax bill.
Form 1040: your income tax cheat sheet
Tax forms often feel like the “choose your own adventure” of the personal finance world. There’s a maze of attachments, calculations, and endless jargon. If diving into a specific form sounds boring — we get it — but if you are itching to learn more, Form 1040 is where to begin.
In case you missed it, President Trump’s tax overhaul included a complete refresh of Form 1040. The new form may be shorter, but that doesn’t make it any less confusing — with 117 pages of instructions, to boot.
The first page of Form 1040
Page one is pretty easy to navigate. You will
enter some basic details about you and your spouse. The most confusing part is
Boxes 1-4, which addresses your dependents.
You can learn more about who qualifies — and whether they qualify for tax credits on pages 20-24 of the instructions. If you are still scratching your head, don’t be afraid to talk to a tax professional.
The second page of Form 1040
Page two is where things get hairy. We have broken it down the entire form into chunks to make it easier to digest.
1. Start with your income (lines 1-6)
You will notice lines 1-6 are all about your taxable income. Start by plugging each type of income into lines 1-5b. For line 6, you will need to add up all your income — plus the total from Schedule 1 (line 22).
2. Calculate your adjusted gross income (line 7)
During the last step, we mentioned Schedule 1. You can use the second half of Schedule 1 to add up your income adjustments — specifically, lines 23-36. If you don’t have any, ignore this step. But if you do, subtract your total adjustments (line 36 on Schedule 1) from your total income.
3. Take the standard deduction or itemize (line 8)
There’s a lot to like about deductions. You can use them to lower the taxable income — a.k.a. your adjusted gross income — which you just calculated on line 7.
The real fun begins with Schedule A. You will use this form to add up all your deductions for the year. This may include medical expenses, state and local taxes, mortgage interest, gifts to charity, and more.
The next step is simple: pick the larger of either your total itemized deductions or the standard deduction. Hint: this year’s standard deduction(s) are in the bubble to the left of line 8.
4. Subtract the qualified business income deduction (line 9-10)
This is a brand new deduction for pass-through businesses — sole proprietors, partnerships, s-corps. If you aren’t sure if you qualify, it’s better to check with a tax professional. Once you subtract it, you will know your taxable income (line 10).
5. Add in some more taxes (line 11a-b)
This line is where you add extra tax in for the following:
- Additional tax on taxable income – see instructions on page 38
- Your children’s dividends and interest – Form 8814
- Lump sum distributions from retirement plans – Form 4972
- Extra tax for shareholders of a foreign company – Form 8621
- Paying back an education credit – Form 8863
- Paying back subsidies your received for health insurance – Form 8885
- Taxes you deferred as a shareholder – see instructions on page 38
- Taxes you deferred and owe now because of a “triggering event” – see instructions on page 38
- Any tax from Schedule 2
Yup, we know this line is super confusing. Again, if you think one of these applies to you, it’s best to get advice from a professional.
6. Subtract child tax credit or credit for other dependents (line 12a)
If you have kids or dependents, it’s possible you are eligible for a tax credit here. There’s a worksheet on page 42 of the instructions to find out.
7. Add in some more taxes (line 14)
We’re sorry to break the bad news, but this is one more spot to add taxes — from Schedule 4. This includes self-employment tax, taxes for folks you employ in your home, repaying a first-time homebuyer tax credit, and more,
8. Subtract the amount of taxes already withheld (line 16)
If your employer took money from your paycheck for federal taxes, that amount goes here. You can find your total for the year on your W-2.
9. Subtract refundable credits and add payments (line 17)
Here’s your final opportunity to subtract a few more credits, reducing your taxes even further:
The last step is adding anything from Schedule 5, if it applies to you.
10. Pay taxes or get a refund (lines 19-23)
Phew! The last few lines are where you reconcile everything. You can see how much you have already paid vs. how much you owe. The difference will either mean you owe money or will get a refund.
Taxes get complicated fast. Don’t be afraid to ask for help.
If you like walking through each line of your 1040 — great! — but working with a professional is never a bad move, either. It’s easy to make mistakes, which may cost you a lot of time later. If you need help, don’t be afraid to ask. You may rest easier knowing your taxes are in professional hands.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.