The A,B,C's (& D's & E's) of Individual Tax Returns

Don't forget F, G, & H!

Navigating the business world is hard enough without worrying about how to fill out a tax return. And why should you? You have an accountant for that!

Still, for the sake or your financial literacy, it can help to learn the basics of how tax returns are structured.

Imagine being able to quickly find the information you need from your tax return without the help of an accountant. Your wildest dreams can now be a reality-- if you just keep reading.

Your Form 1040 Individual Income Tax Return contains calculations that summarize your income, gains, losses, deductions and credits that are used to answer the crucial question: how much tax do I owe (or expect as a refund from) the IRS?

Every financial statement tells a story, and the calculations used to arrive at each number on your 1040 are done in sub-forms known as "schedules."

Each schedule is assigned a letter, starting with the letter A. Let's get started!

Schedule A: ITEMIZED Deductions

Before you decide whether you want to itemize your deductions or take the STANDARD deduction ($6,300 for single & $12,600 for MFJ in 2016), Sch A is used to tally up all the available deductions to see which is more advantageous. Available deductions include:

Mortgage interest expense: found on Form 1098 from bank or financial institution to which you paid mortgage interest (& principle) for your primary residence (Limited to $1.1M principle property)

Taxes: State & Local (federal tax not deductible on federal return) income & sales taxes

Property tax: Real Estate & Auto

Property Insurance Premiums

Medical costs: Unreimbursed medical care expenses, but only those that exceed a % of your AGI (adjusted gross income)

Charity: Both cash and non-cash

Tax preparation fees, certain unreimbursed employee expenses & investment expenses can be deducted, but are limited.

Total appears on line 40 of your form 1040

Schedule B: Interest & Ordinary Dividends

This section is pretty straightforward. Any interest or dividends you received throughout the year are reported on Sch B. Typically, a bank or financial institution will provide you with a 1099-B (or 1099-DIV / 1099- INT) with the total interest and/or dividends paid to you throughout the year.

Dividends are either qualified or ordinary and must be listed as such. Also, make sure to separate taxable and tax-exempt interest.

Questions regarding whether you had money in a foreign bank account is also asked on Sch B.

If you had more than $10K in foreign accounts throughout the year, you may be required to file FinCEN disclosure form 114.

Totals appear on lines 8-10 on your form 1040

Schedule C: Profit & Loss from Business

If you are an independent contractor, self employed, sole proprietor (i.e. you do not have a corporation), or have a Single Member LLC, the activity for the year appears on Sch C.

Not sure if you are an employee or contractor? A simple way to know is if you receive a W2 (employee) or 1099-Misc (contractor).

If you operate more than one business, you can have multiple Sch C's attached to your return.

Make sure to include things like: cost of goods sold, home office expense, auto expenses, self employed health insurance, inventory and depreciation of capital assets.

Total appears on line 12 of your Form 1040

Schedule D: Capital Gains & Losses

Capital Gains are taxed at a different rate than ordinary income, and the information for this activity is located on Sch D.

If you sold any capital assets throughout the year (such as stocks, bonds & real estate), include the cost, date of acquisition, sales price and date of sale on this schedule.

Long term (held more than 12 months) gains are reduced by long term losses.

Short term (held less than 12 months) gains are reduced by short term losses.

Total appears on line 13 of your Form 1040

Schedule E: Supplemental Income & Loss

What a strange name!

Basically, any income not included in schedules B, C or D is included in Sch E.

The main categories are:

Rental Real Estate: If you own property (aside from your personal residence) which is not reported on a K-1, include the activity here. Remember to depreciate!

Royalties: assets such as natural resources, patents, books or music generate royalties for the owner, inventor, author or composer. These are totaled together with Rents in Part I or Sch E. Depletion and Amortization may apply!

Partnerships & S Corporations: These entities distribute K1's with a summary of the income or loss that is allocated the taxpayer. Enter in Part II.

Estates & Trusts: Also distribute K1's. Enter in Part III

Total appears on line 17 of your Form 1040

Schedule F: Profits & Loss from Farming

Enough said.

Schedule G: Fundraising or Gaming Activities

For all those winnings from your trip(s) to the casino and/or racetrack!

Schedule H: Household Employment Taxes

For babysitters, housekeepers, nannies, etc.

All of the above information is strictly for reference purposes and are subject to change. Remember to consult with a tax professional!

Questions/Comments? Please don't hesitate to contact us!